There are a lot of Mortgage Acceleration programs available now that have piqued the interest of Homeowners.  The premise behind them is that if you pay off your mortgage sooner you can live a debt free life longer.  While there are definite benefits to leverage and always keeping a mortgage,  today’s climate of economic uncertainty and news of mounting consumer debt have created a market for these programs. 

The main reason they are popular is that they can help people be rid of their credit card and mortgage debt in their 40’s so they can build their retirement through their prime earning years.

Here is a breakdown of four popular programs that help borrowers achieve an early payoff of their mortgages.

Extra Annual Payment(s)

The way this form of early payoff works is that the borrower makes an extra payment, usually at the end of the year.  This payment is paid directly to principle. 

Typically, this cuts the time it takes to pay off the loan down from 30 years to 23 years. 

If you make two (2) extra payments annually, the term of the mortgage is reduced to 18 years…and so on.

Biweekly Payment Plan

In this method, instead of making a payment every month, you make one every two weeks.  Essentially this means that 26 bi-weekly payments which is the same as 13 annual payments.  Just like the extra payment this cuts the payoff by 7 years… the main difference is that this method is involuntary. 

The Extra Annual Payment method affords the borrower the choice to make the payment or not.  If they are unable to do so one year, they can simply elect not to make the payment. 

A bi-weekly payment plan is something elected prior to or at closing with the lender so the borrower has no choice down the road if money is tight.

MMA - and similar “Mortgage Acceleration Programs“

The MMA and similar programs are essentially a method of using a Home Equity Line of Credit (HELOC) for debt and income management.  Income is paid into the HELOC instead of a checking account. 

Bills and other debts are paid from the HELOC.  Then a set amount every month is applied to principle reduction.   Some money should also be deposited in a traditional checking and/or savings for incidental expenses. 

The main issue with the MMA is the strict budgeting necessary to work within this program.  The discipline required to successfully utilize this program could prohibit those running a very lean budget. 

Unless there is a significant difference in income and expenses, one may be unable to afford spontaneous expenditures outside of their normal spending patterns. 

Interest Only Mortgages

Most people believe that Interest Only Mortgages are only used to reduce monthly payments.  The lower monthly payments of a simple interest payment with no principle and no amortization does help lessen the burden of  the monthly mortgage payment if you are short on cash.

On the other hand, in the first 7-9 years of a mortgage, the interest paid is actually less than it would be with a typical 30 year Fixed mortgage.  Because of this, if one were to get an interest only loan and pay the equivalent of the 30yr fixed payment, the amount paid toward principle would be far greater than if that borrower had opted for a 30 year fixed.

On top of that benefit, Interest Only loans also have the ability to recast every time the principle is reduced.  For example, if you get an annual bonus at the end of the year and want to put 1/2 of it towards principle, the principle would recast at the new, lower amount and then the payment would be reduced as well! 

So in an Interest Only Mortgage the more principle you pay down, the faster the payoff becomes if you are making the 30yr Fixed payment… so it essentially gets paid down at warp speed! 

 The most important consideration with any of these plans is to be disciplined in your strategy.  Whether you choose to simply make an extra payment annually or one of the more advanced techniques, there has to be a commitment throughout the term of the loan.

Some of these techniques can have negative effects if you do not adhere to the program.  So make sure that when you set a budget that includes one of these methods, you adhere to it. 

If living without the debt of a mortgage is your goal, then the best first step is to contact your favorite mortgage broker and set up a time to discuss the options, benefits and even look at the other side to make sure it is the right fit for you.

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David A. Podgursky, MBA
The Mortgage Go To Guy!
Your Source for Residential and Commercial Mortgage Loans in Florida