Beware mortgage accelerators.
You probably don’t need a pricey service to pay down your mortgage more quickly.
There are many great reasons for wanting to pay off your mortgage fast — not in the least part because it can save you a lot of money in interest payments.
Although mortgage accelerators may be a tempting way to speedily pay down your loan, it’s worth being cautious. They just might be too good to be true.
How do mortgage accelerators work?
There are primarily two types of mortgage accelerator products, and they’re both designed to help you budget your finances.
One type of mortgage accelerator product asks borrowers to send the accelerator company money, and this company will in turn send biweekly checks to your mortgage lender. This product has an initiation fee of about $300, as well as a monthly fee of about $5. Biweekly payments can help you pay down your mortgage more quickly — but this isn’t something you can’t do yourself (without fees of about $2,000 over a 30-year period).
A second mortgage accelerator deposits your paycheck into an account that acts like a line of credit. As you pay your bills, you draw against this balance. Whatever’s left at the end of the month is then used to pay down your mortgage.
Here’s the rub: Some of these accelerator products have high upfront costs for the software that’s used to manage your monthly cash flow. And while you do have to pay interest against this line of credit whenever you draw against it, if you use this money to pay down your mortgage, you could ultimately end up paying a higher interest rate than the interest rate on your mortgage itself.
Rather than paying for a service to help you budget or borrowing from one loan to pay another, you can achieve the same goals with the help of easier budgeting tricks. You can simply set up a system on your own that eliminates any fees or interest you’d pay using a mortgage accelerator product.
Round up payments
By increasing monthly payments to the next $100, $500, or some other amount you choose, you can shave years off your mortgage payments. This money essentially prepays your mortgage and lowers your balance so that you owe less overall.
Make an extra payment
One extra payment a year can make a big difference. There are a few ways to approach this plan. Making half a mortgage payment every two weeks (instead of a full mortgage payment every month) will result in an extra payment — you’re making 26 payments a year with this plan. Another way to accomplish this is to calculate a new payment by multiplying your monthly payment by 13 and dividing by 12.
If you can afford a much higher payment, refinancing your 30-year loan into a shorter 15-year or 20-year loan will not only shorten your mortgage term but also lower your interest rate. Consider your financial situation and job security before making the leap — higher payments could become a burden in the event of unemployment.
Make a lump-sum payment
When you have a nominal balance with no interest to deduct, a lump-sum payment could eliminate this debt. This strategy makes sense only if you have the cash readily available and aren’t planning on using money pulled from retirement plans, since there could be taxes and fees associated with anything you withdraw.
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