I’ve been asked by quite a few users about the benefits of adding additional principal payments to the loan with each month’s payment. Logically, since you will be paying double the amount of principal each month, you will, in the end, pay off your mortgage in half the time.
As you get further into the term of your loan, your additional principal payments will become larger each month. The reason for this is that during the first few years of your loan, a majority of each payment goes toward interest, leaving just a small percentage going toward the principal. This switches as you get deeper into your loan term, payments to principal become larger and payments to interest become smaller.
In the end, making double principal payments to accelerate your mortgage loan payment basically serve to make your principal amount (and the resulting interest payments) decrease much more rapidly than with standard monthly mortgage payments.
Many banks and mortgage companies have presented mortgage accelerators in the past by offering bi-weekly payments and calling it a mortgage accelerator. The idea behind the bi-weekly mortgage program is basically this: With a typical monthly payment program, you make 12 payments (one for each month), if you were to simply double this, you’d make 24 payments, right? Right. But the trick with most of the bi-weekly mortgage acceleration programs out there is that they are truly bi-weekly, meaning that a payment is made every other week. What’s my point you ask? Here’s my point, there are 52 weeks in the year, divide that by 2 since you’ll be making a payment every other week and that is 26 total payments. Since these payments are half of a normal payment, this can be equated to making 13 standard full payments per year. So using a bi-weekly mortgage program basically just gives you an extra payment every year. It is this extra full payment that enables you to accelerate your loan payment, and some say that doing this will help you pay off your loan 6+ years early.
Stay tuned for my reviews of other mortgage acceleration options, and the techniques that I use to pay down my mortgage ahead of schedule.