Personal Financial Planning - Mortgage Acceleration Facts
Accelerating your mortgage has a huge impact - in a positive way - on the time you need to get debt free. Reducing interest helps increase your equity rapidly. The real cost of buying your home is not the purchase price, but the total price plus the interest you pay over many years. In a 30-year mortgage, you pay about 93% more than your purchase price (based on 30-year repayment at 5%).
The following facts are all based on a $100,000 mortgage at 5% and with a 30-year repayment term:
-- Without any accelerated payments, your 30-year mortgage is half paid off only after 20 years.
-- Paying an extra $50 every month takes five years off your repayment term -- and reduces interest expense by more than $17,000.
-- Paying an extra $123 per month pays off that 30-year mortgage in two-thirds the time, 20 years. It also saves you almost $35,000 in interest.
-- Increasing monthly payments by $254 every month cuts the 30-year term in half, to 15 years. It also saves almost $51,000 in interest.
It isn’t just the lower interest that counts, but the more rapid increase in your home equity. Increasing and protecting your equity is of utmost importance. In the past, the belief that home values would rise indefinitely created an unhealthy situation in which many homeowners refinanced their homes to take out cash, repeatedly. When the market collapsed, these same people had no equity --thus, the big jump in foreclosures.
In the future, owning a home without a mortgage will become the new American Dream. It is not enough to simply buy a house and make payments for three decades -- and refinancing is no way to build equity. By accelerating your payment, you are building wealth. All of the cash you put into additional principle earns a compound rate equal to what you pay for your mortgage for the remainder of the years you owe money to the bank.
Of course, you also need an emergency reserve fund in cash or easily withdrawn savings, as a first step. Accelerated equity is not available unless you refinance or apply for a home equity loan. Both of these are counter-productive to the underlying goal: paying off your mortgage to reduce interest expense and build home equity as quickly as possible. That is the safest and most practical route to financial freedom and security.