The following article is a summary of content from the book, Realtor for Life, written by Duane Duggan.
BOULDER – Mortgage acceleration is the process of rapidly paying down your mortgage by paying more in principle payments than is due. That payment can be based on a desired amortization schedule, a bi-weekly plan, or something as simple as an extra $100 a month.
Instead of applying any of the mortgage acceleration techniques above, another alternative is to create what is called a “mortgage offset account”.
One of the advantages of the mortgage offset account is that you can get the money back if you need it! If you only pay down your mortgage, you can’t call your lender and ask for your prepayments back. Nor does paying down the principle amount on a 30-year loan for example, lower the payments. It simply shortens the term.
How it might work: Let’s say there is a $200,000 mortgage on a house. The interest rate on a 30-year amortized mortgage is 4.5%. The monthly payment is $1,013.37. At the end of 10 years $81,783.41 in interest will be paid, and the principal has been reduced $39,820.00. If you paid $100 a month extra for those 10 years, the balance would be reduced by a total of $54.940.84, instead of $39,820.00. That means the mortgage is paid down $15,120.84 more than it would have been staying in the 30-year amortized schedule.
Now taking that same $100 a month and investing it at 3% for 10 years, the account would grow to $13,974.14.
The mortgage could be paid down by that amount ($13,974.14) at that point, or just continue to grow the mortgage offset account. The biggest variable to the overall success of this plan is the interest rate on the mortgage offset account. That interest rate, of course, is dictated by market forces and the possibility of combining with other funds that might have a higher yield.
A home and a mortgage is often the biggest financial commitment in a person’s life. Learning about mortgage strategies could significantly affect a person’s financial future rather than blindly making those payments!
By Duane Duggan, RE/MAX of Boulder. Duane Duggan has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life.