What Are the Benefits of an Accelerated Mortgage?

Purchasing a home is the largest investment most people make.
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There is more than one way to pay off your mortgage faster than in a standard 30-year repayment program. There are accelerated mortgage options that include 10-, 15- and 20-year repayment plans. If you already have a 30-year mortgage, you can also pay that off sooner without adding the expense of refinancing your mortgage. Many homeowners want to pay off their mortgage before they reach retirement — but it's important that you weigh the benefits of an accelerated mortgage against your long-term financial plans.

Interest Reduction

The amount of interest you pay on a mortgage is based on the unpaid principal of the loan – or the amount you owe. In the beginning of a new mortgage, the loan is structured so that you pay more on interest than you do on principal. When you choose an accelerated mortgage, your principal is paid down quicker resulting in a reduction in the interest you pay over the length of the loan. For example, a 30-year $100,000 home loan with a 3-percent interest rate equals a $422 payment per month, not including taxes or insurance. By designating an additional $100 to the principal per month, your loan term is reduced by several years, and you save the amortized interest you would have paid in that period.

Loan Term

You can choose a mortgage with a biweekly, bimonthly or monthly payment plan and have the payments withdrawn from your account automatically. If you don't like the automatic withdrawal option, you can still make your payments online or by check via the mail. By choosing an accelerated plan, such as a biweekly plan where you make an extra payment per year or one in which you add an additional amount to the principal for each payment made, the length of your term can be significantly reduced by several months or years. For example, adding an additional $100 to the principal of a 30-year $100,000 loan reduces your loan term from 30 years to 22 years.

Build Equity Faster

An accelerated mortgage program allows you to build equity in your home much faster. Your equity equals your ownership in the home. The amount your home is worth less the amount you owe on the principal balance of the loan is equivalent to the amount of equity you have in your home. As you pay off your mortgage sooner, the ownership value you have in your home increases.

Long-Term Financial Plans

A major drawback of paying your mortgage off sooner is that once the mortgage is paid off you can no longer take the interest deduction for your mortgage on your income taxes. If you invest $1,000 into a savings or retirement account and add $100 a month over the course of your loan, in 30 years you will have saved $103,194 with an annual interest rate of 6 percent compounded annually while still receiving the tax benefits of your mortgage. If you do decide to pay an additional amount on principal, when you set that option up with your lender, it's important to clearly specify that the additional amount is to be paid against the principal, otherwise the lender might apply it to interest, and that won't help increase the equity you have in your home.

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