Concept of Accelerated Amortization Unveiled
Accelerated amortization is a powerful financial strategy where you make additional principal payments beyond the stipulated minimum required by your mortgage contract. This approach effectively decreases the term of the loan and significantly reduces the amount of total interest paid over its lifetime.
Real-Life Example – Accelerate Your Mortgage
Consider a scenario where a mortgage is originated at $100,000 with a 6% interest rate for a 30-year term. The typical monthly principal and interest payment would be $599.55. By increasing this monthly payment by only $100, the loan payoff period can be drastically shortened to a little over 20 years, instead of the original 30 years. This advancement not only helps eliminate debt sooner but also saves a substantial amount in interest.
Advantages of Accelerating Your Loan Payments:
- Reduced Interest Charges: By paying off the principal faster, you lower the overall interest cost of the loan.
- Shortened Loan Duration: Extra payments lead to an earlier payoff date, freeing you financially sooner.
- Increased Equity: More of your payment goes towards the loan principal quicker, increasing the equity in your property.
- Financial Flexibility: Over time, high interest costs eat into your spending power. Accelerating payments can ease long-term financial commitments.
Steps To Accelerate Your Amortization:
- Extra Monthly Principal Payment: Consistently pay an additional amount towards the principal every month.
- Bi-Weekly Payment Plans: Opt to pay half of your monthly payment every two weeks, leading to an extra full payment each year.
- Lump-Sum Payments: Apply windfalls or bonuses directly to the principal to make a significant impact.
- Custom Payment Schedule: Create a schedule that maximizes your ability to make additional payments during certain months when you have surplus funds.
Key Considerations:
- Always verify if your loan has a prepayment penalty clause that could affect your additional payments.
- Ensure that any extra paid amounts are applied directly to the principal to benefit from accelerated amortization recording.
Frequently Asked Questions (FAQs)
What is Accelerated Amortization?
Accelerated amortization is the process of making extra payments on your mortgage principal above the required amount, which helps in reducing both the loan term and the total interest paid.
How Do I Get Started with Accelerated Amortization?
To start, review your current mortgage terms and calculate how much extra you can afford to pay each month towards the principal. Communicate with your lender to ensure these additional payments are applied correctly.
Are There Prepayment Penalties?
Some lenders may impose prepayment penalties if you pay off your mortgage early. It’s essential to check the terms of your contract before committing to accelerated payments.
Can I Use Accelerated Amortization with Any Type of Loan?
While it’s most common with mortgage loans, accelerated amortization can also be effective for auto loans, personal loans, and other type of loans where interest savings by early payoff are substantial.
