How Do Equity Accelerators Work?
The majority of Americans use 30-year mortgages to finance the purchase of their primary residence. With a 30-year mortgage, the overwhelming majority of the monthly payment goes toward interest. After five years, the typical 30-year loan still has 97 percent of the principal remaining as the mortgage balance. You can speed up principal reduction by participating in an equity accelerator program. Banks, mortgage lenders and third-party entities offer these programs.
An equity accelerator program helps homeowners pay off their mortgage balances much earlier, resulting in significant interest savings over the life of the loan and reducing the payment duration by several years. With mortgage accelerator programs, you pay a little extra each month toward your mortgage's principal. With most formal programs, you also make an extra payment each year, which goes directly to principal reduction.
How It Works
Homeowners typically make one payment each month on their mortgages. The primary strategy of most mortgage accelerator programs is to break these payments into half and make them every two weeks. For example, if you normally pay $4,000 per month on your mortgage, under a mortgage accelerator program, you would instead pay $2,000 every two weeks. By doing this, you make your payments earlier, reducing the accrued interest on your balance. This slowly increases your principal contributions over time. In addition, you make 26 payments per year, as there are 52 weeks in a year. This equals 13 months, or one whole additional principal payment per year.
You must participate in formal equity accelerator programs to reap their benefits. If you are not participating in an accelerator program and attempt to do the same on your own, nearly all banks will either return the partial payment you mail in or hold the payment in your account until they receive the full amount due. In this way, you reap no benefits. All banks or third-party providers charge an administrative fee for this service, which they embed in the periodic payments.
You can set up your own equity program by adding principal to your payments, sending in one or two separate principal payments per year or both. For example, you could submit $4,333.33 per month instead of your usual $4,000 payment or send in an additional $2,000 check every six months. If you do this, you must clearly mark "principal payment" on your check and on your mortgage coupon to ensure your mortgage lender properly credits your account. In addition, double-check the next mortgage statement to confirm the bank allocated your payment to principal and alert the bank if it did not.
Most large mortgage lenders, such as Bank of America and JP Morgan Chase, offer equity accelerator programs. Banks typically offer the lowest administrative fees on these programs; third-party lenders often charge more. An equity accelerator program can be an effective, low-hassle way to pay down your mortgage faster, especially if you participate in an automated program that automatically debits your bank account.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.