Colli Real Estate

Mortgage Acceleration – Do You Know the Cost of Waiting?

There is so much interest in mortgage acceleration today and getting out of debt, however, all of the information that I have seen has focused on only one area; the benefits of doing so. Rightfully so, most people want to know the benefits of an action that they are going to take or a purchase that they are making. Many of us have perhaps heard at one time or another, that we humans tend to do things for one of two reasons, either we want to improve our position in some way, or we want to protect ourselves from a loss. One of my psychologist friends told me that many years ago, and I generally think it is true for most of us.

- Mortgage refinance calculator

Of the four major personality types, I tend to function most in the area that many folks think is the least fun one…the analytical. Sorry, it just happens to be great fun…for me. To me, mortgage acceleration is a math problem. I understand the emotional side of it…get out of debt…pay off the home so the family can feel secure…have a secure retirement…no house payment when the kids get to college age…retire early…et cetera. Those are all wonderful reasons of great value, and they have some importance to me, I just support those emotional reasons with some simple math.

- Mortgage refinance calculator

Now, I must post a disclaimer. Mortgage acceleration is a passion of mine…I use it, I sell it, I talk to people about it, I help my clients with it, and, I will be writing conceptually about it because every individuals financial situation is different and the only way for someone to know precisely how it will impact them, is to run an analysis on their specific numbers. All variables are considered…age, mortgage term remaining, mortgage balance, interest rate, other debts, net income, monthly expenses, discretionary income…the calculations can become very complex to determine exactly what your particular result will be. Anyway, most of us are not math majors anyway.

The concept works like this…if I choose to accelerate my mortgage payoff, I will save some number of years and some number of dollars in interest by doing so. Among my clients, the smallest impact that I have seen is a savings of approximately $90,000 in interest and 6 years of time…the largest impact that I have personally witnessed is a family who took their brand new mortgage from 30 years to 4, and saved approximately $1,000,000 in interest! Most of us fall somewhere between those two numbers.

Here is where the cost of waiting comes into play. Conceptually again, if I wait to begin accelerating my mortgage payoff for some period of time, the time value of money comes into the calculation…the value of a dollar today is greater than the value of a dollar tomorrow. There are two pieces to the cost of waiting; piece number one is the cost in time and money that I lose by letting my mortgage run its normal course, I pay longer and I pay more in Interest from it. coin number two of waiting costs begins when my mortgage is paid off. If I believe in the power of compound interest, what I do is that I used to or arising out of investments in the future, the greater will be my pot of money should start.

Let’s say I’m 30 and I have a 30 year mortgage. What will be paid 60. The money that I have other debts to pay the mortgage and now can be freed up to invest,for retirement, let’s say. Were I to accelerate my mortgage payoff, to say 15 years, it will then be paid off when I am 45 years old, I would have saved 15 years of time, many thousands of dollars in interest, and I now have an additional 15 years of investing that I can do with the money that I was paying towards my mortgage. Conceptually, I will have amassed much more money by choosing to accelerate my mortgage payoff and investing that money when my mortgage was paid.

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