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I think it is time someone put a stop to the accelerated mortgage nonsense. This scheme, variously known as the “Banker’s Secret“, or accelerated mortgage plan, or bi-weekly mortgage plan are almost always a very poor deal for the person who decides to go into one of these programs. This is true for at least three reasons.

  1. You don’t need to pay for someone else’s help to make extra payments on your mortgage. Just do it yourself, and direct the bank to apply the extra money to your principal.
  2. For tax reasons, you should carefully consider whether you want to pay off your mortgage. If you are paying 10% nominal interest, your effective interest rate is closer to 7% because the interest is deductible from your income tax.
  3. Paying off your house early is only useful if you, for whatever reason, are unable to find an investment paying more than your current mortgage.

If you had a $100,000, 10% mortgage amortized over 360 months with payments of $877.57; you could pay an additional $197.04 per month and pay off that mortgage in only 180 months and save $122,929.17. To the average person this sounds like an amazingly lucrative savings. But, we as mortgage buyers, ought to know enough to see through this silliness.

If we invested that $197.04 in a good quality (no-load) mutual paying 14% per year, at the end of 180 months we would have $119,364.13. Now you sell the mutual fund and pay off your $100,000 loan which now has a balance of only $81,665.29, and you pocket the $37,698.84.

Better yet, don’t pay off your house. At the end of 30 years your will have paid for your house and your fund balance will be around $1,082,335.00 (before taxes.)

So clearly, the “time value of money“ makes the early pay-off of your home loan more interesting than is readily apparent to the lay person. But after all these are mathematical arguments. Some people just want to own their home free and clear. If that’s what you want to do at least understand what you are doing, and do so with your eyes open. Don’t fall for the “banker’s secret.“

Jon Richards

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  1. 3 Comment(s)

  2. By Johnny u | Reply

    I disagree. This type of loan makes you your own bank with a 30 year equity line. Principal is paid first, and if you want to but a investment property, or a car, even a second home……no need to find a mortgage lender. You write a check against your own line. It’s simple once you get past mind set of traditional loans. Banks hate it, because within the first 7 years, they collect the majority of interest. They figure the average persons will move or refi by then.

  3. By Johnny u | Reply

    Oh yea…try finding 14% return today… I hope your mutual fund didn’t take a 40% hit this quarter.

  4. By simone hardy | Reply

    Absolutely. I agree with Johnny u. There are no mutual funds that pay 14% anymore and in my personal opinion mutual funds suck because you have no control over them.

    As far as programs like money merge accounts people can do it themselves but haven’t that’s why these types of services saw success because people don’t always have that kind of discipline unless they pay for it — just like your personal fitness trainer.

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