Slow Down on Mortgage Acceleration

Jennifer asks if she should pay a nominal fee to be enrolled in a mortgage accelerator program. Dave isn't too keen on the idea.

QUESTION: Jennifer on Twitter asks if she should pay a nominal fee to be enrolled in a mortgage accelerator program. Dave isn’t too keen on the idea.

ANSWER: No, you should not. A nominal fee is $200 or $300. A mortgage accelerator program is something like the bi-weekly mortgage program. It’s a bad idea.

Bi-weekly is fine, but paying money for it is not. In the bi-weekly mortgage program, you pay half a payment every two weeks. It will pay off the typical 30-year mortgage in about 22 years. Why does that work? Because if you pay half a payment every two weeks and there are 26 two-week periods in a year, then you are paying 26 half payments. That equals 13 whole payments.

It pays off your mortgage early because you’re making an extra payment each year. You usually pay 12 payments a year, but now you’re paying 13 payments. That’s what’s doing it—it’s not the fact that it’s every two weeks. Every two weeks is not magic. What really helps you is that you’re paying extra principle.

Instead of paying your mortgage company a nominal fee, just pay an extra payment a year. You’ll be almost exactly there. Or you pay 1/12th of a payment as a principle reduction, separate check and separate envelope, every month. That equals an extra payment a year. If you do that, you’ll pay off the loan the same as you will with a bi-weekly.

If you are taking out a mortgage or they can do it for no cost to do a bi-weekly, then that’s fine. Run it and do that. But we’re not going to pay them a fee for you to pay extra principle. You can do that without paying them a fee.