To prepay or not to prepay

Is a mortgage accelerator program right for me?

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In some cases, a mortgage accelerator is actually not in a home owner’s best interests. A mortgage accelerator allows a borrower to pay off their loan early by applying additional payments to reducing their principal. For instance, by plunking down an extra $100 a month toward the loan balance, a 30-year mortgage for $100,000 could be paid off in 23 years and save a borrower at least $37,000 in interest. Some banks, such as Valley National Bank in Wayne, New Jersey, have what is commonly referred to as an embedded plan. It is not an option to make extra loan payments; rather, it is actually part of the mortgage contract or loan agreement between a lender and customer.

Many lenders recommend that any extra payments be made on a voluntary basis because some mortgage companies may charge borrowers for making embedded payments. To make payments equal to, for instance, a biweekly program, take your monthly payment, divide it by 12 and add the resulting amount to your payment. Before you do this, though, check
to make sure there are no penalties for prepaying your loan.

There are other reasons mortgage accelerators may not be the best financial move for everyone. "[Biweekly mortgage accelerators] are best for people who are paid every two weeks and have the skill to manage their money on a biweekly basis," says Al Engel, first senior vice president of the mortgage department at Valley National. Another recommendation: accelerate a mortgage if you plan to retire soon and don’t want to have the burden of making monthly payments.