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Originally Posted by THE SCUD
You sir, have tapped into what "the 99%" don't get - Well done. There is no free lunch: All these accelerated payment plans do is reduce the time period of your mortgage. So an accelerated bi-weekly, as you mentioned, simply increases your payments per year to mimic the same cash out the door as if you'd signed a ~21 year mortgage. You didn't save money or reduce the interest, you just reduced the amortization period of your mortgage.
What most people don't take advantage of is the fact that 90+% of mortgages allow you to make 2x the payment every month and a 10% lump sum payment every year. What's great about this is any amount you make over the normal payment goes straight to the principal, so you'll do a lot of damage to the interest over the life of the mortgage by doing that!
This gives you the flexibility to put, say, your bonus towards the principal every year, giving you huge bang for your buck.
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These are the same thing. All you are doing with accelerated payments is paying more than you are contractually obligated.
Every extra dollar above your contractual amount goes to the principle. Pay more principle, pay less interest, get loan paid off faster.
Some institutions will allow you to pay down as much as 20% of your original mortgage per year. For a $300,000 house that is $60,000 of the principle you could pay down. Most people don't have that kind of money but watch the difference in the split of you int vs principle if you did that. It is amazing how much you can save.
You can also increase your payments by a similar amount (about 20%). Over time you you can dramatically increase your payments because you can typically keep increasing on top of your previous years increase. Although the amount you can increase by is typically always calculated based on your contractual amount.
Obviously these only work if you can afford to do so. At the end of the day the smaller the balance the less interest, the more principle paid the less interest will be accumulated.
I always roll my eyes when I see people with like $200k in unregistered GICs earning 2% and then they have a mortgage for $100k at 4% and a mortgage LOC at about prime for another $150k and they refuse to pay off their debt because they like having investments. Unless you're earning significantly more from your investments you should pay off your debt.
At the end of the day you could pay off your LOC and pay down your mortgage and actually make more than your investment based on the amount of money you save from not paying interest.
The problem is that FI's don't want you to do this. Then they lose a credit product and they lose an investment. They would rather you invest and borrow heavily. Then they get to pad their numbers on both ends, instead of ending up with nothing.