Home ownership is often referred to as the American dream. That dream has become more common thanks to home mortgages. However, with a term of 30 years, the interest on a mortgage adds up to a lot of money. Not only that, but 30 years seems like a very long time. But, by paying off your mortgage faster, you can cut years off the term of the loan and save thousands of dollars of interest as well.
Time Frame
The traditional mortgage has a term of 30 years. 15 year mortgages have become more common recently as well. In either case, monthly payments are still the norm. Paying more frequently can shave down a mortgage more quickly.
Function
The purpose of a rapid repayment mortgage is to pay off the loan faster and save on interest by paying the same monthly payment, but by paying 1/2 of that payment every 2 weeks instead of a full payment every month.
Significance
By paying 1/2 of a payment every two weeks, the borrower actually makes one additional payment for a year. That is because there are 26 two week periods in every year but there are only 12 months. Thus, the home owner makes 13 months worth of payments in 12 months.
Warning
Many of the so called rapid repayment mortgages come with a fee attached. The fee which can be a few hundred dollars or more can eat into the savings achieved by what is essentially paying the mortgage early. The same thing can be achieved by sending in an additional 1/12 payment with each monthly payment. However, that must be designated as an additional principal payment.
Misconceptions
It is common for mortgages to contractually specify that payments received "out of cycle" will not be credited early. Thus, sending in a payment due on the 31st on the 15th will not get credited until the 31st. Similarly, additional payments MUST be designated as "additional principal" payments or they will simply be credited to the next payment due.
Effects
Thanks to the way mortgages are amortized over 30 years, the amount of each payment that goes toward interest early in a mortgage is a very high percentage of the overall payment. Thus any early re-payment is magnified greatly on the overall term of the mortgage because interest will never be charged again on that amount.
