What Is a Rapid Repayment Mortgage?
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. And three decades can seem like a very long time. By paying off your mortgage faster, you can cut years off the term of the loan and save thousands of dollars in interest as well.
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Time Frame
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The traditional mortgage has a term of 30 years. Fifteen-year mortgages have recently become more common as well. In either case, monthly payments are still the norm. Paying more frequently can shave down a mortgage more quickly.
Function
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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.
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Significance
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By paying 1/2 of a payment every 2 weeks, the borrower actually makes one additional payment per year. This is because there are 26 2-week periods in every year, but only 12 months. Thus, the homeowner makes 13 months' worth of payments in 12 months.
Warning
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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 one achieves by essentially paying the mortgage early. The same benefit can be achieved by sending in an additional 1/12 payment with each monthly payment. However, this must be designated as an additional principal payment.
Misconceptions
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It is common for mortgages to contractually specify that payments received "out of cycle" will not be credited early. Thus, a payment that is due on the 31st but sent in on the 15th will not be 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
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Thanks to the way in which 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 repayment is magnified greatly on the overall term of the mortgage, because interest will never be charged again on that amount.
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