What Is Mortgage Cycling?
For years, real estate speculators have ventured into the business expecting to profit by using different strategies for mortgage payments. This, in some cases, has led to "exotic" mortgages--such as negative amortization loans--which can end up drowning both speculators and individual borrowers. However, a new method called mortgage cycling can drastically reduce the amount of interest you pay on your mortgage. The technique is not truly new, and the concept is quite simple.
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Principles of Amortization
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Mortgages are long-term loans. Banks make profit by collecting hundreds of interest payments over the course of one loan. The higher the interest rate, the more profit. Each monthly payment on a fixed-interest, fixed-term mortgage consists of both an interest and principal payment. In the earlier months of the loan, a borrower pays more toward interest. As time passes, more of the payment goes toward principal.
Utilizing Mortgage Cycling
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Mortgage cycling is simply paying your principal balance down faster. Borrowers who use mortgage cycling make their standard mortgage payment then add an additional amount to that payment that goes directly toward reducing the principal. For example, on a $100,000 mortgage with a 6 percent interest rate on a 30-year term, the standard monthly payment is $599.55. Of that payment, in the first month, $500 is going toward interest and $99.55 is going toward principal. If a borrower added an additional $99.55 to his or her payment each month for a year, he or she would be cutting one full year off the mortgage.
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Funds for Cycling
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For consumers interested in low-risk cycling who also live paycheck to paycheck, income-tax refunds may offer the best opportunity. Borrowers who have funds left over at the end of the month can make disciplined payments in addition to their standard payment to reduce their interest cost. Some borrowers even set up separate accounts--such as Christmas funds--that are used exclusively to pay down extra principal.
Other Funds
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Some borrowers interested in cycling will cash out annuities, stocks and retirement plans to make massive lump-sum payments against mortgages. Remember, any payment over the standard payment required on a mortgage will go directly toward reducing the balance. Some riskier mortgage cycling uses debt--either credit card debt or other mortgages--to pay down first mortgage balances.
Warning
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Only market-savvy customers should engage in risky mortgage cycling. Using debt to pay down debt is a recipe for disaster. Often, customers who attempt to use this strategy end up with overwhelming debt. Average mortgage customers can easily engage in low-risk cycling by setting aside small amounts of money to put toward principal balances.
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