Mortgage Cycling Secrets

By Steve Gillman - 2009

What is mortgage cycling? You may have seen the ads for books on this "secret technique" for paying off your mortgage sooner. There is undoubtedly some useful information in them too, especially if you are not familiar with the basic premise of the concept - pay extra principle every year and you'll pay off the loan sooner and save thousands on interest.

Of course mortgage cycling is dressed up as a "new" system. There are many little tricks to doing this most effectively, and there are more risky techniques too, like using short-term home-equity loans to pay down your primary mortgage now. In the end, using this latter technique could cost you more in interest or even put you into financial trouble that may lead towards foreclosure.

The safest method of "mortgage cycling" is just to put large lump sums of money towards your mortgage loan every few months to a year. Yes, if you pay thousands of dollars extra per year, you will pay off your loan many years sooner. No surprise there, but what if you don't have the few hundred dollars a month extra needed to do this?

Funds for Mortgage Cycling

First, don't assume you can't come up with SOME extra money each month or at least each year. Many people will say they can't, and yet still add hundreds of dollars per month to credit card payments buying anything from expensive shoes to snowmobiles. There's nothing wrong with buying things, but the choice is yours if you want to pay down that mortgage instead.

Other ways to pay off large chunks of principle include using your annual tax refund, insurance settlements that are not otherwise allocated, and any cash gifts or prizes you may receive.

How much sooner can you pay off your mortgage? That depends on how much extra you pay and when. The sooner you put extra towards the loan, the better. Let's look at an simple example, just making an extra payment each month.

Suppose you have a $160,000 30-year mortgage at a 7% annual interest rate, for example. The regular monthly payments will be $1064.40. Look at your second payment and you would see that it is composed of $932.57 interest and $131.83 principle (the amount you actually pay down the loan). If you add $131.83 to your normal payment of $1064.40, you have taken an entire month off the time until your mortgage is paid off.

In other words, if you did this each month, you would cut the time to pay off your loan in half. Of course, the principle part of the payment would be growing with each payment, so the extra payment would be a little more each month, but hopefully we can assume that over the 15 years your income will rise enough to afford that. Consider this: pay normally, and your last year of the mortgage you'll be paying out $12,772.80 ($1064.40 x 12 months). If you pay about an extra $1600 that first year, in the way shown above, you'll eliminate that entire last year - a savings of over $11,000!

There are other ways to pay off extra principle. You have to evaluate them carefully, though. For example, you could put a few thousand in savings towards the loan right now and save perhaps tens of thousands in interest over the years. The question here, though, is will you need to pay even higher credit card rates because you emptied your savings account and need some money? You could cash in stocks, but will you be giving up a 9% return to pay down a 7% mortgage? Also, you may want to pay off any debt that carries a higher interest rate than your mortgage, before you start applying extra money to that.

If you want to keep it simple, just set aside extra money every month and apply it to the loan. Also use any other money that will likely be squandered (like tax refunds). Just do a few simple things to pay something extra on the loan each year, and you can forget about complicated mortgage cycling plans.

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