In any investment strategy the ultimate goal is to increase your net worth.
In order to understand the investment strategy that uses an accelerated mortgage reduction plan you must first understand some basic concepts about debt.
For every dollar you pay in principal toward a loan say at 8% is like investing that dollar at 10 to 14% depending on your tax bracket. Of course investing the dollar carries more risk than paying down the principal on a mortgage that has no tax consequences.
Taking this concept one step further with a credit card that is charging 22% per year in interest one would have to invest the same amount owed at 30% because one would have to pay taxes on the investment. These results would be to just break even on an asset vs liabilities balance sheet. The risk of an investment earning 30% would be extremely high while paying down the principal on a loan would carry no risk.
Next you need to understand the significance of paying a loan payment and knowing how paying the loan at a specific time of the month will effectively start to save interest on the loan paid. Knowing when is the optimum time of the month to pay a loan payment is crucial on how that will affect the interest paid on the loan. Paying close attention to payment timing will go along way towards allowing one to pay the same amount per month but actually provide more 'bang for your buck' and pay off the loan quicker. Having the knowledge of the best time to pay a loan payment and repeating this payment at the same time of the month begins to accelerate the reduction even though it seems like an insignificant amount. The dynamics of the paying off a loan changes with different loan sizes, payment due dates, interest paid and when your income is paid and how many times per month.
Having a budget and continually viewing your monthly expenses you can see what variations can do to the acceleration of the debt pay off time. By making changes in your spending habits you can observe some drastic changes to your pay off time. This instant feedback motivates the participant keeping the participants on track. Making early partial payments but making a second payment later in the month will equal the total amount due for the month and equal the same cash flow but will significantly affect the total interest paid that month.
The knowledge required to make these kinds of decisions could be more work than most people have time for. Just because it might seem to be logical to pay off a loan with a higher interest rate it might be more important to pay down the loan with a smaller interest rate because the total amount owed times the smaller interest equals a larger amount of interest paid than the smaller loan with the higher interest amount. A bimonthly payment plan has some significant results even though the total payment may be exactly the same because part of the payment is paid early in the month. It is important to understand that if you are paid biweekly or bimonthly than you should change the way you pay bills.
Most acceleration reduction programs have built in algorithms that make decisions on how your bills are paid. To decide on which program works best for you will require looking at the bullet points of each program. Some programs are free but have no support and make no guarantees as to results, some programs have a small initial setup fee but require a monthly fee, and then some programs require a large fee up front but will promise support for the entire loan period. The best way to decide is to do a Google search on line for the phrase 'accelerated mortgage reduction' and then decide which program meets your needs the best.
To further validate the importance of this investment strategy one only has to see that at the end of the accelerated mortgage reduction plan you will have increased your net worth by the value of the mortgage you started with. If you started with a 0,000 mortgage you will have increased your net worth by 0,000 in lets say a period of 12 years. To duplicate this increase in net worth outside of this investment strategy one would have to save 00 per month above your monthly cash flow for the same 12 years. The return needed between 5 and 8% would depend on your particular tax bracket. For most families invesing an extra 00 per month would be a daunting task and requiring more risk than paying down the mortgage through an accelerated mortgage reduction plan.
Although the results will vary for any acceleratd mortgage reduction plan and some programs are better than others the total effect will be pretty much the same. So increasing your net worth and using an accelerated mortgage reduction plan is a financial plan that can open future financial doors and improve your quality of life. Of course by paying off your debt early will also allow you to take the original mortgage payment and put it into a conservative savings program which will significantly increase your net worth even further.