Mortgage acceleration allows you to pay off your mortgage faster by making more frequent payments, such as bi-weekly or weekly, instead of monthly. This reduces the amount of interest paid over the life of the loan.
The formula to calculate the accelerated payment:
\[ P = A \times i \times \frac{(1 + i)^{n \times 12}}{(1 + i)^{n \times 12} - 1} \times \frac{1}{w} \]
Where:
Imagine you have a mortgage of $350,000 with an annual interest rate of 4% and a loan term of 30 years. You want to switch to bi-weekly payments. Here's how you calculate the accelerated payment:
First, calculate the periodic interest rate:
\[ i = \frac{4}{100 \times 12} = 0.0033333 \]
Next, calculate the number of payments:
\[ n \times 12 = 30 \times 12 = 360 \]
Then, calculate the monthly payment:
\[ P = 350,000 \times 0.0033333 \times \frac{(1 + 0.0033333)^{360}}{(1 + 0.0033333)^{360} - 1} \times \frac{1}{2} \]
This gives you a bi-weekly payment of approximately $582.25.