Accelerated Amortization

What Is Accelerated Amortization?

Accelerated amortization is a process by which a mortgagor makes extra payments toward the mortgage principal. With accelerated amortization, the loan borrower is allowed to add extra payments to their mortgage bill to pay off a mortgage before the loan settlement date.

The benefit of accelerated amortization is that it reduces the overall interest payments paid by the borrower over the life of the loan. And, of course, it retires the debt sooner.

Accelerated amortization should not be confused with accelerated depreciation, an accounting method for recognizing the decline in value of a piece of property or equipment over its useful life.

How Accelerated Amortization Works

A home mortgage is a type of amortized loan, which means that the borrower repays the loan in regular installments (usually monthly) over a period of time. These payments consist of both principal and interest.

Initially, most of the borrower’s payments will go toward paying the loan’s accrued interest, with a smaller portion of each payment going toward paying down the principal. This ratio will be reversed over time, and a larger portion of the borrower’s payment will go toward paying off the principal and a smaller portion will go toward interest.

When a loan is taken out, the home mortgage lender provides the borrower with an amortization schedule. This table shows how much of the borrower’s payment each month will be applied to the principal and how much to interest until the loan is paid off.

With accelerated amortization, the borrower will make additional mortgage payments beyond what is listed in the amortization schedule. A borrower can accelerate the amortization of their loan by increasing either the amount of each payment or the frequency of payments (biweekly mortgages are a common example). The extra accelerated payments go directly toward reducing the loan’s principal, which in turn lowers the outstanding balance and the amount owed on future interest payments.

Example of Accelerated Amortization

Let’s say Amy has a mortgage with an original loan amount of $200,000 at 4.5% fixed-rate interest for 30 years. Consisting of principal and interest, the monthly payment amounts to $1,013.37. Increasing the payment by $100 per month will result in a loan payoff period of 25 years instead of the original 30 years, saving Amy five years’ worth of interest.

Advantages of Accelerated Amortization

Adopting an accelerated amortization strategy has several pluses for borrowers.

The obvious one is that it shortens the life of the loan — meaning you get out of debt sooner. More specifically, paying a mortgage in an accelerated manner decreases the loan principal faster, which means your equity (ownership stake) in the home increases faster as well. This increases your net worth and often strengthens your credit score.

Also, accelerated amortization diminishes the overall amount of additional interest that the borrower incurs. Generally, the longer a loan lasts, the more interest you pay. Although the interest rate itself doesn’t change, by reducing the principal, you reduce the total interest charged on that principal — saving money in the long run.

Limitations of Accelerated Amortization

There are also reasons why it might not make sense to pay down mortgage debt early. The most important reason is that interest in mortgage debt is tax deductible, according to the U.S. tax code. Anyone who takes out a mortgage from Dec. 15, 2017, to Dec. 31, 2025, can deduct interest on a mortgage of up to $750,000, or $375,000 for married taxpayers filing separately. While fewer American homeowners are opting to claim the deduction than in the past, it provides significant tax savings for some homeowners. By paying down a mortgage early, these homeowners could increase the income tax that they owe.

In such a scenario, it may make sense for homeowners to use the funds that they would have used for accelerated amortization to invest in a retirement or college fund. Such a fund would earn a return while maintaining the tax advantage of a mortgage interest deduction. However, very affluent buyers, who already have sufficient retirement funds and sufficient capital to make other investments, may want to pay down their mortgages early.

Some lenders include a prepayment penalty in their mortgage contracts. This is a clause that assesses a penalty to the borrower if they significantly pay down or pay off their mortgage during a specified time (usually within the first five years of the mortgage origination).

Special Considerations

Homeowners in the United States typically take out a 30-year fixed interest rate mortgage, secured by the property itself. The length of the loan, and the fact that the interest rate is not variable, mean that borrowers in the United States typically pay a higher interest rate on their loans than borrowers in other countries, like Canada, where the interest rate on a mortgage is typically reset every five years.