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Tempted By Mortgage Acceleration Programs? Not So Fast

Tuesday, 17 Feb 2009 | 4:49 PM ET

Despite the fact that homeowners are having a hard time paying their mortgages and, even worse, understanding the basic terms of their home loans, mortgage lenders and some other creative “cash flow management” companies are still pushing the need for accelerating your mortgage payments. Personal finance and tax experts often criticize the strategy as being a poor use of your money. Here’s why:

1.You’re “de-liquefying” your cash – When you spend more money paying down your home loan you convert liquid assets into non-liquid assets. This is problematic especially if you believe the stock market will eventually recover. The more money you throw at your loan the less you have to invest in the market. This is problematic given that many experts predict the market will eventually rebound at a rate that easily outpaces the rate of your home’s appreciation during any sort of real estate recovery. If you have extra money that you don’t know what to do with, save it for your “rainy day” fund and keep it in an interest-yielding account such as a money market account or short-term certificate of deposit.

2. You actually might want and need mortgage debt – Of all of the debts that we, as individuals, incur there are so few that offer as nice of a tax break as your mortgage interest. In most cases every dollar of interest you pay on your mortgage loan, which is usually substantial, is completely tax deductible. This is especially nice in the early years of your loan when the distribution of your monthly payment is heavily tilted toward interest. For example, I have a home loan, 30-yr fixed at 6%, and every month I pay $1,446. Out of that amount all but $230 goes right into the lender’s pocket as interest. And I write off every cent of that at the end of the year.

4. You can do it yourself, for free – Mortgage lenders position these programs as if they’re doing you a favor by letting you pay back your loans faster. And, even worse, some third party companies actually want to charge you to facilitate the process of making more frequent payments. The most popular is the weekly payment taken directly out of your checking account. These services are nothing more than a lender getting paid more frequently, and on their timetable. This is great for their cash flow and poor for yours. If you insist of paying more than you have to each month then look at your mortgage statement. Do you see that section called “Additional Principal?” That’s where you can add in some amount of extra money each month and direct the lender to apply it to your principal loan amount, for free.

5. Your money is better spent elsewhere – If you really want to make better use of your extra money each month then you should throw it at your credit card debt. The interest rate is probably much higher than your mortgage interest rate, it’s not tax deductible and is damaging your credit scores much more than your mortgage ever will.

John Ulzheimer is a nationally recognized credit expert, president of Consumer Education for Credit.com and contributor to On The Money. Learn more about him at CreditExpertWitness.com.