What is Mortgage Cycling?

Ken Black

Mortgage cycling is a mortgage repayment strategy that, if followed, will reduce the length of the home loan and save significant amounts of money through a reduction in interest payments. While the mortgage cycling strategy is sound, some have advocated using home equity lines of credit to finance the strategy. That may or may not be risky, depending on your situation.

Mortgage cycling can reduce the length of a loan and save money on interest.
Mortgage cycling can reduce the length of a loan and save money on interest.

To simplify mortgage cycling, assume that you have a mortgage payment of $1,000 US Dollars (USD) per month and that this mortgage is relatively new. It will be front-loaded with interest. Let's say the interest versus principle payment is $900 USD to $100 USD. That means only $100 USD each month is going to the principle at first.

Putting an additional $100 USD toward the principle means an additional month has been paid off. If this is done for 12 months, you have saved an entire year on the backside of the mortgage. With mortgage payments of $1,000 USD over the course of the last year of the mortgage, that means you have saved nearly $10,800 USD that last year. This is because you spent $1,200 USD the first year to save 12 payments of $1,000 USD each month in the final year.

Doing this each month means you would cut the length of your mortgage in half. Although as time passes, the payments made each month would increase, simply because as the mortgage ages, the payoff of the principle amount gets larger. However, even if a full principle payment is not made every month, mortgage cycling can still offer significant savings.

Some mortgage cycling strategies call for substantial payments twice a year. For example, it is suggested taking out a home equity loan of $5,000 twice a year to make large payments. The key to this strategy being effective is paying off the loan every six months -- something many may not have the ability to do.

Financing mortgage cycling in this way can pose significant risks. If a situation arises where the loan holder cannot repay the entire home equity line in six months, they have, in effect, two house payments to concern themselves with. Those wishing to engage in a mortgage cycling strategy that calls for one or two large, lump sum payments a year would be better to simply hold off making the payments until they have saved up the money needed, then paying once the money is saved up.

Following this strategy accomplishes the same thing as a home equity loan would do, albeit six months later. However, it also does not obligate the homeowner to more debt. The goal of any mortgage cycling strategy should be to get out of debt quicker. not to get in more debt.

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