(Updated November 2014)

Mortgage cycling is a repayment strategy for those who want to get out from under mortgage loans and off the grid of rising mortgage rates. Like other accelerated payoff plans, it involves making more payments than required, at fixed intervals, in order to reduce your home loan debt. What distinguishes the cycling approach is that it works more aggressively than other strategies. If normal amortization of mortgage loans is like walking, and bi-monthly plans are like jogging, then mortgage cycling is Lance Armstrong going downhill with a strong wind at his back.

The mortgage cycling strategy

By paying off your principal early, you also reduce your interest payments, and a greater percentage of each monthly payment goes toward paying off principal. The faster you reduce the principal, the faster you pay off the loan.

Let's say, for example, that you have a mortgage loan of $100,000. Make two extra principal payments of $5,000 each, spaced six months apart, to contribute an additional $10,000 a year to paying off the principal. During the course of a decade, that repays $100,000, or your entire balance.

In actuality, you'll pay your loan off in less than 10 years, because your monthly payments also continuously contribute to nibbling away at principal. As the principal shrinks by more than $10,000 annually, your interest payments are put on a starvation diet and soon wither away to nothing.

Who might it work for?

Mortgage cycling is a strategy that can work well for business owners or persons who work on commission in cycling businesses or receive a large chunk of their earnings in annual bonuses. These people can make their regular payments throughout the year and when they enter their flush time, can throw a big chunk of cash into their mortgage and put a major dent in their loan principal.

Unless you have cash reserves to invest, mortgage cycling isn't a practical strategy, because it may put unnecessary strain on your budget. Some cyclers use home equity loans to come up with their lump sums, and pay off the equity loans gradually each year. But if interest rates are rising-or home values are declining-equity loans may not be a viable aid.

Mortgage cycling light

If you don't have large piles of dough on hand, you might still be able to try a smaller-scale type of mortgage cycling. People who get paid on a weekly or biweekly basis, rather than once or twice a month, get an extra paycheck either four or two times a year. Kicking all or part of that toward your mortgage would be a form of mortgage cycling.

Imagine a borrower who makes $52,000 a year, meaning they get paid either $1,000 every week or $2,000 every two weeks, before taxes. That means $4,000 in "extra" paychecks each year in those month with an extra payday. Putting half of that toward a $250,000 30-year mortgage ($2,000 a year) would allow you to pay it off six years earlier.

Another strategy for people paid on a weekly or bi-weekly basis is to pay your mortgage out of every check, in equal amounts. So if you're paid weekly, you pay one-quarter of your monthly mortgage payment out of each check; bi-weekly, you pay half of each payment with each check.

The benefit of this is that it allows you to make an extra full mortgage payment every years - 13 payments instead of 12. In the example above, this would pay off the loan in 26 years - not as fast as you would by making massive payments once a year, but still knocking several years off the loan - and realizing some significant savings in interest.

Most effective with higher rates

It's worth noting that the benefits of these strategies increase as mortgage rates go up - making extra payments on a mortgage that carries a 7.5 percent rate will whittle it down faster than doing so with a loan with a rate of 4.5 percent, because you're reducing the amount of principal that interest rate is calculated against. So the higher the rate, the greater the benefit of paying down your principal more quickly.

Crunch the numbers ahead of time, and if the results balance out in your favor by eliminating your mortgage loan, it may be time for you to become a devout mortgage cyclist. Within 10 years, you could cross the finish line, free of mortgage loans, and a lot healthier and fiscally fit.

Published on November 27, 2006