It's Smart To Double Up On Mortgage Payments

When I first started reading your excellent column I didn't own a house. But thanks to your constant encouragement to buy a home, last month I closed the purchase of my first home. It is just a little two-bedroom house, but it's mine. Or should I say, the bank has the mortgage and it lets me live in the house as long as I make the mortgage payments? I recall you explained some time ago how to cut a 30-year mortgage in half to make it a 15-year mortgage. I should have clipped that article, but I didn't. Please explain the formula again.

A: Your situation is a classic example of why I often repeat the same types of questions. There is constantly a new group of readers to which this is new information. And the old-timer readers like you tell me they enjoy occasional "re-runs" of the same type of questions from new readers.

To cut your mortgage from 30 to 15 years, just double up on your principal payment each month. At first this will be easy because the principal portion of your monthly payment is so small and the interest portion is so large. But each month the extra principal payment grows.

To illustrate with a simplified example, suppose your monthly payment is $1,000 and $999 goes toward interest with $1 going toward principal. Just add an extra $1 and pay $1,001 total this month. Suppose your principal payment next month is $2, then add an extra $2 and pay $1,002 total next month. Keep this up by increasing your principal payments for 180 months and you will have paid off your mortgage in 15 years.

To know the exact amount of your monthly principal payment, you'll need an amortization schedule. Many lenders will give you one free. Others charge a few dollars. Some nasty lenders won't give you one, but if you insist they must account for each monthly principal and allocation. If you complain loud enough, you'll get what you want.

Q: We recently bought a new house. In talking with the loan agent he told us how to shorten a 30-year loan without making additional principal payments. He said that by making mortgage payments two weeks before they are due we can save interest costs, since the payment will be credited to our loan two weeks early, thus saving 14 days of interest each month. Or is it better to add a few extra dollars to each payment or make one extra monthly payment each year?

A: The loan agent is correct only if you have a simple interest mortgage on which interest is calculated daily. Then it is to your advantage to pay that mortgage as early as possible each month.

However, if you have an amortized mortgage like most home loans, paying it early is not smart. Then the best ways to save interest by paying the loan off early are to either double up on each monthly principal payment or make an extra payment each year. Get out your loan documents to learn if you have a simple interest loan or an amortized mortgage.

(Copyright 1991, Tribune Media Services Inc.)

Bob Bruss' column appears Sundays in the Home/Real Estate section of The Times. Letters and comments should be sent to Bob Bruss, Seattle Times Newsroom, P.O. Box 70, Seattle, WA 98111.