Search:

News by Subject
Complete list of specialty news sections.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Mortgage Industry News
Subscription-based news for people who work in real estate finance.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from MortgageDaily.com.

Mortgage News Reprints
Put entire MortgageDaily.com stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed MortgageDaily.com stories for your web site or for your RSS reader.

News Archives
Archive of news entries.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Graphs
Directory of lenders, branch operators and mortgage service providers.
home advertise email RSS about us
 
HOT Topics Rates Glossary LO License Search
Consumer Mortgage News
Free mortgage news for current and prospective borrowers from a leading online mortgage industry news publication.



Early Payment Options for Mortgage Borrowers

The Mortgage Professor: Mortgage repayment: Questions about systematic extra payment plans

Feb. 26, 2016

By JACK GUTTENTAG The Mortgage Professor - Tribune News Service


For many borrowers, it is easier to accelerate the pay down of a mortgage balance if the process of making extra payments is routinized.

Then the extra payments become a habit.

The questions posed below apply to plans of this sort.


Q: What is a bi-weekly mortgage and how does it work?

A: A bi-weekly mortgage is one on which the borrower makes a payment equal to half the fully amortizing monthly payment every two weeks.

Since there are 26 biweekly periods in a year, the bi-weekly produces the equivalent of one extra monthly payment every year. This results in a significant shortening of the period to payoff.

For example, a 4 percent 30-year loan converted to a bi-weekly pays off in 310 months -- or 25 years, 10 months.


Q: For whom does a bi-weekly make sense?

A: It makes sense for borrowers who have the capacity to pay more than required but need the discipline of a well-defined routine.


Q: Do all lenders offer a bi-weekly option?

A: No, and some of those that do charge for it.

But you can always create your own.

Open a bank account into which you deposit half the payment every two weeks, and withdraw the full monthly payment every month for submission to the lender. At the end of a year, there will be enough in the account for a double payment.


Q: Are there any approaches that don't require a special bank account?

A: Yes, the simplest is to increase the scheduled monthly payment by one-twelfth.

If the payment is $1,200, for example, you remit $1,300. Doing it this way will actually pay off the loan a little sooner than using a bi-weekly because the loan balance begins to decline with the first payment rather than after a year.


Q: What is a semi-monthly mortgage?

A: A semi-monthly mortgage is one on which the borrower makes half the fully amortizing monthly payment on the 15th of the month, and the other half on the first of the month.

In contrast to the biweekly, there are no extra payments, but payments are credited twice a month rather than once a month.

That is the only source of benefit to the borrower, and it is small.

On 30-year mortgages with rates of 6 percent or less, payoff occurs after 719 half payments, shaving just one-half of a month off the term.


Q: For whom does a semi-monthly payment make sense?

A: It may make sense for any borrower who finds that making payments twice a month is convenient, and whose lender offers the option at no cost.

You cannot roll your own semi-monthly, because it is wholly dependent on the willingness and ability of the lender to credit payments twice a month.


Q: Is there any way to add extra payments to a semi-monthly?

A: Yes, borrowers who are using a semi-monthly can add to their payments in any way they like, and I have developed a spreadsheet that is designed to help them.

It allows you to assess the impact of additional semi-monthly payments on your payoff period.

For example, the borrower with a $200,000 mortgage at 4 percent who pays $477.42 twice a month gets to a zero balance just half a month early without extra payments. But if the borrower rounds off the payment to $500, payoff occurs after 659 payments, or 30.5 months early.


Q: What is a weekly payment mortgage?

A: A weekly payment mortgage is one on which the fully amortizing monthly payment is multiplied by 12 and divided by 52 to get the payment made every week.

There are no extra payments and the weekly payments are credited to the borrower's account only once a month. The weekly payment does not result in an early payoff unless the borrower makes extra payments.

The lender may charge for offering the facility.


Q: For whom does a weekly payment mortgage make sense?

A: The only borrowers who might benefit are those who are paid weekly and place a high value on the budgetary discipline imposed by having to pay their mortgage weekly.


Q: Is it true that the payoff period of a mortgage can be cut in half if the borrower doubles the principal payment each month?

A: Yes, it is true, but there is an important proviso.

The extra payments required are larger than the principal payments that are customarily displayed as part of an amortization table, because such tables assume that there are no extra payments. For the scheme to work, the extra payment in each month must match the actual principal payment in that month, which amount has been affected by prior extra payments.

This means that the required extra payment has to be recalculated every month.


Q: For whom does a doubling-of-principal scheme make sense?

A: It makes sense for a nerd with rising income.

You have to be something of a nerd to appreciate having to recalculate the required extra payment every month.

And you also must have the capacity to raise the ante every month.

For example, in using this technique to pay off a 30-year 4 percent mortgage of $280,000 in 15 years, the required extra payment would rise from $403 in month one to $597 in month 60, to $889 in month 120, to $1325 in month 180.


Q: How would the mortgage professor accelerate the payoff of his mortgage?

A: He would develop an extra payments plan using a special calculator he and Chuck Freedenberg designed specifically for this purpose.

The calculator provides maximum flexibility in defining extra payment intervals, amounts, and durations, and it shows the payoff period for any combination of these factors.

With this calculator, I can design a program that is geared exactly to my own unique needs, and monitor the progress from month to month.


About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

next story

back to home page


To see more of The Mortgage Professor or to subscribe to the newspaper, go to www.mtgprofessor.com

Copyright (c) 2016, The Mortgage Professor

Distributed by Tribune News Service.


This story was distributed by TNS - Tribune News Service
 
Refinance News
News about refinance programs, pricing and production.
H A R P 2.0 News
News stories about the H o m e Affordable Refinance Program including expanded program guidelines.





Copyright © 2016 MortgageDaily.com
MortgageDaily.com Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

pricing engine directory

wholesale lender directory

More Mortgage News Resources (MortgageDaily.com full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

free mortgage news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter

MBS

mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

refinance news

reverse mortgage news

sales blog

secondary marketing

servicing news

subprime news

wholesale lenders

wireless mortgage news