This is one of about fourteen issues of the Debt Free newsletter.
I was impressed by Mr. Carroll's commitment to share what he found out with others
and I asked him to include one of his articles in the Infosite Library.
He writes from personal experience, and doesn't sell and credit or debt related services.
TABLE OF CONTENTS
1. You Can Save THOUSAND$.. THOUSAND$.. THOUSAND$..!
2. Mortgage: A Surprising Definition!
3. Weekly or Bi-Weekly: What the experts are saying!
4. Distressing Facts Of Monthly Payments!
5. Time to Calculate Your Savings!
6. Weekly and Bi-Weekly Calculations!
7. The Ultimate Strategy!
8. The Solution!
AUTHOR'S INTRODUCTION
Despite my previous involvement in real estate as a realtor for 15 years,
just two years ago I discovered the magic of weekly (or bi-weekly) mortgage payments.
I had never arranged a mortgage for a buyer.
Once I understood the huge financial savings that were available by refinancing my current mortgage and switching to a weekly payment system, I was able to reduce the mortgage from a 20 year "albatross" to a 9 year payout with a $75,000 +/- savings in interest.
Now, when you stop to think about how much "before tax" income one needs to earn in order to pay that extra interest, it will be difficult to keep from weeping uncontrollably. This "before tax" will also apply, even if you can deduct some of the mortgage interest for tax purposes.
Am I convinced or what?. B e y o n d a d o u b t!
I am living proof that this works and every month that goes by the excitement grows in knowing that I will be out from under this burden. I am so focused that I have chosen to forgo some of life's other so called pleasures. Like another Cadillac!
SIGH!
The "secret" formula - don't expect your lender to tell you about this - that allows you to lop thousands of dollars and years of your mortgage is based on a principle well known in financial and banking circles: --> PREPAYMENT OF PRINCIPLE <--
MORTGAGE: A SURPRISING DEFINITION
The root meaning of the word MORTGAGE stems from the French word "mort" meaning "death", and "gage" a "wager or pledge". So.. "death pledge" is an accurate description for the word mortgage.
DISTRESSING FACTS OF A 30 YEAR MORTGAGE:
* After paying 15 years on your 30 year mortgage, you'll still owe 90% of the amount you borrowed!
* After paying nearly 24 years, you'll still owe over 50%!
* You will pay over 3 TIMES the amount you originally borrowed before paying off your mortgage!
* To make matters worse, the FDIC estimates that 1 out of every 2 mortgages are miscalculated, overcharging homeowners $8 - $10 billion dollars each and every year!
* Of the 52 million mortgages in the U.S., only 2.7% of homeowners ever prepay for more than a year!
(How sad).
* It will take nearly $500,000 in gross income to net $300,000 in mortgage payments to pay off a $100,000 loan!
* If you move about every 5 to 7 years, like most Americans, you are really paying 91% of your payments toward interest on your loan!
* After paying every month for 10 years, you will have paid off only about 10% of your loan!
WEEKLY OR BI-WEEKLY: What the Experts are Saying!
Your mortgage is costing you $50,000 to $100,000 more in unnecessary interest payments.
You can pay off your mortgage 10-15 years early! Here's How...
By converting your monthly payments on your current mortgage to a Split-Mortgage payment schedule or by refinancing and going to a weekly or bi-weekly payment.
(These articles date back and despite enough publicity, most people have not taken the time to investigate these true savings.)
"When prepaid on a bi-weekly schedule, a $70,000 mortgage at 10.5% annual interest produces a savings of $60,000 compared with a
standard 30-year payback." - Wall Street Journal, January 18, 1989
"If you have a $100,000 bi-weekly mortgage instead of a regular 30 yr mortgage at 10.5 percent interest, you could save nearly $86,000 in interest over the life of the loan."- Consumer Reports, June 1988
"The result on a $100,000, 30-year mortgage at 10%,is that you can burn your mortgage in just under 21 years and save $78,359 in interest." - Money, April 1988
Those in the media and financial community are unanimous in their support of the bi-weekly prepayment program.
Here are some other examples I found. Although the interest rates are higher than they are currently, the basic math and strategies to reduce your outstanding "debt" are still valid.
Examples of dramatic savings you can achieve by using this formula.
1. On a loan of $125,000 at 11% for 30 years, by prepaying a mere $25 monthly, save $47,538 in interest costs. Few if any investment gives you such a fantastic return for such a small outlay.
What's more, you'll own your home free and clear almost 4 yrs sooner and you keep the $47,538 in your own bank.
2. If you borrow $100,000 over 30 years at 10.5% you will wind up paying $329,306 by the end of the loan. That's $229,306 more than you borrowed!
This same mortgage you will pay off in only 21 years 10 months. by using weekly payments.(savings of $82,093 in Interest alone)!
3. A 30 year fixed rate mortgage at 9.5% would cost you $202,708 in interest ofer the life of the loan. On a bi-weekly payment, you will shorten the life of the loan by 8 and a half years and only pay $132,931 in interest with savings of $69,777 in interest costs.
4. Example Using a $100,000 Loan At 8.5% Standard 30 Year Loan Current payment PITI $1000 Total Interest $176,811 $500 Bi-Weekly** Paid off in 21.2 Years Total Interest Paid $115,784 You Save $61,027
5. On a 30-year, $100,000 loan at 8.875%, you pay $186,432 in interest. A bi-weekly payment plan saves you 24%, or $69,395!
6. Here's how much shorter mortgage terms can save you in interest, based on a loan of $100,000. Rates are fixed and monthly payments show principal and interest only. The interest savings represent savings vs. a 30-year mortgage.
Loan Term Rate MoPayment Total Int Interest Savings
30 years....7.75%...$716.41..$157,908.....$--,---
20 years....7.50%...$805.59..$93,342......$64,566
15 years....7.19%...$909.48..$63,706......$94,202
10 years....7.00%...$1161.08.$39,330.....$118,578
TIME TO CALCULATE YOUR SAVINGS:
This site is of value to U.S. residents since it provides an online mortgage calculator, sadly only monthly:
MONTHLY CALCULATOR
It is still very useful in helping you calculate different mortgage scenarios. You will see the savings available even when you make a small additional monthly payments.
The next site is VERY IMPRESSIVE. All kinds of calculators.
CALCULATORS
This calculator will show you how much you will save if you make 1/2 of your mortgage payment every two weeks instead of making a full mortgage payment once a month.
In effect, you will be making one extra mortgage payment per year -- without hardly noticing the additional cash outflow.
But, as your about to discover, you will certainly notice the increased cash flow that will occur when you pay your mortgage off way ahead of schedule!
If you want it, mailto:doit@cwave.com?subject=SendSoftDFS
WEEKLY OR BI-WEEKLY CALCULATIONS:
This site deals with Canadian mortgages. V E R Y R E V E A L I N G!
It calculates monthly, semi-monthly, semi-weekly and weekly payments.
Plug in the variables.(Make sure that you are sitting down.) You will be shocked (and probably mad) when you note the difference in the amount of interest you have paid and are to pay.
In addition, note how the length of time to pay out your mortgage falls dramatically.
NOTE: Very little difference between a monthly and semi-monthly payments. The same applies to weekly versus bi-weekly.
BUT notice the HUGE difference between semi-monthly and bi-weekly.
DIFFERENCE BETWEEN SEMI-MONTHLY AND BI-WEEKLY
If you re-negotiate or renew your mortgage, insist on the true bi-weekly payment system. Figure it out before you sign. Do not let the lending institution off the hook in not providing amortization tables so you can see the difference and know exactly what you are getting.
ANOTHER VALUABLE SITE:
This other site covers a lot of teritory.
Hundreds of Lenders Thousands of Mortgage Rates Constantly Updated
Over 5,000 Pages Covering: 109 Loan Programs Perfect and Less-than-Perfect Credit Every State -- Hundreds of Lenders Thousands of Mortgage Rates Constantly Updated
THE SOLUTION!
CONVERT TO BI-WEEKLY MORTGAGE PAYMENTS AND SAVE $50,000 TO $100,000 OR MORE ON YOUR EXISTING MORTGAGE AND KNOCK OFF 9-12 YEARS!
THE ULTIMATE STRATEGY
1. Check to see if your mortgage gives you the legal right to pay extra on principal every month. It should.
2. Beware of Traps! Not all lenders take the same approach to calculating weekly payments. The proper way to calculate a weekly or bi-weekly payment is:
Take the regular monthly payment and divide by 4 for weekly and multiply by 52 or divide by 2 for bi-weekly and mutliply by 26.
For example: If your monthly payment is $400.00 divide by 4 = $100.00 x 52 = $5200.00 per year. The additional $400.00 payment becomes a 13th payment in the calendar year and comes straight off the principal portion. There are 13 "4 week" periods in a year.
Some lenders will accept bi-weekly payments even if they were not part of the formal mortgage documents. Check with you lender.
3. If re-financing, calculate all the costs. Not all the costs outlined here might apply. Appraisal fee, pre-payment costs,lawyers fee, credit report, title fees, etc... Pull out your documents and see what other costs might be associated with this. Make sure that the fees requested are really necessary and that they not just some means to bill you extra fees.
Now total the amount of fees and penalties to re-finance by the weekly or bi-weekly savings to get the number of weeks it will take you to break even.
4. To keep out of financial trouble, maintain your mortgage payments about the same as you had done for the monthly amount budgeted for. BUT ... your mortgage document may allow you the following options:
A. Pre-Payments of principal,with no penalties, on the original mortgage amount of 5-10-15% or more, one a year or monthly up to that stated yearly amount.
B. To increase anywhere from an exta $5.00 to double your current outlay with no penalties. This way you can increase what you pay out, but if you suffer some unforseen expense, you can drop back to the original agreed upon payment without hurting your credit record or affecting the agreed upon payment.
C. Or both!
5. Be sure that any extra payment, be it monthly, weekly, bi-weekly or yearly is credited against the principal and not against interest. Get a new amortization schedule to insure that it is going on principal repayment. It is also very motivational to see how the debt keeps falling.
6. Make sure that if you get a loan commitment, that the approval for said amount does not say "subject to availability of funds" and that the interest rate is locked in for a period of time. No need for any surprises!
7. Reduce the amortization period.
8. Know the effective rate of interest calculation:
8.00% calculated monthly has an equivalent effective annual rate of 8.30%
8.00% calculated semi-annually has an equivalent effective annual rate of 8.16%
8.00% calculated annually has an equivalent effective annual rate of 8.00%
In the United States, mortgage interest is calculated monthly. In Canada, mortgage interest is generally calculated semi-annually. In the U.K, it is the annual percentage rate.
9. Consult 5 to 8 lenders in your area.
10. Ask yourself this: Do I really need to be in the home I am in or would a smaller one do? Could I move to the country or smaller centre?
11. Shop, Shop, Shop. Ask lots of questions and keep notes on all discussions. No question is dumb except the one you chose not to ask. A simple word would cost you thousands. Do your HOMEWORK! If need be, go to your library and get some books on mortgages.
CONCLUSION:
Success in shopping for the right mortgage will not always be measured in dollars in sense but by the absence of problems. A good mortgage will allow the borrower to do what they want, when they want, with a minimum of restrictions and fees.
In striving to becoming debt free, leave no stone unturned in your quest to reduce the interest burden on any outstanding loan.
The traditional borrowers lament - "if I only knew then what I know now" need no longer apply.
Hopefully, this will wet your appetite to do additional research and get rid of one of the most expensive "Death Wager" most of us will ever have.
A T T I T U D E is E V E R Y T H I N G !
Get out from the slavery of debt!
Invoke the law of sacrifice:
"You have to give up something, in order get something."
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Copyright (C) 1998 by Wayne J Carrol
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