Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP
Posting-Version: version B 2.10.2 (Tek) 9/28/84 based on 9/17/84; site tekcbi.UUCP
Path: utzoo!watmath!clyde!bonnie!akgua!whuxlm!whuxl!houxm!vax135!cornell!uw-beaver!tektronix!tekcbi!jimb
From: jimb@tekcbi.UUCP (Jim Boland)
Newsgroups: net.consumers
Subject: Re: Semi-monthly mortgage repayments
Message-ID: <401@tekcbi.UUCP>
Date: Wed, 13-Nov-85 13:42:34 EST
Article-I.D.: tekcbi.401
Posted: Wed Nov 13 13:42:34 1985
Date-Received: Sat, 16-Nov-85 23:41:23 EST
References: <1389@decwrl.UUCP>
Organization: Tektronix, Beaverton OR
Lines: 39

> 
> I have recently read about a new type of real estate mortgage agreement,
> in which the bank gives the buyer a mortgage at the normal insterest
> rate for, say, a 30-year, fixed-rate mortgage, but allows the mortgagor
> to pay off the loan semi-monthly rather than once a month.  The total
> monthly payments are the same, they are just split in half and paid
> twice a month.
> 
> The incredible part of this is that you manage to reduce your interest
> so much by paying the loan semi-monthly, that you end up paying only a
> fraction of the total interest you would otherwise have paid, while
> expending the same amount of money per month, and you pay off what would
> have been a 30 year mortgage in something like 12 years.

Are we missing something here??? Somehow, the logic of all this escapes me.
It doesn't make a lot of sense.
Obviously, you need to pay off the principal plus the interest on the 
amount left owing (usual method).  That is why the initial payments are
primarily interest and the final payments primarily principal.
You said that you are paying the same amount per month, only twice
a month instead of once.  I fail to see where that would affect the
total amount payed by much.  I also fail to see how the term would be
shortened significantly - certainly not 18 years.  

Now, if you had said that you make two full payments per month, then
I might buy that argument.  Primarily because one of those payments
would be primarily principal.  Then you would decrease the payback period
by over half.  In other words, if your payment were $500 per month for
30 years, you would not gain much by making two $250 payments per month.
You are still paying $500 per month for 30 years.  However, If you make
the $500 (of which $480 is interest - initially) payment on the first
and then make another $500 payment (primarily principal only) on the
fifteenth, you can see that the balance will go down rather quickly -
thus shortening the loan period significantly.

Or maybe what you're proposing is part of the new math that I don't
understand.):

This is one that someone should put to Bruce Williams.