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!burl!ulysses!mhuxr!mhuxt!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: <412@tekcbi.UUCP> Date: Mon, 18-Nov-85 21:00:55 EST Article-I.D.: tekcbi.412 Posted: Mon Nov 18 21:00:55 1985 Date-Received: Wed, 20-Nov-85 00:52:45 EST References: <1389@decwrl.UUCP> Organization: Tektronix, Beaverton OR Lines: 206 Summary: MASS CONFUSION I have read so many different answers to the original question, that I am totally confused about the whole thing. Am I the only one???? or did I just happen to fall off a turnip truck |-).?????? Let's summarize what we have got here --------: R.M. posts the original in article 975 > 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. Well, I couldn't believe any of this. Then we heard from: >Ilya Goldberg >12 years seems a much smaller time period than 30 and is not very believable. >Could someone post a formula either verifying '12 years' or giving the >correct period of time based on the above pay off arrangement? Right On. Let's see some formulas and proofs. How about some examples??? Next we heard from: >S.SINGHAL >In the semi monthly mortgage plan you pay every second week instead of twice a >month. Since there are 52 weeks in a year, you make 26 payments each equal to >half the monthly payment. Consequently you make 13 monthly payments a year >instead of just 12. This extra payment, along with some interest savings, >enables you to pay off a 30 year mortgage in just 18 years or so. Oh, now we're making one extra payment per year. OK, I can buy that. I can see where it will shorten the length of time somewhat. But not by 12 years! And then along comes: >Andrew Koenig >If you pay twice a month instead of once, and your payments are >half what they would be otherwise, you pay off the loan in half >the time (believe it or not)! So the number above should have >been 15 years, not 12. Oh, now we cut it in half. Let's see, now. Some say 12 years, some say 18 years, some say 15 years. Where are the facts to support these claims?? And how about the statement from: >Partha Dasgupta >No Way! By your logic, if I made 4 payments a month, at one-fourth the monthly >rate, I would pay off the mortgage in 7.5 years. >If you beleive that, I would love to borrow $100,000 from you, at those terms, >any time! Boy, count me in too. Why just $100K. At rates like that, how about $1M? Then we heard from: >Mark Horton >When I first saw this, the claim was that the bank having the >extra half payment for half the month was what was cutting down >on the interest. But this doesn't make any sense because if you >were to just prepay half a payment extra when you took out the >loan, it would give the bank that same amount of money all the >time instead of half the time, and obviously it would just apply >to the principle and make almost no difference. >Finally I read something in the Sunday paper that explained it. >It isn't a semi-monthly payment, it's a bi-weekly payment. Since >there are 52 weeks in a year, you in effect make 13 months worth >of payments every year instead of 12. This extra payment is what >is bringing down the mortgage that much more quickly. Oh, OK, I think. I guess we have a consensus(sp) on one point, anyway. It is a bi-weekly payment, not semi-monthly. Then someone with experience wrote: >Marsh Gosnell >Check the fine print. All of the half pay programs I've seen call for >you to pay half the amount every two weeks (not twice a month). Having >recently purchased a house, I carefully investigated this kind of mortgage >and concluded that they aren't worth it. >Almost ALL of the interest savings come not from the fact you are paying >more often but because you are paying the equivalent of 13 "monthly" >payments each year. If you were to take out a conventional 15 or 30 year >mortgage and pay 1/12 extra each month you pay off the mortgage within a >month or two of the half pay mortgage. And then, Robert is going to help explain it: >Robert E. Schleicher >There are two versions of this type of plan, which I think are being >mixed-up a little in the above discussion. >1. As described above, you make two 1/2 payments a month. This provides > a fair savings in overall interest payments, but not enough > to pay off the loan in 12 years (it saves several years, though.) >2. The other variation is that you pay 1/2 of what would have been your > monthly bill, but every two weeks (or, alternatively, your old > monthly bill every four weeks). This amounts to making 13 months > of payments every year, and DOES pay off the loan very quickly, > in about 12 years. Of course, you're really paying a higher effective > monthly payment. Somehow, I can't see it. How about taking a real life example and showing it? Considerations: Does it work at all interest levels? Does it work at all principal levels? I'll give you one to work on-- My loan is for $32K. length is 30 years. rate is 8.75%. monthly payment for principal and interest is $232. If the payout is twelve years, then that means I have paid 12 * $232 extra for principal = appx $2850. That is less than 10% of the loan. Somehow I can't see where this is going to work out. How about a month by month listing of what the principal balance and interest are? But read on: > >Suzanne Barnett-Scott >What I have heard is that the payments are bi-weekly, not >semi-monthly, which means you pay approximately 13 months >worth of mortgage payments each year. For example, if your >payment is $1000 per month, and you pay $500 every two weeks, >you pay a total of $13000 in the year, not $12000. > >Yes, this pays your interest faster, but, you could pay off the >loan even sooner if you have that extra $1000 applied directly to >the principal, not the interest first, as are most mortgage payments. Hmmmm. And finally, the first posting with some meat----- I mean substance: >Andrew Koenig >Whether or not you can pay additional principal (please note the spelling!) >on your mortgage depends on whether the lender allows it. This, in turn, >depends at least in part on whether the laws of your state require the >lender to allow it. In New Jersey, for example, all mortgage loans >must be prepayable in any part without penalty. Such loans are sometimes >called "simple interest" loans. > >Here's how it works. On January 1, you closed on a house and got a >$100,000 loan at 12% nominal rate to finance it. Although the banks >here say the loan is 12%/year, it is really 1%/month, or, if >you like, 12%/year compounded monthly. > >Thus, at the end of January, you owe the bank: > > 100,000 your principal as of January 1 > + 1,000 1% interest on your principal. > >plus enough extra to make up the payment you agreed on (which, according >to our assumptions, is $1028.61 for a 30-year term). This extra is >$28.61 for the first payment, so after you have made this payment, >you owe the bank $99971.39. Now, at the end of February, you owe the bank > > 99,971.39 your principal as of February 1 > + 999.71 1% interest on your principal. > >plus enough extra to bring your payment up to $1028.61. This extra is >$28.90 this time around. See, you're paying it off already! :-) > >Here are the similar figures for the first year: > >period balance principal interest > 1 100000.00 28.61 1000.00 > 2 99971.39 28.90 999.71 > 3 99942.49 29.19 999.42 > 4 99913.30 29.48 999.13 > 5 99883.82 29.77 998.84 > 6 99854.05 30.07 998.54 > 7 99823.97 30.37 998.24 > 8 99793.60 30.68 997.94 > 9 99762.93 30.98 997.63 > 10 99731.94 31.29 997.32 > 11 99700.65 31.61 997.01 > 12 99669.04 31.92 996.69 > >The important point to realize is that on a simple interest loan >with a fixed payment and interest rate, the only thing that determines >how much time you have left to pay it off is what your principal is. > >For instance, my $1028.61 payment at the end of January reduced my balance >to $99971.39. If I had paid $1086.70 instead, I would have reduced my >balance to $99913.30, and would effectively now be beginning period 4. >I would effectively have reduced the term of my loan by two months >for the cost of $58.09. > >Sounds like an irresistable deal, right? Well maybe. If instead I had >taken that $58.09 and invested it at 12% a year, compounded monthly, >I would have exactly enough money 29 years and 10 months from now to >pay off the balance of the loan, two months early. > Now it's 29yrs and 10 months. And I am still confused. My gut tells me that you can pay it off in less than 29 5/6 years but certainly more than 12-18 yrs. I would imagine it to be somewhere around 25 years. But, I am not a financial person. What we need now are no more "I Think"'s but some real examples of how it works, itemized out so we can understand it. Anyone else feel this way???? Is there a net.financial?????