Mortgages can be paid off early Accelerated payments can save thousands

March 15, 1992|By Gertha Coffee | Gertha Coffee,Cox News Service

Eldridge and Selma Miller are taking the money they saved by refinancing their mortgage and using it to pay off their loan early.

"The closer you get to retirement, the less financial obligation you want to have," said Mr. Miller, the 46-year-old elementary school principal in Stone Mountain, Ga. "We want to get our mortgage paid off while we're working."

And they have found an interesting way to do it.

In addition to making their regular monthly payments, the Millers are paying the following month's principal in advance. By doing that, they can shave off thousands of dollars in interest and retire the loan much faster.

It's a strategy many homeowners should seriously consider, mortgage experts said.

For example, on a $100,000 mortgage financed at 8.5 percent for 30 years, a homeowner who made the extra payment each month would pay the loan off in 15 years, and save $99,555 in interest.

"It's a wonderful deal," said Brooks Campbell, vice president of Metro First Mortgage Corp. in Atlanta. "You can shorten the length of your mortgage with a little bit more payment each month."

And it can be safer than locking yourself into a 15-year loan, because the plan is voluntary.

You can start or stop any time you like. If you lose your job, for example, you can stop making the extra payments until you find another one.

Here's how the strategy works:

First, ask your lender for your mortgage's amortization schedule, which lists the principal and interest portions of each month's payments.

Those amounts change every month.

Then, with every scheduled monthly payment, send along an amount to cover the principal payment due the next month. For example, your first month's payment will cover the first month's interest and principal, plus the second's month's principal.

On a $100,000 loan refinanced at an 8.5 percent rate, that means initially paying an extra $61 a month. The amount grows gradually.

The extra payments continue to be small for years. In fact, you're only paying $100 extra a month in the third year of the loan.

Eventually, as the loan ages, payments become larger. At some point, it may become too painful for some people to continue the strategy, since the extra payments eventually amount to making a double payment.

But even if you stop after just a few years, you'll still shorten the loan and save on interest.

That's because you are borrowing less by making extra principal payments.

Of course, there can be drawbacks. By plowing extra money into your home, you could be losing out on other investment opportunities.

And by paying the loan off earlier, you lose some interest deductions. But those losses are more than offset by the savings.

If you do decide to follow this strategy, keep careful track of the HTC payments. Either mark clearly on the check, or send a note with the check, explaining that the extra payment is to be applied to the principal.

It may be a good idea to send two separate checks -- one for the scheduled monthly payment, and one clearly marked as extra payment to apply to the principal.

Another way to chip years off your mortgage is to add whatever you can afford to your monthly payments, and apply it to the principal.

That's what mortgage broker Jim Pettee and his wife, Deborah, are doing.

"It all depends on when you want to get out of debt, how long you plan to live in the house, and your long-term and short-term goals," Mr. Pettee said. "Everybody's situation is different."

He works on commission, so Mr. Pettee is making extra principal payments when he can.

They owe $60,000 on the house, and would like to pay the loan off in three years.

He's only 43, but their goal is to retire to Florida in 1996.

"If you have no debt, you don't have to answer to anybody," Mr. Pettee said. "Then, we can sell mangoes off the back of a truck, or mow lawns if we want."

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