A Mortgage question...

Years ago, I heard about a formula whereby one could pay off one’s mortgage in a 6 year period by paying double on it consistently. This supposedly works on any mortgage, for any length of time, at any amount. Does anyone know anything about this?

Well, the numbers vary based your interest rate and the duration of the loan. So, yes if you pay more principal each month, your loan duration will be reduced. But no, it won’t be exactly six years for exactly doubling it. I believe if you double your principal payment each month, it’ll cut the loan duration exactly in half, but I could be wrong about that.

I, being the anal accoutant that I am, have my loan amortization table in an Excel spreadsheet. To test your theory, I made a copy and doubled the monthly payment. Sure enough, my 30 year house loan would be paid off in exactly six years.

Now, to be difficult, I recalculated my mortgage as if it were a 25 year loan, doubled the payments and the results was an 8 year pay-off.

Since I like being REALLY difficult, I recalcuated again. This time I figured in a 40 year loan, doubled the payments and the result was a surprising 9 year 9 month pay-off.

That was weird, I would have thought the longer term would have been paid off sooner.

Then it hit me. (Ouch.) When I doubled the payments, I was also doubling the escrow and PMI portions of the payment as well. So I recalculated my mortgage and took out the “extra bits” from the payment and only figured for loan repayment and interest. Doubling the payments paid off the loan in 8 years and 9 months.

So it basically boils down to semantics. You are doubling what you pay on the loan, but you are more than doubling what you are paying on the loan itself since the escrow and PMI normally do not go against the balance of the loan.

Yes. It is nonsense. By chance it works if the interest rate is 11%. That’s it. I have prepared a chart for monthly payments for 30 years down to 6 years and for 4% up to 14%. The last column is the payment ratio between the 30 and the 6 year payoff and you can see there’s a huge difference depending on the interest rate.

       30        20        15        12         6       6/30 ratio
 4    477.42    477.42    739.69    875.53   1564.52      3.28
 5    536.82    536.82    790.79    924.89   1610.49      3.00
 6    599.55    599.55    843.86    975.85   1657.29      2.76
 7    665.30    665.30    898.83   1028.38   1704.90      2.56
 8    733.76    733.76    955.65   1082.45   1753.32      2.39
 9    804.62    804.62   1014.27   1138.03   1802.55      2.24
10    877.57    877.57   1074.61   1195.08   1852.58      2.11
11    952.32    952.32   1136.60   1253.56   1903.41      2.00
12   1028.61   1028.61   1200.17   1313.42   1955.02      1.90
13   1106.20   1106.20   1265.24   1374.63   2007.41      1.81
14   1184.87   1184.87   1331.74   1437.13   2060.57      1.74 

Well, in any case, the conclusion one can come to is that paying extra principle each month is a good thing. I forgot to figure the interest rate into th equation. Thanx for your help, guys.

No! Not necessarily a good thing. If you have the discipline to make the extra payment into some type of investment fund that returns better than the interest rate on your house, it’s not a “good thing” to pay off your house early. Heck, for some people the recently-emerging “interest only” loans could be a good thing: you never reduce the debt.

You have to read the mortgage to be sure it allows early amortization. Some mortgages do not allow extra payments, as the lender wants the added interest.