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Please explain the paying the 30yr mortgage in 15yrs please?
Old 01-03-2011, 07:21 PM   #1
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Please explain the paying the 30yr mortgage in 15yrs please?

I've seen some posts about Charles Givens' book and I might order it. Can someone explain how the pay the 30 yr mortgage in 15 works? From what I understand it requires knowing (and paying in advance) the principal for the "next" month, but I'm a tad confused about that.

Thanks everyone, I love this site!
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Old 01-03-2011, 07:34 PM   #2
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I've seen some posts about Charles Givens' book and I might order it. Can someone explain how the pay the 30 yr mortgage in 15 works? From what I understand it requires knowing (and paying in advance) the principal for the "next" month, but I'm a tad confused about that.

Thanks everyone, I love this site!
I'm not familiar with the book you refer to but it is easy to pay a 30 year mortgage in 15 years. All you have to do is to calculate the monthly payment for a 15 year mortgage with the same loan amount and interest rate as your 30 year mortgage and make payments of that amount. There are calculators out there that you can use or someone at your bank or credit union (or your accountant) could help you with the calculation.

Obviously, your payment will be higher than under a 30 year schedule (and your interest rate will be higher than a 15 year loan rate would be), but you will have the flexibility to revert back to the lower regular payment amount based on a 30 year amortization schedule if money gets tight without being in default.
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Old 01-03-2011, 07:39 PM   #3
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Last time I had a mortgage, you could pay whatever you liked over the nominal payment. The excess was applied automatically to principal.

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Old 01-03-2011, 07:45 PM   #4
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Last time I had a mortgage, you could pay whatever you liked over the nominal payment. The excess was applied automatically to principal.

Peter
This isn't always true, if you don't speicify principal only on excess payments, many will just apply it to principal and interest.
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Old 01-03-2011, 08:10 PM   #5
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This isn't always true, if you don't speicify principal only on excess payments, many will just apply it to principal and interest.
If your monthly payment exceeds the interest for the month, all of the excess woudl be applied to principal. At least for most conventional fixed mortgage loans. They can't apply any excess to interest because interest would be paid to date, so the excess has to go to principal.
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Old 01-03-2011, 08:14 PM   #6
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Originally Posted by wilkens21 View Post
I've seen some posts about Charles Givens' book and I might order it. Can someone explain how the pay the 30 yr mortgage in 15 works? From what I understand it requires knowing (and paying in advance) the principal for the "next" month, but I'm a tad confused about that.

Thanks everyone, I love this site!
I'd suggest getting it from the library. I like his stuff, but it's not worth paying for IMNSHO.

Here's the short version of how it works:

1. Get an amortization schedule for your loan. You can ask your lender for one, or you can plug your numbers into any one of a bazillion online mortgage calculators. The key thing about an amortization schedule is that it lists the principal and interest amounts for each month's payment.
2. On month 1, pay the principal and interest for month 1 plus the principal amount listed for month 2.
3. On month 2, pay the principal and interest for month 3 plus the principal amount listed for month 4.
4. Repeat the previous two steps for another 178 payments.

Basically, after step 2 is done, you have paid for the first and second months' payments. After step 3 is done, you have paid for the third and fourth months. Because you've paid the principal amount for month 2 in month 1, you save yourself the month 2 interest. Similarly, you've paid the principal amount for month 4 in month 2, so you save yourself the month 4 interest.

Note that if you have a lender escrow account, you'll have to add the escrow amount to each payment as well.

Note that this method will cause your payments to gradually increase each month. If you want a level payment plan, do as pb4uski suggests above and just pretend like you have a 15 year fixed mortgage.

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Old 01-03-2011, 08:20 PM   #7
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If your monthly payment exceeds the interest for the month, all of the excess woudl be applied to principal. At least for most conventional fixed mortgage loans. They can't apply any excess to interest because interest would be paid to date, so the excess has to go to principal.
I don't think that's always the case and I wouldn't advise sending in extra money unless you take the proper steps to insure it is going towards your principal. When I was doing this I went to the trouble of writing two checks - one for my normal payment and a second check with a note attached saying I wanted it applied to my principal.

Here is a quote from How to Prepay Your Mortgage

Quote:
Phone your bank or mortgage company and verify that any extra payment will get applied immediately toward paying down the principal. They may ask that you enclose a form letter or add a memo to each check to this effect. Prepaying a mortgage is still uncommon enough that some companies don't seem to know what to do about it.
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Old 01-03-2011, 08:41 PM   #8
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If your monthly payment exceeds the interest for the month, all of the excess woudl be applied to principal. At least for most conventional fixed mortgage loans. They can't apply any excess to interest because interest would be paid to date, so the excess has to go to principal.
I seen this on 2 out of 2 mortgages, one stated you needed to specify in writing that any overpayment needed to go to principal only, otherwise it would be applied as if you were making a normal payment or % of one. The other mortgage, Citibank, had options to check how you wanted it to be applied.
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Old 01-03-2011, 08:44 PM   #9
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My mortgage payment slips have a line for how much prepayment you are adding. I've only been writing one check per month and in 18 years the bank has never screwed it up.

P.S. -- I agree with pb4uski in suggesting that you use a mortgage calculator (look on Yahoo finance or Bloomberg personal finance for one) and figure out what the payments on a 15 yr mortgage at your interest rate would be and then simply pay that.
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Old 01-03-2011, 09:14 PM   #10
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P.S. -- I agree with pb4uski in suggesting that you use a mortgage calculator (look on Yahoo finance or Bloomberg personal finance for one) and figure out what the payments on a 15 yr mortgage at your interest rate would be and then simply pay that.
Or round it up to the next $25/50/100 (whatever you're comfortable with) and pay it off in ~13-14 years.
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Old 01-03-2011, 09:23 PM   #11
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folks...thanks for the responses. i'm asking this question because of a potentially large mortgage ( >375K) that I may need to take out to finance a new home and the plus/minus of doing a traditional 15yr mortgage vs the flexability of a 30 yr in terms of lower payments.

as i'm not sure if i can comfortably afford the straight/consistent payments of a true 15yr at the moment. but may get a 30 yr with the hope that with wise investments i can pay it off in some way to mimic the 15 yr.

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Old 01-03-2011, 11:14 PM   #12
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folks...thanks for the responses. i'm asking this question because of a potentially large mortgage ( >375K) that I may need to take out to finance a new home and the plus/minus of doing a traditional 15yr mortgage vs the flexability of a 30 yr in terms of lower payments.

as i'm not sure if i can comfortably afford the straight/consistent payments of a true 15yr at the moment. but may get a 30 yr with the hope that with wise investments i can pay it off in some way to mimic the 15 yr.

SecondCor521: i like what your name stands for btw.
That's very sensible. Only take on a monthly payment that you are sure you can afford. You won't get quite as good rate on the 30 year mortgage compared to the 15, but the peace of mind and security are well worth the difference. Make extra principal payments when it's comfortable and you'll be amazed at how quickly the balance comes down.

I have a 15 year loan and I try to make extra payments each month and I hope to have it paid off 6 years early.
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Old 01-03-2011, 11:22 PM   #13
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I think you should ask your lender how to pay the loan down in less than 30 yrs. Charles Givens is a name I have not heard in a long, long while and I think it is considerably easier to pre-pay a mortgage than it used to be, but different lenders may have preferences. As an example it used to be recommended to write a seperate check for the additional principle payment, but I doubt that many lenders are that strict anymore.
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Old 01-03-2011, 11:54 PM   #14
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Be sure you don't sign up for a mortgage that has any kind of pre-payment penalty!

We had a 30 yr. mortgage many years ago when there were Savings and Loans. We paid a one-time service fee of $10 or something like that to get a schedule book that showed the payment number, the amount going for principal, and the amount going for interest, line by line through the 30 years of the loan.

So when we sent in the regular monthly P&I payment, we also sent in extra $ that exactly paid off n number of Principal payments in the future, along with a note saying that. In the beginning years of a loan, almost all of a monthly payment is for interest, very little for principal. So in the early years of a loan, it doesn't take many extra $ added to nuke out years worth of principal (and therefore, nuke out many years of corresponding interest payments off of the term of the loan).

As time went on, we added less and less months of extra principal on (as each additional Principal payment was increasing). And in some months when $ were tighter, we added none. By pre-paying principal, and inflation to help out too in that time frame, we paid off a 30 yr. in about 8 years. But back at the start, there's no way we could have handled a 15 yr. fixed with it's required monthly payments.
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Old 01-04-2011, 07:45 AM   #15
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You could also invest the difference in a diversified fund and pay off the mortgage in a lump sum when you are ready. That gives you even more flexibility. Of course, if you couldn't really ignore that pot of money, it might fool your emotions into thinking you have a bigger ER portfolio than you really have.
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Old 01-04-2011, 09:22 AM   #16
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You could also invest the difference in a diversified fund and pay off the mortgage in a lump sum when you are ready. That gives you even more flexibility. Of course, if you couldn't really ignore that pot of money, it might fool your emotions into thinking you have a bigger ER portfolio than you really have.
Which begs the obvious question... Should you even pay off that mortgage?
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Old 01-04-2011, 09:50 AM   #17
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Which begs the obvious question... Should you even pay off that mortgage?
Noooooo. That question is like bringing Hitler into the conversation. The thread is over.
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Old 01-04-2011, 05:59 PM   #18
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I've always been a bit confused by the get 30 year mortgage and pay it off in 15 years approach. Looking at Bankrates.com the 30 year mortgage average rate is 4.99%, 15 years is 4.32%. Why not get the 15 year mortgage and save the >1/2% a year?
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Old 01-04-2011, 06:12 PM   #19
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I've always been a bit confused by the get 30 year mortgage and pay it off in 15 years approach. Looking at Bankrates.com the 30 year mortgage average rate is 4.99%, 15 years is 4.32%. Why not get the 15 year mortgage and save the >1/2% a year?
Primarily because you're not sure you will always have the cash flow to pay the larger monthly payments attendant upon the 15 year. You are paying the extra interest for the option to reduce your monthly payments when you need to.
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