Mortgage Q & A : Biweekly Loans Floor Some S

QUESTION: My mortgage is with the local office of a statewide savings and loan, and the people there advise me that they will not accept twice-a-month payments to reduce the payoff time on my mortgage. Any suggestions?

ANSWER: I’m not at all surprised that they won’t accept biweekly payments--it requires the rather sophisticated electronic transfer of funds, and not too many S&Ls; are geared up for it.

Instead, just send an extra monthly mortgage payment to them at the first of each year. The savings in interest and the cut-down in payoff time will be roughly equivalent to making biweekly payments.

Paying Future Interest Can Halve Life of Loan

Q: I have been accelerating my mortgage payments by prepaying next month’s principal by separate check at the time I pay the current month’s mortgage payment. I have been doing this since the first payment on a 30-year fixed-interest mortgage.

By prepaying principal, I have always assumed that the loan would be paid off in about one-half the term, or 15 years.

After recently speaking with representatives of my lenders, I find that not only have they never heard of this method of accelerating payments, but they also seemed to indicate that this method is rather bizarre and unworkable. I am thoroughly baffled.

A: The principal-only acceleration simply means (still using this same 10%, $70,000 mortgage as an example) that when you made your first monthly payment of $614.30--$30.97 of it, remember, going to principal--you added a second “principal only” check in the amount of $31.22.

This would be the amount going to principal on the second line of your amortization schedule, and with your second regular payment you wrote a “principal only” check for the amount on the third line.

Each time you do this, you are knocking one extra month off the life of your mortgage and, sure enough, if you pursue it to the bitter end, the 30-year mortgage will be paid off in 15 years.

If this is so “unworkable” why have your lenders been accepting these payments? Ask them for the balance outstanding on your mortgage right now.

I don’t know how long you’ve been doing this, but if you have been doing it, say, three years (that’s 36 monthly payments plus 36 principal payment only payments) then your balance outstanding right now should be just about--as shown on your amortization schedule--what it would normally be after six years of conventional monthly payments.

Simple Formula for Calculating Principal

Q: Your recent article on how monthly mortgage payments are amortized was interesting, but you did not explain how the principal is divided for the life span of the mortgage.

In the example given, what is the formula that decides that $26.54 goes for the first month’s principal and so on for the other 359 months?

A: The formula is deceptively simple: take the balance owing (in this case $60,000), multiply it by the annual interest rate (10%, or $6,000) and divide this by 12 which gives you $500 and that’s the amount going for interest. The difference between that and the monthly payment ($526.54) is the amount going to principal ($26.54).

The trouble is that it has to be recomputed each month. In the second month, for instance, the balance is now $59,973 and so the amount going to principal would be $26.76.

‘Deed in Lieu’ Gambit Can Be Worth a Try

Q: If my condominium is valued by a real estate broker at $60,000, and I owe $65,000 on the mortgage, can I write the lenders a check for $5,000, give them back the condo and walk away with my credit intact? What other options are open to me if I have to move to another state?

A: Giving a piece of real estate back to the mortgagee and “walking away” is one of those gambits that always looks easier than it is. It’s the old deed-in-lieu-of-foreclosure strategy and while it can work in many cases, it has become an increasingly difficult ploy to sell to mortgage holders.

In principle it works to the mortgagee’s advantage as well as yours: Instead of having to go through the time-consuming and costly foreclosure procedure, he can, by “taking it back” from you, immediately put it back on the market. And nine times out of 10, it does keep this blight off your credit report.

Although some lenders are overloaded with properties of this type, you have one strong argument that might change your lender’s mind: You’re willing to buy your way out.

Never mind what the real estate broker thinks your condo is worth. It may not command the $60,000 he envisions (the selling costs are going to reduce the net even further) and your $5,000 offer may still leave the lender hung up with a loss.

However, your $5,000 offer is certainly a sweetener that he can’t afford to ignore, and so you may find him quite receptive to the deed-in-lieu-of-foreclosure offer. Also, if you do have to leave the state, this too may work in your favor. That’s a far more acceptable excuse (in the lender’s eyes) for walking away than telling him that you simply overextended yourself. It’s certainly worth a try.

Retiring Mortgage With Windfall Unwise

Q: My husband and I are retired in our late 50s--he was forced to retire for medical reasons.

We only have $20,000 in IRAs and owe $13,000 on a home-equity loan at 11.5% with 6 1/2 years left to pay.

We have come across $13,000 unexpectedly. Do we pay off our loan, leaving us with no debts, or put the money in a safe 8% investment?

A: Perish the thought of paying off the home-equity loan with that windfall. With only $20,000 in IRAs as a cushion, you’re stretched entirely too thin as it is.

Having the debt off your back is all well and good, but not at the cost you’re contemplating.

How much of those monthly mortgage payments that you been making dutifully in the first year of your 30-year mortgage have actually reduced your debt?

Try 5%. And for many years that ratio doesn’t get much better without relatively painless acceleration of your principal payments.

“Free and Clear: Getting the Mortgage Monkey Off Your Back” explains how. Send a long, stamped, self-addressed envelope and $2 to cover costs to Don Campbell, P.O. Box 80260, Phoenix, AZ 85018.

Campbell, a retired Times staff writer, now is a Phoenix-based free-lance writer. Questions can be sent to Campbell at P.O. Box 80260, Phoenix, Ariz. 85060.