The Arithmetic of Prepaying Your Mortgage
Q: How much time can be cut from a 30-year fixed interest rate mortgage if a borrower were to make payments at two-week intervals rather than at monthly ones? Also, what loan conditions need to be in place to do this? --D. V.
A: Basically, you save money--lots of it!--by making biweekly mortgage payments. But, most California lenders don’t offer you this opportunity directly. However, if you have a variable- or adjustable-rate mortgage loan, you can fashion your own accelerated payment schedule and get the same advantage of a biweekly payment plan.
Here’s the set-up. Major residential lenders in California charge a penalty for prepaying a fixed-rate mortgage. Most lenders do not charge a penalty for prepayment of adjustable- or variable-rate mortgages. So, for starters, what you need is an adjustable- or variable-rate mortgage.
Having said that, let me add that it’s virtually impossible to forecast how making biweekly payments would affect your total payments without knowing precisely what interest rates are in effect during the course of your loan. But--for example only--let’s return to your hypothetical 30-year mortgage and say the interest is fixed at 10%. If you were to make payments every two weeks, you would pay off your mortgage in about 21 years and would pay a total of $601,224. If you paid it off in 30 years, your total payments would be $789,814. By paying it off about nine years early, you would save $188,590. (These calculations were made by Home Savings of America.)
The bottom line, as you must already know, is that a biweekly payment schedule means that you make 26 payments per year, or the equivalent of 13 months. And this is how you must look at it.
Most lenders are not set up to receive mortgage payments every two weeks, and they don’t allow such a schedule because of the expense and paperwork. But this does not mean you can’t make an additional payment during the year or include a bit of extra money in each of your regular monthly checks. To get the advantage of biweekly payments, all you have to do is make an extra monthly payment--a 13th payment--or include the equivalent of 1/12 of your regular payment as an extra payment each month. Most lenders will accept this without any problem, and you will have achieved your goal of prepaying your mortgage.
By the way, the higher the interest rate on your mortgage, the greater the advantage of prepaying the loan.
EXAMPLE: $250,000 MORTGAGE
Interest rate Monthly payments Biweekly payments Savings 10% $789,814 total paid $601,224 total paid $188,590 over 30 years over 21 years 9 years 11% $857,091 total paid $618,590 total paid $238,501 over 30 years over 20 years 10 years 12% $925,751 total paid $635,773 total paid $289,678 over 30 years over 19 years 11 years
Here’s How to Redeem a U.S. Treasury Bond
Q: I need some information about the process of redeeming a 10-year U.S. Treasury bond that is maturing very shortly. I often read about how to purchase these instruments, but I do not recall seeing anything recently regarding redemption. --H. P. H.
A: It’s really quite simple, and you have several choices. You may go directly to the Federal Reserve Bank branch closest to you--the L.A. branch is located downtown at 950 S. Grand--to present your bond. You will be asked to complete some paperwork. A check for the appropriate amount will be mailed the day the bond matures. Be sure to bring the bond with you.
If it isn’t convenient to go to a Federal Reserve Bank branch, you may take your bond to your local bank and ask to redeem it. Most banks will oblige you, but you may be required to pay a fee. You are probably best served to go to your bank about five to 10 days before the bond actually matures to ensure prompt redemption.
Your third choice, and probably the most popular among bondholders, is to redeem the bond through the mail. Your first step is to complete a W-9 tax form which you can obtain at your local bank branch. This form simply certifies that you do not owe any back taxes to the government. Include the completed W-9 form with a letter stating your desire to redeem your bond, which you should identify by its serial number. Sign the letter in your own handwriting and don’t forget to include an address where your bond proceeds should be mailed. Finally, include the bond, endorsed on the back by all holders. This means that both a husband and a wife must sign the bond if both are listed as owners. Mail the letter to the Federal Reserve Bank, P.O. Box 2077, Terminal Annex, Los Angeles, Calif. 90051.
And now for the most important part: Send the letter by either certified or registered mail to ensure that it can be traced if it becomes lost in the postal system. After all, you wouldn’t want to trust your bond to a 25-cent stamp, would you?
You may begin the mail-order redemption process up to two weeks before the bond matures to ensure that you receive your proceeds on the exact date of maturity.
Bondholder Seeks to Join Class-Action Suit
Q: Please tell me the names of the attorneys handling the class-action lawsuit on behalf of American Continental Corp. bondholders. I’d like to join the crowd! --E. M.
A: The principal attorneys are: Joseph W. Cotchett Jr. at Cotchett & Illston, 840 Malcolm Road, Suite 200, Burlingame, Calif. 94010; Ronald Rus of Alvarado, Rus & McClellan, 1100 Town and Country Road, Orange, Calif. 92668, and William S. Lerach of Miberg, Weiss, Bershad, Sprecthrie & Lerach, 225 Broadway, Suite 2000, San Diego, Calif. 92101.
You should know that whether you contact these attorneys or not, you are covered by any settlement a class-action suit might generate on behalf of the bondholders. According to the terms of a judicial ruling earlier in the proceedings, all the bondholders are considered a single class of plaintiffs and will share any settlement. The names and precise ownership amounts are a matter of record.
