“I have been advised that I can cut the life of my mortgage in half by making an extra payment to principal each month equal to that month’s principal payment. Is this true?”

I have been asked this question many times and have always answered it in the same way. “No, it isn’t true, because your extra payments are too small in the early years.”

Only recently did I decide to actually test the idea that doubling the amortization would halve the life of a mortgage. Using an extra payment spreadsheet from my web site, I assumed a 15-year loan at 6 percent, and made extra principal payments equal to the principal portion of the monthly payment.

I quickly realized that there are two ways this can be done. One way is to make extra payments equal to the original schedule of principal payments. When I did it this way, the loan paid off in 100 months, not 90.

However, if I based the extra payments on an actual schedule that reflects the impact of prior extra payments, payoff occurred in 91 months – just a tad past the halfway mark.

Principal payments based on the original amortization schedule assume no extra payments. In months 1 and 2, they are $343.86 and $345.58. If I pay an extra $343.86 in month 1, however, the actual principal payment for month 2 would be $ 347.30 rather than $345.58. The additional payment of $343.86 in month 1 reduces the balance on which the interest for month 2 is calculated, resulting in less interest and more principal in month 2.

It thus appears that you can cut the life of your mortgage in half, or almost in half, if you make extra payments to principal, provided the extra payments equal the actual principal payments. While the required amount has to be recalculated every month, this is easy to do if you download the first of the extra payment spreadsheets on my Web site, and update it every month.

The merit in this approach is that you don’t require anyone’s permission, and having a concrete goal such as cutting the life of the loan in half is one way to discipline yourself to save.

The downside of the scheme is that you must increase your savings every month over the previous month. For example, on my $100,000 loan at 6 percent for 15 years, the required savings would rise from $344 in month 1 to $833 in month 90. This might work well for some but for many, if not most borrowers, it would not.

Borrowers who want to cut the life of their mortgage in half can do it in many ways. For example, the four savings plans shown below would all pay off my $100,000, 15-year, 6 percent mortgage in 90 months. They are thus alternatives to the double amortization plan with its rising extra payment.

  • A flat additional monthly payment of $539 starting in month 1.

  • A flat additional quarterly payment of $1,624 starting in month 3.

  • A flat additional annual payment of $7,021starting in month 12.

  • A combination of flat additional payments of $300 a month starting month 1, and $3,000 a year starting month 6.

The four plans were derived from calculators 2a and 2c on my Web site, which you can use to develop your own plan. It should meet your own goals, which might be more or less ambitious than shortening the mortgage term by half. And it should be based on a realistic appraisal of the amount and timing of the savings you will be able to generate.

“Am I better off saving my surplus income, or using it to pay down the balance of my mortgage faster?”

Extra payments to principal constitute savings, just as adding to a savings account is savings. Both increase your wealth. The only difference is that when you save in the bank, your wealth increases through an increase in assets, whereas when you save by repaying your mortgage, your wealth increases through a decline in debt. At the same interest rate, the increase in wealth is the same.

For example, if you put $100 a month in a savings account that paid 6 percent compounded monthly, after five years you would have $6,977 in the account. If instead, you have a 6 percent mortgage and you make extra payments of $100 a month for five years, your balance declines by $6,977 more than it would have without the extra payments. In reality, of course, savings accounts don’t pay 6 percent, which makes mortgage repayment a more attractive way to save.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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