“HALF-TIME” PLAN
Originally written by
Realtor® Russ Miller. 

Some sections modified for current conditions.
Information deemed reliable but not guaranteed.

The process is extremely simple, and yet a revelation to almost all new home buyers, particularly when it is realized that with a 7%, 30-year mortgage loan for $200,000, the savings can be $139,220.16.  It can be shocking to realize that in this example, interest for 30 years amounts to $279,021.94.

Another seldom realized fact is that with a mortgage under the above terms, it is not until after 260 months, (over 21.5 years) that the balance will have reached the half way point of $100,600.85.

Add the next month’s principal payment to this month’s regular payment and you have effectively paid two months at one time.  By doing so, two things will happen to your loan balance:

1.   The term is reduced by one extra month each time you add another principal payment, and
2.   An amount is saved equal to the interest that you would have had to pay with the next regular payment.  In the early years of the mortgage, such savings will be many times greater than the principal amount in that month.

It must be noted however that this process DOES NOT eliminate the necessity of making the next month’s regular payment, but merely moves your next payment down the amortization schedule, one more line closer to the final payment.

To accurately follow the progress of your mortgage loan education, you will need an amortization schedule.  This is a form indicating each monthly payment breakdown of the interest and principal, and the remaining mortgage balance.

As an example, an amortization schedule for an $200,000.00 mortgage loan at 7% interest for 30 years would have a monthly payment of $1,330.60.   The first 6 months of the schedule would look like this:

You will note that with each payment, the principal increases slowly while interest proportionately decreases.  Towards the final payments, the procedure gradually reverses itself and the principal exceeds the interest payments, all the more reason to concentrate on as many extra payments as possible in the early years.

By referring to the sample chart above, a typical application would be to pay the regular payment #1 amounting to $1,330.60 (plus any required taxes and insurance escrow amounts), and then add the principal payment of $164.89 on line #2 which will also be applied to your principal balance.  By doing this, you have actually saved the interest on payment #2 for the remaining term of your mortgage.  In our example, the savings would amount to $1,165.71.  The next regular payment would then be #3, NOT #2.

To determine the actual savings that you will realize on your loan using “HALF TIME,” use the following formula:
1. Multiply your monthly payment by the number of months in your loan.
2. Deduct the original principal amount which will give you the total interest.

Divide the total interest in half.  The answer is your potential savings when the loan is paid off.

Keeping an accurate record of your progress is a must, plus the fact that it gives one a great feeling of accomplishment as you see the monthly savings.  Each regular and additional payment should be logged on your amortization schedule and checked against the lender’s annual statements.

Of equal importance is to advise the lender exactly what you are doing each month on the payment coupon which may provide for additional principal, or by including a detailed breakdown with your monthly payment as follows:

*Note: The next regular monthly payment due on my amortization schedule will be payment #3.

The extra principal payments need not necessarily be in an amount equal to the next month’s principal; however, when you are not following the amortization schedule exactly, it is easy to lose track of your progress, and the exact unpaid balance.  For larger extra payments, it is wise to send an amount which would be equal to the sum total of several scheduled advanced principal payments, then mark that position on the schedule for reference and accuracy verification with your lender’s statements.

Strangely enough, there are still some lenders who employ persons not familiar with the “Half Time Plan.”  If you should encounter such a person, send them a copy of this pamphlet as your explanation.

What to do if Lender says "No" 

If you are told that it cannot be used with your mortgage, insist that the lender give you a copy of your mortgage document and that they outline the clause which would prohibit you any additional payments on principal.  Such cases are extremely rare and probably would be found mostly in private mortgage agreements.

An Adjustable Rate Mortgage (ARM) was an option chosen by many home buyers.  If you are involved with an ARM, it will be necessary to obtain a new amortization schedule for the remaining balance of the loan each time the interest rate is changed.

The “Half Time Plan” is not usually recommended for investment properties where leverage is an important factor, (except in the case of very high interest rates) since the additional principal payments reduce the investor’s leverage.  Consulting with a REALTOR with a designation such as “CCIM” (Certified Commercial Investment Member) will help determine the advisability of infusing extra principal into the investment after purchasing.

Other Plans

CONSTANT PAYMENT:  Another way to pay the mortgage off in 15 instead of 30 years is to simply follow a 15-year loan amortization schedule.  Using the same principal example in this pamphlet, and making regular payments of $1,797.66 instead of $1,330.60, the loan will be paid in full in the same 15 years.  In the event it becomes difficult to continue with the “constant”  15-year payment, simply drop back to $1,330.60 until you can afford the higher amount.

A RETIREMENT PLAN:  For homeowners wishing to have the mortgage paid off by the year of retirement, here is the plan: Divide the number of months remaining before retirement into the balance as it will be at that date.  (Balance can be obtained from the amortization schedule, projected to estimated date of retirement.)  Add that amount each month to the monthly payments as additional principal and when the retirement date arrives, the house will be paid in full.  EXAMPLE: Balance in 120 months (retirement date), $12,000.00 (12,000.00/120=100.00).  Add $100.00 extra per month to retire mortgage free.

THE BI-WEEKLY PLAN:  There has been a lot of publicity about the “Bi-weekly” mortgage plan which when implemented results in 26, 1/2 payments made each year instead of the usual 12 full payments.  This results in 13 month’s payments per year, and the mortgage will be paid off in just under 20 years instead of 30 years.

Where the lender does not offer such a bi-weekly plans, some companies, for a fee, are offering to set-up a payment plan for you and will arrange for bi-weekly payments to pay the loan off in a little over 20 years.

You can do the same thing yourself without help from anyone by merely adding an additional 8.33% of the principal and interest payment to your regular payment.  The same results are obtained WITHOUT any fees or charges to anyone.  It is just another form of extra principal payments.  Formula: Multiply your payment by 1.0833.

Once you have embarked upon one of these programs, you are well on your way to financial independence by owning your home free and clear!  Please check with your financial consultant before embarking on any program.