Retire your debt early
By Peter G. Fernandez, DC

Abraham Lincoln, tired of splitting rails, opened a store with a friend. He went into debt to buy the store and then borrowed more money to buy out a neighboring competitor.

The problem was nobody had cash to buy from the store, and the trading that did go on was barter. Needless to say, the store didn't stay open very long.

In need of a job, Lincoln went into politics and won a seat in the state legislature. After celebrating, Lincoln found his horse missing. The sheriff had taken the horse, saddle, bridle, and everything else Lincoln owned and put them up for auction. But the proceeds still didn't clear all of his debt.

Lincoln said to a friend, "That debt was the greatest obstacle I have ever met in my life."

Though it took him years to achieve, Lincoln eventually paid his debts. He overcame his debt the same way any of us overcome an obstacle — he faced it.

Throughout life, everyone has to overcome a number of obstacles, including financial debts such as college loans, car loans, medical bills, and mortgages.

Just remember: Your first step toward overcoming an obstacle is to confront it.

One way to confront a mortgage (and overcome it) is to pay it off early using a double payment method called a principal pre-payment technique (PPT), which can save thousands of dollars on your home or office mortgage. (You can also use this technique on most installment notes and credit card loans.)

PPT can cut nearly 50 percent from your mortgage interest charges and pay off your 30-year loan about 13 1/2 years early. At the same time, it can earn up to 1,701 percent interest.

For example: If you pay an extra $100 per month on the principal of your 30-year, $80,000 mortgage at 10 percent interest, you will save $80,803 over the life of the loan and pay your mortgage off 12 years early.

However, if you were to put $100 per month into a savings account earning 4 percent interest, you will earn a total of $10,064 over that same 18-month period. In this case, by putting an extra $100 per month towards your mortgage, you end up with $70,738.65 more in your pocket than if you had simply put the $100 per month into a savings account.

Earning interest or saving money is the same. "A penny saved is a penny earned," said Ben Franklin. Put your money where it will produce the greatest financial benefit for you.

PRECONCEIVED NOTIONS

When you get a mortgage, you must make consecutive monthly payments, but most mortgages allow you to prepay the principal of your mortgage, or pay off your mortgage at any time without penalty. (Check your mortgage documents.)

Although it seems that making the required monthly payments for 15 years on a 30-year mortgage would reduce the loan amount by 50 percent, this does not happen.

After 15 years, a 30-year, 10 percent interest mortgage of $80,000 is only reduced by $14,668; $111,702 of the monthly payments up to that point pay interest on the loan.

After 20 years, you will have paid the $141,619 in interest charges and reduced the original loan amount by only $26,875. Almost 50 percent of your original mortgage amount is paid in the last six years of the loan.

How much does an $80,000 mortgage really cost? At 10 percent interest, you actually end up paying $252,270.

HOW PPT WORKS

To illustrate the mechanics of PPT, an amortization schedule for the first 12 months of a sample loan is given in figure 1. (All figures are rounded to the nearest whole dollar.)

When you prepay a future monthly principal-only payment, you save paying the corresponding interest charges associated with that payment. This does not mean paying another principal and interest monthly payment, just prepaying the principal-only portion of future payments.

When you make the first payment (principal and interest due on Jan. 1, 2008) on the amortization schedule, and also prepay the $36 principal-only portion of the payment due on Feb. 1, 2008, the interest charge of $666 associated with the $36 principal payment is removed. Therefore, for an extra payment of $36, you can save $666 in interest payments — a savings/earninIgs of 1,867 percent interest.

On Feb. 1, when your next mortgage payment is due, your payment would be for the March 1, 2008, payment on the amortization (principal and interest) because you prepaid the Feb. 1, 2008, payment in January. At this time, in addition to paying the March 1, 2008, payment, prepay the principal-only portion for the next payment due ($36 for April 1, 2008). By doing this, you will save an additional $666 in interest charges.

By prepaying the principal-only portion of installments two and four, a total of $72, you will have saved $1,332 in interest — a savings/earnings of 1,851 percent. Not a bad return on your investment and it's also tax-free.

Peter G. Fernandez, DC, has been a practice consultant for 27 years. He can be reached by phone at 800-882-4476, by e-mail at DrPete@DrFernandez.com, or through his Web site, www.DrFernandez.com.