However, I’m a little nervous/skeptical about the legitimacy of this letter. How can I be sure that they will satisfy his collection and that this isn’t a scam? Does anyone know where I can find reliable information about debt collections?

Thank you!!
-Bekki

It doesn’t seem that the posters’ own experiences encourage the following of the posted advice here.

In my situation, the snowballing method is cheaper and takes less time to repay when compared to the “pay off high interest balances first” method.

Check out the link to the Excel file though it’s a good one.

don’t worry, I don’t think you are being argumentative.

I wish I could access that form right now so I could check the template name and look at the formulas. (I’m at home with an older version of Excel.) I’ll try to post the formulas used and the template name when I return to the office. It was not a mortgage repayment template; just a generic loan one, which is probably far simpler than a mortgage calculator.

I guess what’s key here is how frequently the interest is compounded and not how often payments are made toward principal. My guess is that mortgage interest is always compounded monthly (at least in the US); that is, one big sum based on the principal on that day. So if you make one monthly payment, two semi-monthly payments, or 30 daily payments, it doesn’t affect the compounded interest. That would explain the discrepancy. I think the template assumed that the repayment terms were semi-monthly, and the interest cycle as well.

I did my calculations using the Excel built in functions:

You started with $150,000 mortgage, 30 year loan period, 6.25%. You, the PMT function and any other mortgage calculator give the monthly payment as $923.58. As I understand it you are proposing to pay half that amount 24 times a year ($461.79)

Putting that into the PMT function to calculate the number of payments to pay off this new loan:
=NPER(6.25%/24,461.79,-150000)
This gives 719 payments at a rate of 24 payments per year:
=29.96 years
=29 years 351 Days

The key thing here is paying twice a month is not really an “extra payment” it is just paying the payment you would have made at the end of the month two weeks earlier. Any time you pay any money off a loan sooner it saves you interest. But as you were going to pay this amount at the end of the month anyway it is only saving you the 2 weeks interest on the amount of this payment.

I’m not trying to be argumentative but the numbers in the article just don’t add up.

In this template, you enter the original loan amount, the interest rate, the original loan terms, and how many yearly payments you wish to make. According to this template, if you can pay 24 times a year, you can knock several years off the loan. It seems, though, that this won’t work if the mortgage company holds the payment for half a month. I think the 26 annual payment works because you are making one extra payment, with that payment amount added to the principal all at once. For example, say you get paid three times in July and make a payment each payperiod, the mortgage company holds that extra payment until your due date and then the extra is applied to the principal then. So, they still make interest, but you are reducing the amount of capitalized interest accruing on your loan.

Also, Excel 2003 has an “additional mortgage payment” template (I forget the name of it), in which you can add an additional amount of your choosing to the monthly payment, and it will tell you how much sooner the loan is paid off. I think there is an error in that template, though, because if you add 1/12 of your regularly scheduled payment to the loan (the monetary equivalent of 13 payments per year), it says you will pay it off only a few months sooner, which doesn’t sound right.

I think you have made a serious error in your calculations here. Switching from 12 monthly payments to 24 payments of half the size only saves you the interest on that half payment for the 15 days or so. When I run the numbers from your example, this adds up to saving just over 14 _DAYS_ off the life of a 30 year mortgage (a long way from the 14 years you seem to indicate!)

I thought I should point this out before people rush around reoorganising finance and loans to save only a couple of dollars per year.

Paying fortnightly works great however as it adds up to the equivalent of 13 monthly payments per year.

Actually I was using $100 to knock out almost $500 from each of the last three months. That’s still not as much as I would be making by finding an investment with better returns than my mortgage interest rate. But it’s so exciting that you might get motivated to save more than you otherwise might.

The reason I implied you were knocking out the upcoming month rather than the last month is so that you can keep up to date on how much of your money is really going toward principal on your next payment. If you pay off the principal more quickly, then the amount of your P&I going toward principal increases more quickly than is shown in the amortization schedule, so using my method you are also moving down the amortization schedule quickly enough to keep up to date.

Here’s the exciting thing to do with a new mortgage. First the depressing part: Get an amortization schedule. You can request one from your lender or make your own on a spreadsheet this way:

In column 1 put the total amount you owe. In column 2, put the total amount of interest accrued in one month (column 1 * interest rate / 12). In column 3 put the amount of principal you’re paying off (the P & I part of the payment minus the amount in column 2).

No go back to column 1, and in the second row calculate your new total amount owed for the second month (the first month’s amount owed minus first month’s principal paid off). Now copy the cells down until you get to the total number of months for your loan which should be the same as when you get to where the principal equals zero.

So the depressing part is how much money is not going to principal. When I started (many years ago), my ~$500 P&I had only ~$30 going to principal.

Now here’s the exciting part. If you add that tiny depressing amount that is going to next month’s principal to next month’s mortgage check (and tell them to apply it to principal and not escrow), you are cutting one month off the end of your loan. Basically, you can check off that month and the next month from your schedule. In my case, I added $100 each month, thus cutting off over three months from my loan each month.

For the psychological thrill, yes, I did check off the months as they were paid off, and I also made a chart showing how much I would be owing if I had stuck to the schedule compared to how much I actually owed. I made it a very large scale so that only the top part of the graph (not all the way down to zero) appeared on the graph paper.

(After two years I refinanced from a 30-year loan to a 15-year loan at a lower interest rate and with much lower mortgage insurance and a slightly higher monthly payment. Nowadays, ~$350/month is going toward my principal, which is great, but now I just put my extra money into probably higher-paying investments, which I can use to pay of my mortgage at any time if I want.)

Most lenders have put these policies in place to be more competitive, knowing full well that most people won’t take advantage of them.

In the USA it’s up to consumers to put pressure on the lenders to offer more favourable terms. Seek out lenders that are more flexible with prepayment, and give them your business rather than lenders who make a mortgage as restrictive as possible.