Pick your mortgage loan length

Pat and Sammy Martin had 23 years of payments left on their mortgage when they refinanced at a lower interest rate. They got another 30-year mortgage -- and the payoff date is still 23 years away.

The Martins knocked about seven years off the loan term by making half a mortgage payment every two weeks. In effect, the residents of Denton, Texas, make 13 monthly payments a year. The payments are deducted automatically from their checking account by their mortgage lender, Colonial Savings of Fort Worth, Texas. Colonial calls it the Interest Saver Program.

"We did the Interest Saver Program because it knocks seven years off the mortgage and it also saves like $40,000 -- a lot of money," Pat Martin says.

Amortize as you like
As the Martins' example shows, refinancing with a 30-year mortgage doesn't require paying for another 30 years. You can shorten your repayment period by paying extra every month or year. With help from a mortgage calculator, you can specify the payoff date you want and figure out exactly how much extra to pay monthly or annually to reach your target.

"Many people want to not increase their term if they're refinancing. They say, 'I have 22 years left and I want to set up the new loan for 22 years,' " says David Motley, loan production manager for Colonial Savings. Through the Interest Saver Program, Colonial will set up what Motley calls a "synthetic amortization" to pay off the loan early, at a target date specified by the borrower.

About 20 percent of Colonial's servicing customers use Interest Saver, Motley says.

Not all lenders offer early-repayment programs such as Colonial's, but that might change in 2003 as mortgage companies seek to extend the 2-year-old refinancing boom. Lenders believe that, of the homeowners who could lower their monthly payments by refinancing, about half haven't done so.

"I think there are large chunks of people who are above 7 percent," says Bob Walters, vice president of secondary marketing for Quicken Loans. "It blows my mind that these people haven't come in."

Walters thinks he knows why some of these people haven't refinanced: They have been paying their mortgage for a few years and don't want to start all over again on another 30-year loan. He gives a hypothetical example of someone who got a 30-year mortgage four years ago, with a payoff date in 2029.

Someone in that situation could benefit by refinancing because rates are about three-quarters of a percentage point lower now than they were four years ago. But the homeowner might object to getting a mortgage ending in 2033 when his heart was set on paying off the loan in 2029. And he's not going to find a lender that will underwrite a 26-year loan. The problem has a simple solution.

"I would tell them to take the 30-year (mortgage) and set up your amortization schedule to pay it off over 26 years," Walters says. "I don't think people realize they can do that."

Add it up
An amortization schedule is a list of regular equal payments that will pay off a debt in a specified period. If you want to pay off a 30-year mortgage in, say, 26 years, you can ask the lender to figure out the payments for you.

Or, you can work out the numbers yourself in Bankrate.com's mortgage calculator. The mortgage calculator lets you plug in the amount of the loan, the interest rate and the term, or length, of the loan. You can specify the term in years or months.

Here's an example of how it works, based on Walters' hypothetical borrower:

Let's say you have decided to refinance your 4-year-old mortgage to get a lower interest rate. You want to keep the 2029 payoff date of your original mortgage, so you need to amortize it, or pay it off, in 26 years, although it will be a 30-year loan. And let's say you're borrowing $100,000 at 6 percent.

Amortized over 30 years, monthly principal and interest on that loan total $599.55. Your monthly payment will be that amount, plus taxes and insurance.

Change the term to 26 years and the calculator says monthly principal and interest is $633.68. So an extra $34.13 a month shortens the repayment period by four years.

If you decide to add to your payments so you can pay off the mortgage by a certain date, it's a good idea to check with the mortgage servicer to find out if you're paying the correct extra amount. Also check to make sure your extra payments are applied to principal.