Suppose you have a 20 year mortgage. When you get your mortgage statement there is an interest charge and a principle charge. If each month you pay twice the principle payment and the interest charge will you finish paying off the mortgage in half the time?
Okay, I devised a new scheme.
1) You must choose the 1st payment. Standard 20 year monthly. 5% annual effective gives $1,307.67
2) Pay twice the Principal when you get the statement - assume this happens simultaneously with the payment on the statement. Thus, we paid $814.82 interest and $985.70 principal.
3) Here's the problem. Just exactly what is the 2nd payment? I recalculated it with 239 months at the same interest rate and the new principal. 5% annual effective gives $1,304.44. If you do not recalculate, and retain the $1,307.67, you get the results already reported.
Effects:
Change in Duration of Loan: None. Entirely insensitive to interest rate, term, or original amount of loan.
Principal Portion: Increases through 70 payments, then begins to shrink.
Interest Portion: This is a little harder to describe:
Years 1-5: 40% vs 51% -- Without the extra principal payment, 40% of the eventual total interest is paid in the first 5 years. With the extra, 51%.
Years 6-10: 31% vs 32%
Years 11-15: 21% vs 15%
Years 16-20: 8% vs 3%
Total Interest at 5% Annual Effective $114K vs $82K.
We significantly decreased the total interest, but packed more of it up front.
Note: It's still not the same payment every month.