Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, July 10, 1995                   TAG: 9507100013
SECTION: MONEY                    PAGE: A-8   EDITION: METRO 
SOURCE: MAG POFF
DATELINE:                                 LENGTH: Medium

INTEREST RATES KEY TO REDUCING LOAN LIFE WITH EXTRA PAYMENTS

A: Michael Hincker, manager of the Roanoke office of National City Mortgage, said the period of time that extra payments reduce the life of a mortgage varies with the interest rate. The higher the interest rate, the greater the impact.

He pointed out that you could choose between making one extra payment of principal at the start of the year or dividing that amount into 12 equal installments over the year.

As an example in calculating the reduction in the life of the loan, Hincker assumed a 15-year mortgage for $100,000 at 8 percent interest. Your payments would be $956 monthly for the 180 months. If you paid an additional $956, you would pay off the loan in 12.9 years, or 13 years for practical purposes. You thus would save two years.

If you had the same $100,000 mortgage at 8 percent for 30 years, you would pay off the loan in 22 years, a saving of eight years, by making one extra payment a year.

If you saw an illustration showing savings of 10 years, Hincker said, it probably was based on an assumption of a higher interest rate than the current 8 percent.

With a 15-year mortgage, Hincker said, you already are paying so much extra principal compared to a 30-year loan that there is not much room left for savings through an additional payment.

Converting savings bonds

Q: I'm holding $25,000 in Series EE savings bonds. They were purchased in October 1992. Should they be converted into Series HH bonds, or should I leave them as they are?

A: The difference between the two series is that EE bonds increase in value by earning interest while HH bonds pay semiannual interest to their holders.

Your choice, therefore, depends on whether you need the money now. If you want the income, you should convert to HH bonds. If you have no need of the extra payments, you should stay with the EE bonds and let them continue to earn more interest, building in value for the future.

The conversion from EE to HH bonds is a tax-free event. If you make the conversion, however, you will be taxed on the interest income from the HH bonds.

Calculating Social Security

Q: I am retired with a small Social Security pension but continue to work part time. What happens to the Social Security taxes taken out of my working pay? Will my small Social Security pension ever increase? I've asked Social Security a number of times but get a different answer every time.

A: The answer is that it depends on your individual work record.

James Harris, assistant manager of the Social Security office in Roanoke, said the usual way to calculate benefits is to look at your work record from 1950 through the year before you retired. Social Security then drops the five lowest-earning years and applies a formula to the balance.

If your earnings now are higher than another year that was used in calculating your benefits, then the lower-earning year will be dropped and your current year will be substituted. This would increase your benefits.

This is unlikely in your case, because you are working only part time. But Harris said it sometimes happens that a current year, even with part-time work, produces more income than a year back in the 1950s. You would have to compare your earnings now to your earnings in the years on which your benefits are based.

Coverage on old cars

Q: When financing a used-car purchase, full insurance coverage is required. My son purchased a 10-year-old car. Why is collision insurance required when the car has no Blue Book value? Why do some insurance agents write collision on old cars? Aren't damage claim reimbursements based on the age of the car?

A: It makes no sense from your son's point of view to carry collision insurance on a 10-year-old car. The coverage is relatively expensive compared to the amount you could collect on an old car, as you point out.

Your son, however, does not own the car. The bank or finance company owns the vehicle, and it will not risk taking the loss if your son has an accident that damages or destroys the auto, which serves as collateral for the loan. The car has some value, even though it may not be worth much. Your son obviously thought the car had value when he paid a price to buy it.

All financed cars are covered by collision insurance. When your son pays off the loan, he can drop the coverage.