Ask Our Broker: Pay Early,Stay Flexible

QUESTION:

Is it worthwhile to pay additional principal on my mortgage? I pay from $40 to $200 extra every month. Is it better to have the bank set this up? They have offered a prepayment plan for a $200 fee.

ANSWER:

You already have a prepayment plan you like, so why pay $200?

Right now, you pay your regular payment plus an additional $40 to $200 per month extra as your finances and preferences allow. But what if you didn’t want to make an extra prepayment? For the bank’s program, would you be required to make a bigger payment?

Given an economy that has been battered since real estate values reached their peak in 2007, it’s wise to have the smallest monthly obligations possible, and to prepay mortgage debt when you can, if you want to. (This is also the reason to consider refinancing now to a fixed-rate loan at today’s low rates.)

If you have a mortgage that allows prepayments in whole or in part at any time and without a prepayment penalty, then you can effectively modify your loan by paying extra each month. This is a good saving plan for many households, especially if you do not have high-cost credit card debt.

You can shorten the term of a fixed-rate mortgage by prepaying. For example, if you have a $150,000 mortgage at 4 percent, the monthly cost for principal and interest over 30 years will be $716.12. The lifetime interest cost of the loan is $107,803. If you pay an additional $50 per month, the loan will be repaid in 26.5 years, and the total possible interest cost will fall to $93,518.

But what if you prepay monthly and sell after eight or ten years? Good news – you’ll owe less to the lender at closing.

With adjustable rate mortgages, the result of prepayment is uncertain, because interest costs can rise and fall over the life of the loan as rates change.

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