Making extra payments on fixed-rate mortgage reduces loan, cuts interest cost

Q: I have a mortgage with a balance of $54,000 with a rate of 6.5 percent. This is a 15-year fixed rate. Awhile back a friend said that if you have a 30-year mortgage, by making one extra payment per year, the loan would be reduced to 22 years. Two extra payments in the same year would reduce it to 15 years. Is there a way for me to reduce my mortgage balance using the same principle? Just curious -- I would like to pay it off but my loan officer evades my questions. -- D.

A: Any time you send in an extra $100 in a separate check clearly marked "to be applied entirely to principal," you are borrowing $100 less from then on, and you save $6.50 in interest every year. It's like making a fixed-rate risk-free investment, guaranteed 6.5 percent return.

Then, if you keep on making the same monthly payments, every year there will be an extra $6.50 that can go to reducing the principal even faster. The benefit compounds. Yes, with a fixed-rate loan, making extra payments will reduce the time remaining. (An adjustable-rate mortgage would still go to the very end but adjustments would be for lower payments than they would have been otherwise.) With either type of loan, you'd save on interest overall, because you'd be borrowing less than originally planned.

Note differs from mortgage

Q: What is the difference between a mortgage and a note? Is it possible to be on a mortgage but not on the note? If the house goes into foreclosure would I be responsible for the money owed if I'm not on the note? -- Via e-mail

A: When you sign the note you're making a personal promise to repay the loan. When you sign the mortgage you're saying "and if I don't do that, you can have my house sold to get your money back."

If you're not on the note you're not personally liable. You might lose the house if you didn't make payments, but they couldn't come after you for any shortfall.

There's a catch, though: I don't think a lender will give you the money in the first place if you aren't willing to take responsibility for the debt. In rare situations, buyers take over an existing mortgage without assuming the loan personally. For normal mortgage lending, though, borrowers must sign both documents.

Selling brother's business

Q: My brother has a well-established business that he would like to sell. I have had my real estate license for three years now, but have never listed any commercial property. My real estate office claims to handle all types of real estate transactions but they have no commercial properties listed.

My brother told me he is going to list his business with an experienced commercial broker. I am somewhat upset. My brother also doesn't want to list his business with my company because he is afraid that word would get out that his business is for sale, as my company is local. Your advice would be appreciated. -- L.

A: Doing business within a family is a delicate matter. Look how you're already feeling "somewhat upset." Don't risk your family's harmony. Your brother will be better off with a company that's experienced in commercial sales. Problems are sure to arise before it's all settled, and you'll be glad you stayed out of it.

House isn't selling

Q: Our house has been on the market four months with no offers. We have lowered the price as far as we can. Our agent has only had two open houses. We are so disappointed in how things have gone and frustrated in knowing there is not much we can do. We signed a six-month contract with her and would LOVE to be out of it. -- Via e-mail

A: Frankly, open houses don't often result in sales. They're useful mainly to show the seller something is happening, and to let the agent meet potential clients and customers.

If your house is multiple-listed, so that lots of people know about it, then the buying public is simply voting that you're asking too much.

It's no use basing your price on "as far as we can go." Buyers aren't interested in your needs, but in their own.

You always have the right to withdraw from an agency. Your listing contract is with the company, not with the particular salesperson.

Edith Lank will respond personally to any questions sent to her at 240 Hemingway Drive, Rochester, NY 14620 (please include a stamped return envelope), or readers may e-mail her at ehlank@aol.com.