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Monthly Mortgage Prepayments Can Bring Big Savings, Faster Payoff

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By ILYCE GLINK Tribune Media Services

The Tampa Tribune

Published: September 25, 2008

I took a short-term job with a substantial increase in pay and would like to apply the extra money to my mortgage. Is it better to pay an extra amount each month, or should I hold onto the cash and pay a large lump sum each year?

And if I make one lump sum payment annually, does it matter when I send in the payment?

When it comes to paying down any sort of debt, the sooner you make an extra payment to your loan, the less interest you'll pay over the life of your loan and the faster you'll pay it off.

Here's how this works:

Let's assume you have $6,000 extra in cash each year to prepay your mortgage, and you have just closed on a 30-year $200,000 fixed-rate mortgage at 6.5 percent. If you pay an extra $500 per month, you'll pay off your mortgage in 15 years, and pay $110,940 in interest.

But if you make a $6,000 payment once a year, at the end of the year, it will take a few months longer to pay off the loan and you'll shell out an extra $5,000 in interest. If you make the payment in the middle of the year, you'll just about break even with the monthly prepayments. And if you pay the lump sum each year at the beginning of the year, you'll save a few thousand dollars extra.

Of course, if you have that much extra cash and you're shopping for a new mortgage, you're better off getting a 15-year loan to start with, because the interest rate will generally be lower than you could get on a 30-year mortgage. But if you have a great rate now, and don't want to incur the costs of refinancing, then you should start adding an extra amount to your mortgage check each month. Be sure you tick off the box that indicates the overage is to be put toward the remaining balance (the prepayment of the loan).

I recently took out a home equity line of credit (HELOC) with a national mortgage bank. I was approved for a $25,000 line of credit but only have a balance of $3,750.

Now the HELOC is listed as a "second mortgage" on my home, according to my homeowners insurance. That scares me, as I only owe $55,000 on my house.

Does the HELOC really have to be listed as a second mortgage?

Yes. A home equity line of credit is a loan that uses the property as collateral. The lender correctly took out a lien against the property, and is listed as the second mortgage holder, meaning that if you default against both of your loans, the primary mortgage lender gets first dibs on any equity. The house gets sold and the primary mortgage lender is paid off first, then the second mortgage lender gets to dip into whatever's left.

I'm sure your loan specifies that. Please read your loan documents and be sure you understand them.

Write to Ilyce Glink at Real Estate Matters Syndicate P.O. Box 366, Glencoe IL 60022; or e-mail thinkglink@aol.com Write to Ilyce Glink at Real Estate Matters Syndicate P.O. Box 366, Glencoe IL 60022; or e-mail thinkglink@aol.com

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