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Lowering your monthly mortgage payment

Dear Dr. Don,

I have an extra $15,000 to invest, and what I would like to do is lower my house payment by paying down my loan by this amount so that my mortgage payment would decrease. My mortgage company tells me that I cannot do this. They tell me that I can only reduce the interest that I owe.

I don't understand this reasoning. Since I am on a limited budget, I really need to pay less on the mortgage. If I could lower my mortgage by $100 a month, I think that would give me a better return on my money than if I invested in a ladder of CDs. What do you think? Thanks. -- Joyce Jimmy



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Dear Joyce,
The mortgage company is right. When you make an additional principal payment it doesn't change the contractual monthly mortgage payment, it just shortens the life of the loan by reducing the outstanding balance.

A mortgage payment on a fixed-rate, self-amortizing loan is sized to cover that month's interest expense and pay down a portion of the outstanding loan balance. Making an additional $15,000 payment to principal reduces the interest expense in future months because the loan balance was reduced by $15,000, but the mortgage payment stays constant so that more money is going toward the principal repayment component each month.

The end result is a significant interest-expense savings and a shortened term on the home mortgage. You can put the particulars into the Bankrate mortgage calculator and amortization schedule, and the schedule will show you the change in the loan term and the total interest expense with the new payment stream.

Your stated goal is to reduce the monthly payment on your mortgage by $100 a month. Without refinancing the mortgage you won't be able to change your monthly mortgage payment, but you can free up $100 a month in your budget by withdrawing $100 a month from your $15,000 in savings. Invest the $15,000 in a CD ladder and keep some funds in a money market account to provide you with that $100-a-month cash flow.

You didn't give me the particulars of your mortgage, but refinancing may be an option. You'll pay closing costs on the loan, but extending the loan term should lower the monthly payment. Kick in the $15,000 from savings and you'll accomplish your goal of reducing the monthly payment by reducing the loan amount of your mortgage.

Bankrate.com's corrections policy
-- Posted: June 8, 2005
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