 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
 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.
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