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Lump sum won't lower mortgage payments

Dear Dr. Don,
The loan balance on my mortgage is $65,926. I have $10,000 available to pay down the mortgage balance. I want a lower monthly payment. Should I use the $10,000 to make part of my monthly payments each month or make a lump sum additional principal payment to make my monthly mortgage payment go down? Thanks. -- Laura Loan-Balance

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Dear Laura,
Unless your lender agrees to open up the loan agreement, a lump-sum payment isn't going to lower your monthly mortgage payment. Additional principal payments don't lower the mortgage payment. Instead they reduce the loan balance so more of each monthly payment goes toward principal repayment instead of interest expense. The reduced interest expense allows you to pay off your mortgage sooner.

The amortization schedule on Bankrate's mortgage calculator can show you how much interest you'll save by making that lump-sum payment, but you won't have a lower monthly mortgage payment because of it. I used your loan balance and an assumption of a 6-percent interest rate and 15 years remaining on the note to illustrate below how the lump-sum payment reduces the interest expense and shortens the loan term.

In this example, it shortens the loan term by 3.75 years and saves about $12,000 in interest expense, ignoring any income-tax considerations. Use your actual interest rate and loan term to find the potential savings for your situation.

Loan balance: $65,926 $55,926
Interest rate: 6% 6%
Remaining loan term (months): 180 141
Monthly payment: $556.32 $556.32
Total interest expense: $34,212 $22,081


Refinancing is an option, but paying thousands in closing costs on a new loan negates the net benefit from this strategy. Bankrate's refinancing calculator will help you look at the economics of refinancing. If you're not getting a lower interest rate on the loan, it can make more sense to use a little bit of the $10,000 each month as part of the monthly payment to free up money in your monthly budget.

If you don't have an emergency fund available for financial emergencies, then it's an easy decision to draw down a little bit of this reserve each month versus making a lump-sum payment on your mortgage. It will preserve a measure of flexibility in your finances rather than tying up all your liquid funds in real estate.

Bankrate.com's corrections policy
-- Posted: Oct. 5, 2005
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