 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
 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.
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