Ask a Broker: Are quick pay-down systems for home mortgages a good idea? [07/14/2007]

By Peter G. Miller/CTW Features

Q: Can you comment on quickie pay-down systems for home mortgages. Would you recommend them?A: I would not recommend any "program" involving third-party payments.It often pays to accelerate loan payoffs to reduce overall interest costs. For instance, a $150,000 fixed-rate mortgage over 30 years at 6.25 percent will have a total potential interest cost of $182,487. Pay off the same loan in 15 years and the interest bill falls to $81,504 a savings of more than $100,000. (In practice, savings would be larger because a 15-year mortgage would have a lower interest rate.)To get the benefit of that smaller interest cost, you would increase monthly payments from $924 to $1,286.Prepaying a mortgage raises several questions that borrowers should carefully review: Can you prepay your loan in whole or in part without penalty? If yes, you can just increase your monthly payment and cut years off the mortgage term and, thus, big money off the interest bill. Does it make sense to prepay a mortgage? Are there places where you can put your money and earn more interest with as little risk? Of course, you also can divide your surplus dollars, pay down your mortgage and invest in stocks, bonds or whatever. If you're considering a mortgage-cost reduction program, will you have to pay a fee to someone else? If the answer is yes, then the money you spend for such a "service" is money that is not being used to reduce your loan balance. Will someone else either hold money for you or make payments to your lender? Either option is a bad idea: If a third party is late or doesn't make a payment, it's your credit that's damaged and potentially your home that's foreclosed. Is someone proposing that you quickly prepay your loan by investing in the stock market, maintaining a money-market fund or buying lottery tickets? In theory, if an investment paid more than your mortgage interest rate you would be ahead, but the nature of investments is that returns vary and are not guaranteed. Meanwhile, the requirement to repay your loan is absolute. If you put money in an investment account and it does not produce promised returns after all costs or if it actually results in a loss - then your mortgage-reduction goal will be shattered.Borrowers should never pay mortgage-reduction money to anyone other than their lender. Typically, this requires nothing more than filling in a payment coupon line and sending in a bigger check each month. For specifics, speak directly with your lender, avoid middlemen and don't pay for "services" you don't need. Also, keep your checks to assure that your account has been correctly credited.Q: What's the difference between a "hard" prepayment penalty and a "soft" one?A: According to Carolyn Warren in the book "Mortgage Rip-Offs and Money Savers (Wiley, 2004), a "hard" prepayment penalty will be charged if you sell or refinance the property within a given period. A "soft" prepayment penalty will apply only if you refinance. In other words, you can sell without a penalty at any time. For specifics, ask your loan officer and check your Truth in Lending statement.Q: We're thinking about buying a new house that sits below a dam. Will there be any negative aspects in trying to resell this home?A: You bet. A real estate purchaser in a given price range typically has many choices, so why would someone give a second look to a home that has a tainted location when the same dollars can buy a property not threatened by a potential dam failure?Is a dam failure likely? Not hardly, but that's not the point. As flooding in New Orleans and elsewhere has shown, even one deluge can produce catastrophic results that can impact a household for years.If there is a dam failure somewhere, anywhere, then all dams can suffer from a negative public perception. That perception may be neither real nor fair with regard to individual dams, but if it takes hold it will surely impact property values, especially for a home that "sits below a dam."Before going further, speak with local insurance brokers. Can you get coverage for such a property? At what cost? How does the insurance expense for this property compare with other homes of equal value in non-threatened locations?Also ask about financing. Homes are "security" for mortgages, and many lenders may not want to finance a property with such an unusual potential for risk. Some may provide financing but only with a steep rate. CTW FeaturesNeed real estate advice? Peter G. Miller, author of "The Common-Sense Mortgage," would love to hear from you. Send your questions to peter@ctwfeatures.com