Mortgage Q&A: Make lump-sum payment?

By Henry Savage SPECIAL TO THE WASHINGTON TIMES

Q. I have some extra money and am considering paying down my mortgage by $30,000. The existing balance is $112,000. The mortgage company says that by doing so I would save 52 months of interest at $532 per month. I plan on selling my house sometime next year. Should I keep my money for a down payment or pay down principal?

Unfortunately, there's not enough information in your e-mail for me to give your situation and question a thorough answer. I would need to know the details of your existing loan, such as the interest rate, amortization, start date and so forth.

But your e-mail does indicate that you may not fully understand what your mortgage company told you. Paying down your $112,000 mortgage by $30,000 in a one-time lump sum will not save you $532 in interest per month for 52 months if you pay off the loan earlier than the full term.

I think perhaps what they told you was that if you continue to hold the loan and make the regular mortgage payments after a $30,000 one-time payment, you would pay off the loan 52 months earlier.

Indeed, paying extra principal, either as a one-time lump sum or in small monthly extra payments will result in paying the loan off earlier, which will result in less interest charges over the life of the loan. Whether you want to do this is a function of the current interest rate on your loan and your longer-term objectives.

If your interest rate is high, paying off the loan earlier makes more sense. Remember it's best to pay off expensive, high-interest debt before anything else. If your interest rate is significantly higher than market, a low- or zero-closing-cost refinance may be in order.

You say you will be selling the house next year. This fact automatically means there will not be a significant interest savings if you curtail the loan balance by $30,000 today. If you sell the house 12 months from now, you have effectively only saved the interest on $30,000 for one year at the interest rate of your mortgage.

The tradeoff is that you will be $30,000 less liquid. You say you may use the money as a down payment. Does this mean you will be purchasing a new home before you sell your existing home? If so, I would highly recommend that you keep your $30,000 in case you need it.

Another thing to point out is that unless your loan carries an interest-only payment feature, curtailing the balance does not change the monthly payment. It only results in the eventual earlier payoff of the loan balance if you don't sell or refinance.

Without knowing the full details of your situation, but after reading your e-mail, my advice is to keep your money liquid and pay off the loan in full when you sell the house.

It is really best to pay off loans as soon as possible. That way, we can save ourselves from the interest and the headache.

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