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Being An Early Mortgage Bird

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Posted On: 04/01/2009

Q: What's the best way to prepay a mortgage?

A: As many people have discovered, whether home values rise or fall mortgages still need to be paid off. I'm a long-time advocate of mortgage prepayments because I think less debt is better than more debt, a view which was widely scorned until recently ...

There are several steps and considerations to make before you begin prepaying a loan. Let's look at a quickie list:

Do you have credit-card debt? If yes, you're likely better served paying off credit card balances because of their steep interest rates.

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Does your loan have a prepayment penalty? If yes, speak with the lender. Often mortgages with penalties allow for some level of prepayments, say 10 or 20 percent of the total loan amount per year during the first several years of the loan term.

Does your loan servicer provide a payment booklet? If so, take a careful look. You may well find a line that allows you to make prepayments just by filling out the form. Make sure any additional payments are credited toward principal and not taxes or insurance reserves.

It's a good practice to make regular monthly prepayments – after a month or two you won't notice the expense. Whether you add in $50 a month or something much larger is up to you.

Imagine that you have a $150,000 mortgage at 6 percent fixed. The loan has a 30-year term and the monthly cost for principal and interest is $899.32. Add in an extra $100 a month and the loan will be paid off in 23.17 years. The loan term will be reduced by 21.83 months. At $899.32 per month you'll save $19,632.16.

At this point someone will notice that most borrowers do not have a loan for 30 years or 23 years or anything close. Why then do prepayments make sense?

Let's say you sell the property after 10 years. If you make regular payments you will owe $125,527.94. Make $100 prepayments each month and the balance due at closing will fall to $109,140.81. That means you walk away from the settlement table with an extra $16,387.

But wait, some will say, do not prepayments reduce mortgage interest tax write-offs? They do – but so what? The goal is not to have higher write-offs, it's to have less debt. If bigger tax write-offs were important people would want financing at 11 percent instead of 5 percent, a choice not too many borrowers make.

Folks with degrees in finance will wonder about the time value of money and other issues, but for most people the matter that counts is very simple, the need to have less debt. If you can knock off credit-card debt, if you have money for health insurance, if you're saving, then reducing a mortgage can be a conservative, reasonable use of capital.

Q: We sold our home and paid off our FHA loan. Can we get back some of the mortgage insurance premium we paid over the years?

A: Maybe. If your FHA loan was originated prior to December 8, 2004, then you may be able to claim a rebate. After that date the FHA rebate program ended.

For specifics -- and without paying a fee to anyone -- visit HUD on the Web at http://www.hud.gov.

Q: I can't make my mortgage payment. Why doesn't matter. Can I give my house back to the lender?

A: If foreclosure is inevitable and unavoidable, then giving back the keys will save everyone a bunch of time and money, but things are not so simple.

First, there is the question of whether the lender wants the house back. Ownership implies expenses for taxes, insurance, repairs, maintenance and other costs so there are lenders who will not want a property returned.

Second, you just can't return the keys. If the lender agrees, you'll need to provide a “deed in lieu of foreclosure” so there's a written title change which can be recorded in the local property records.

Third, if the lender accepts your property there can still be big problems. Your credit standing will plummet, if the property was an investment you may owe taxes on the unpaid loan balance and the lender could sue.

Before turning in the keys, see if there are alternatives that may allow you to save the house. For instance, would the lender agree to a loan modification or a repayment plan? Can you sell the property? Take in a boarder? Get a second job? Etc. Get a real-estate attorney or legal clinic to help you figure out what's best.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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