We recently purchased a home and got a mortgage for 75,000 at 4.5. We have 10,000 extra to put down on the principal. Should we do one lump sum or?

Asked by Irene, Des Moines, IA Sun Nov 1, 2009

each month add extra to the principal. We want to be debt free, but go about it that saves us money.
Thanks

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John Shellin…, Agent, Pearland, TX
Sun Nov 1, 2009
BEST ANSWER
If you prepay principal, you are doing two things, reducing the remaining term of the mortgage and eliminating a good bit of interest. However, it does not lower your P&I. It all boils down to whether you can use the money better elsewhere which is a personal call. One other option would be to contact the lender you closed the loan through or the lender they sold it to (the serviving lender) and ask if they wil recast the loan. Some lenders will do that if a large lumps sum payment is made to principal in the first year or so. Recasting the mortgage will reduce your payment based on the new outstanding balance. The only catch is the lender does not have to offer this program.
0 votes
, ,
Sun Nov 1, 2009
Hey Irene!

Thanks so much for posting your question. The tricky part about these types of decisions is that we are normally in a good financial position when we have to make them. You really have to take consideration into what could happen in the future.

Before making the decision, read this article "10 Great Reasons to Carry a Big, Long Mortgage":
http://www.ricedelman.com/cs/education/article?articleId=232

I agree being debt free is the goal, but I also think it's extremely important to stay liquid. It doesn't matter how much you owe on your home if you can't make your next payment. That's the reason I feel it's best to save up the money until you have enough to pay the mortgage off entirely, then pay it off.

It's also worth mentioning that you can probably out-earn your 4.5% mortgage (which is effectively 3.?% after tax....) in investments over time.

I hope that helps! If you'd like more specific advice for your situation (because I know so little about it at this point), I'd be happy to talk with you over phone or email. Feel free to contact me at the places listed below.

Thanks so much!

Tyler Osby
Branch Manager l Certified Mortgage Planner
The Tyler Osby Team l Fairway Independent Mortgage

Phone l 515.257.OSBY (6729)
Twitter l @tylerosby

Have you checked out our extremely educational blog? http://www.wealthwithmortgage.com
1 vote
John Shellin…, Agent, Pearland, TX
Sun Nov 1, 2009
If you prepay principal, you are doing two things, reducing the remaining term of the mortgage and eliminating a good bit of interest. However, it does not lower your P&I. It all boils down to whether you can use the money better elsewhere which is a personal call. One other option would be to contact the lender you closed the loan through or the lender they sold it to (the serviving lender) and ask if they wil recast the loan. Some lenders will do that if a large lumps sum payment is made to principal in the first year or so. Recasting the mortgage will reduce your payment based on the new outstanding balance. The only catch is the lender does not have to offer this program.
1 vote
Matt Grohe, Agent, Urbandale, IA
Mon Nov 23, 2009
Irene, Great question! Are you aware that with most lenders you can sign up to pay your mortgage in two installments monthly, rather than make one payment? The effect of this is that you pay the same amount, but it is like making 13 payments a year instead of 12. The net result is shaving appx. 6 years off a 30 year mortgage. This could be an option for you to more quickly amortize your loan without paying anything additional to principal. Hope that helps.
Web Reference:  http://www.myiowahome.com
0 votes
John Shellin…, Agent, Pearland, TX
Sun Nov 1, 2009
If you prepay principal, you are doing two things, reducing the remaining term of the mortgage and eliminating a good bit of interest. However, it does not lower your P&I. It all boils down to whether you can use the money better elsewhere which is a personal call. One other option would be to contact the lender you closed the loan through or the lender they sold it to (the serviving lender) and ask if they wil recast the loan. Some lenders will do that if a large lumps sum payment is made to principal in the first year or so. Recasting the mortgage will reduce your payment based on the new outstanding balance. The only catch is the lender does not have to offer this program.
0 votes
John Shellin…, Agent, Pearland, TX
Sun Nov 1, 2009
If you prepay principal, you are doing two things, reducing the remaining term of the mortgage and eliminating a good bit of interest. However, it does not lower your P&I. It all boils down to whether you can use the money better elsewhere which is a personal call. One other option would be to contact the lender you closed the loan through or the lender they sold it to (the serviving lender) and ask if they wil recast the loan. Some lenders will do that if a large lumps sum payment is made to principal in the first year or so. Recasting the mortgage will reduce your payment based on the new outstanding balance. The only catch is the lender does not have to offer this program.
0 votes
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