Is Making Extra Payments as Good as Refinancing?
Miami Herald (11/25/01) p.10H; Bruss, Robert J.

While today's favorable interest-rate environment may tempt many homeowners to refinance their mortgage, others are turned off by the inconvenience and complicated nature of the refi process. These borrowers instead may choose to save money by making extra payments on their home loan in order to pay it off early--which, in turn, can yield thousands of dollars in interest savings. The additional money--whether it is $100 or $1,000--essentially is a financial investment at whatever interest is tied to the mortgage. Prepayment on a home loan at 7 or 8 percent, then, allows the homeowner to "earn" that amount on their dollars--which is significantly better than other investment vehicles, such as a CD, which might yield only 2 to 4 percent. While many lenders charge a one-time fee to set up a biweekly mortgage schedule plus an annual fee for the automated electronic transactions, disciplined homeowners can make the extra payments on their own simply by dividing the monthly mortgage note by 12 and adding that amount to their remittance. They should make sure, however, that they notify the lender that extra money should be applied to principal only; and they also must check to make sure their provider does not levy prepayment penalties for early mortgage resolution. While prepayment is a savvy move for homeowners whose mortgage carries interest of 7 or 8 percent, it is less effective for lower-priced loans. After tax deductions on interest are considered, the true cost of loans at 5 to 7 percent interest is really only about 3 to 5 percent; at such bargain rates, the rationale for paying off the mortgage early is lost.

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