What would you say if you could save $26,257 by investing your pocket change?
Sound like a scam?
Not if you are a homeowner with a mortgage.
By investing $25 a month, or 83 cents a day, you'll save $26,257 in interest costs on an 8.50 percent, 30-year mortgage loan of $100,000.
That's what Linda T. Gebelein, 35, of Baltimore wishes she had known 10 years ago when she and her husband bought their first house with a mortgage at a whopping 14 percent rate. When they sold two years later, they had almost no equity. That -- plus a real estate agent telling them they should have prepaid an extra small amount of principal each month -- taught them a lesson, says Mrs. Gebelein. Now, she says, they make an extra principal payment every month. "We regard it as a form of savings," she said.
"Everyone blows $25 a month, everybody has $25 in a cookie jar or a penny jar," says Marc Eisenson of Elizaville, N.Y., and author of The Banker's Secret, a do-it-yourself guide to prepaying all types of debt, particularly home mortgages. "If you get into the habit of managing debt, your mortgage is a good place to invest." Yet few homeowners do prepay, according to a rough estimate by the Washington, D.C.-based Mortgage Bankers Association, a trade association. Though it has no hard data, the association estimates that about 5 percent to 10 percent of homeowners prepay, a number its researchers believe has stayed relatively static.
Prepaying your mortgage is simple -- as long as you write the check to pay your mortgage, you can prepay your mortgage. In fact, many lenders have made the process easier in recent years by adding a line to payment coupons for extra payments toward principal.
Middle school teacher Barbara K. Hall of Montgomery County was 38 when she and her husband bought their dream home in Spencerville three years ago. She knew she did not want to be paying her mortgage into retirement, so she cut down the term of her loan and began prepaying the principal. Last August, Ms. Hall and her husband refinanced their loan, trading their 9.25 percent 30-year mortgage for a 15-year loan at 7.25 percent. They now add $200 a month toward the principal. That, she says, will pay off their mortgage in 12 years and two months and save her and her husband $22,500 in interest payments.
While everyone agrees that paying $25 or $50 a month extra toward the mortgage is a fine investment, making more hefty payments may not be wise, says Robert F. Hines of Chesapeake Financial Planning and Tax Services in Annapolis. Borrowers should consider the tax benefit of their mortgage interest deduction -- and the impact paying it down would have -- on their income tax bill. They also need to consider how much of a strain an extra payment will put on their budgets and whether that money could bring a higher return elsewhere.
"It depends on the age of the client, how close to retirement, the type of mortgage they have, how much time is left on it, and the interest rate," Mr. Hines said. "If you are in a high tax bracket, and there is a strong likelihood of staying in a high tax bracket and your income staying stable, then you may not want to prepay." Instead, he said, borrowers may want to invest the money they would prepay into a higher-return investment. That allows them to keep the tax deduction from mortgage interest payments as long as possible.
Such arguments do not convince Mr. Eisenson. On the advice of his brother Sam, Mr. Eisenson paid off his first house in five years. Freeing himself from that mortgage made all the difference in his life, he said. "Being debt-free meant that I didn't have to keep chasing my tail to earn money . . . And it allowed me to semi-retire when I was 30 years old."
He believes borrowers should view paying off their debt as another type of low-risk investment.
Homeowners who want to pay their mortgages off early can handle it themselves, or turn to specialists for advice or a range of services. At the low end, for instance, Mr. Eisenson, for instance, sells his book, The Banker's Secret, and its companion computer program, for $42.95 with shipping. (The book costs $14.95 separately.)
But some companies offer packaged plans -- such as the Split Payment Mortgage System and the Biweekly Mortgage Acceptance Corp. service -- that cost $400 to $500, a lifetime fee that is portable with mortgages.
According to these two companies -- and there are similar offers from other companies -- they will electronically transfer money from the borrower's bank account biweekly to pay the mortgage. The benefit, say the companies, is that the borrower makes one extra mortgage payment per year. These companies also audit the lender's record of the borrower's mortgage payments and adjustable rate mortgage calculations to make sure the account was properly credited. The companies sell their service directly and through financial planners who receive a commission.