Paying mortgage off early gets tricky



Sure, you get a tax deduction for the interest you pay on your mortgage, but that doesn't mean you aren't heartsick about all that interest. Should you try to pay your loan off early and cut out a chunk of the interest due?

If you make half your mortgage payment every other week, that's 26 half-payments - or 13 full ones rather than 12, shaving a month each year. But it's not worth it if your lender charges you a fee to do so, says's Greg McBride. You're better off making an extra payment once a year or adding 1/12th of that amount to each monthly payment.

"Neither of those cost a dime, and you retain the flexibility to change course if money is tight," McBride says.

More complex pay-off-early plans suggest you replace your mortgage with a home equity line of credit and use that line as your savings and checking account, depositing your paychecks and withdrawing money for your bills. The idea is that your deposits lower your mortgage balance as long as the money sits there, unspent. You end up with a lower average monthly mortgage balance than you otherwise would, saving you on interest payments.

"It's good if you're cash-flow positive. If you're cash-flow negative, you're going to be in trouble," says Ethan Ewing, president of Spend more than you earn, and you're eating up your home equity. "We've got a negative savings rate in this country, so there are certainly a lot of people who would be cash-flow negative."

Also consider the cost to refinance and the possibility that your lender could scale back or freeze your line, McBride says.

A related concept requires a line of credit in addition to, rather than instead of, your regular mortgage. Again, you deposit your paychecks and pay your bills through the line. The difference? Every few months, you put, say, several thousand dollars from the line of credit toward your mortgage. You reduce principal by borrowing against your line of credit, paying interest on what you borrowed for the months it takes for your discretionary income to catch up.

Rich Leffler, a Towson-based consultant for Money Merge Account, a $3,500 program that comes with software telling you when to make the extra payments and how much they should be, says you'll come out ahead because your deposits lower the line-of-credit balance as long as they sit there.

"Eight to 14 years is when you could expect a typical 30-year mortgage to be paid off with this program," says Leffler, who's also a mortgage consultant. Depending on the loan, "You could save $80,000 on the mortgage by paying it off sooner and end up spending maybe $5,000 in interest over the life of the line of credit."

McBride doubts the net benefit for most homeowners would be nearly that dramatic, particularly if they're starting off with a $3,500 payment for the program. With isolated exceptions, he doesn't see how it would work to your advantage unless the interest rate on your line of credit is lower than the rate on your mortgage - and remains lower.

McBride and Leffler agree on one point: Find out the costs and savings for you, personally, before you take the plunge.

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