Can loan pre-payments reduce my monthly mortgage costs?
If you have a fixed-rate loan, payments remain the same throughout the life of the mortgage. Thus, if you make prepayments, monthly costs will be unchanged but the loan term will be shortened. If you sell or refinance before the loan term is finished you will owe less to the lender at closing than would otherwise be the case.
With an ARM, when monthly payments are re-calculated the lender will base the new payment schedule on the remaining loan amount and new interest rate. While lower payments are likely if you make pre-payments this is not always the case. It’s possible to make ARM prepayments, reduce the loan balance, and see monthly costs rise if interest rates increase sufficiently.
If you’re going to make pre-payments, first check with your lender to assure there are no prepayment penalties. Also, ask how prepayments should be made — with many lenders you simply indicate on a payment coupon that additional money is being paid. With coupons, be certain that the extra money is being used to reduce the loan debt and not to increase the “escrow” account, the money held in trust by the lender to pay property taxes and home insurance.
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