Your Mortgage : Reducing Payments Involves New Loan

QUESTION: I bought this house 10 years ago for $80,000 and a down payment of $20,000. My monthly payment is $725. I am planning to retire in five years and want to reduce my monthly payment about in half--to about $300-$350. How much more would I have to send with my monthly payment to be applied to principal to do this?

ANSWER: The harsh reality of a mortgage is that the terms of a fixed-interest mortgage (which I’m assuming this is) are, sure enough, “fixed.”

If you take on a $60,000-, 30-year mortgage at, say, 10%, your payments for principal and interest, will be $526.54 a month. That’s the amount you pay the first month of the first year, and it’s the amount you’ll be paying, 30 years down the road, when making your final payment No. 360.

It is immaterial that you have, perhaps, accelerated your payments to principal and, in fact, may be paying the mortgage completely off in 15 years rather than 30. No matter how much you have reduced the principal, your final payment is still going to be $526.54.

How do you reduce the monthly payment--by half, or whatever--when you retire in five years? You’ve got to refinance the balance owing and, in effect, extend the payoff time to accommodate the smaller monthly payment.

It’s a bit difficult to work out in your case, since you didn’t tell me what interest rate you are paying, what the current balance owing is and, I suspect, you lumped into that $725-a-month figure the amount that you are paying for taxes and insurance. So, bear with me--this is hypothetical.

In five years, you’ll be 15 years into what is presumably a 30-year mortgage. At that time, in order to refinance and lower the monthly payment into the $300-$350 range you are going to have to have reduced your balance outstanding from the original $60,000 to somewhere in the $35,000-to-$40,000 range.

Bear in mind: There’s a cost involved in refinancing and when you do refinance to bring the monthly payments down to the desired level you are right back in there with another 30-year mortgage around your neck.

Talk to your lender, however. Some of them, in tacit acknowledgement that both lump-sum or accelerated payoffs have become so popular, are offering to rewrite mortgages to accommodate this sort of payment adjustment for a flat fee that is lower than a standard refinancing charge.

In a recent case called to my attention the lender billed this as a simple $150 “modification” fee.

It’ll never take the place of liquid savings, but for a young couple with a first home the modest acceleration of payments on mortgage principal can build up a solid equity dramatically. Our leaflet, “Free and Clear: Getting the Mortgage Monkey Off Your Back,” explains how. Send a long, stamped, self-addressed envelope and $2 to cover costs to Don Campbell, P.O. Box 80260, Phoenix, Ariz. 85060.