By: Ilyce Glink and Sam Tamkin
Q: I have a 20-year fixed mortgage and am two years into it. If I inherit a chunk of money and want to pay down my mortgage, is there a way to reset the loan without starting from scratch again? And, is there a better use for my inheritance? I want to do right by the family member who may leave me this money.
A: The industry jargon term for what you’re proposing is “reamortization.” Some lenders will allow you to pay down a chunk of your mortgage and then will reamortize what is left over the number of years left in the loan term, thereby lowering your monthly payment.
More commonly, if you pay down a chunk of your loan, and then don’t change your loan payments, you will dramatically shorten the loan term.
For example, if you pay down the loan by tens of thousands of dollars, you could end up paying off the loan in 12 years rather than 18. If your intent is to lower your monthly loan payments and continue to pay off the loan over the 18 years left you have on it, you might find that difficult. Most lenders will not reamortize a loan to allow you to pay off the loan with smaller monthly payments over the same term. But you should ask to be sure.
Fixed-rate mortgages are sometimes handled differently than variable rate mortgages. When you have a variable interest rate loan, each interest reset period causes the lender to reamortize the loan and have you pay off the loan over the same loan term you took out. In these variable loan cases, if you pay down the amount of debt you owe, you don’t shorten the term, but you do lower your monthly loan payments substantially.
You might want to call your loan servicer and find out if there is an option that would allow you to pay down your fixed rate loan and recompute or reamortize your payments, while keeping the loan term unchanged.
Also, consider this: We have written quite a bit about paying down your debts, particularly your mortgage debt, but if you have other debt out there, you should consider paying down high interest, nondeductible debt before paying down your mortgage. We would always tell you to pay off credit card debt that may carry a variable interest rate at 18 to 24 percent over a fixed-rate mortgage loan at 4 percent.
If you have a good handle on your finances and can invest wisely and for the long term, you could consider not paying down your mortgage at all but instead investing the inheritance you receive into your retirement accounts or even personal investment accounts. If, over the next 18 years, you are able to obtain returns at about the market average, those returns may be far above the interest you pay your mortgage lender.
We don’t pretend to have a crystal ball that will predict what will happen to the market and your money. It’s all up to you. So if you don’t trust your investment skills or are prone to dipping into your available money, then you might be better off lowering your mortgage debt, even when the interest rate on that debt is so low.