Get A Fixed-Rate Home Equity Loan When Refinancing Is Unavailable
REM # A629
By Ilyce R. Glink
Summary: A reader wants to save money by prepaying their mortgage. Ilyce thinks the homeowner can save more by getting a fixed-rate home equity loan and paying extra each month.
Q: I owe $17,500 on a 15-year mortgage with 11 years to go. The interest rate
is 6.875 percent.
If I pay an extra $30 a month toward the principal, approximately how many years would that knock off the mortgage? I am asking this because I read over and over again that paying more than the regular mortgage payment is a good thing and can save me money over the long run.
A: In your case, the answer isn't just about paying an extra $30 per month. To maximize your savings, you need to completely re-think how you're paying this mortgage.
First, refinancing isn’t going to work for you. You’d have a hard time refinancing your home loan because lenders really don't want to do a refinance on a loan that is for less than $50,000. And, any benefit of a lower rate might be lost in what it would cost you to refinance the loan.
But you could quite easily get a no-cost home equity loan for 10 years, with an interest rate that might be under 6 percent.
That could drop your monthly payment from about $200 per month to $192.10 per month. But you'd pay off the loan in 10 years instead of 11, saving about $2,400.
If you add another $30 per month to the payment, you'll actually pay off your loan in 9 years, saving a total of $4,800. That's a significant amount of cash.
Please start shopping around for home equity loans, but you’ll have to make sure it’s a fixed rate equity loan. If you get a variable interest loan, you’ll probably better off keeping the loan you have and paying it down with any extra money you may have.
You'll want to get several quotes in order to compare. You shouldn't have to
pay points or fees, and the lender should be able to close on your fixed-rate
home equity loan in a matter of days or within a week or two.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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