Should I Prepay on an Adjustable Rate Mortgage?

Posted by Lise | Filed under: Buyers

Q: “My loan officer has told me that on a 5/1 adjustable-rate mortgage (ARM), paying $1,000 more each month for 60 months won’t generate any savings over paying $60,000 in month 60, just before the interest rate and payment reset. Is this true?”

A: No, he is wrong and it is scary that he would say this.  In fact you might want to look for another loan officer, and I will be glad to give you some names.  If you need more information about an adjustable rate mortgage, email me and I will send you a great informational sheet!

If you pay an extra $1,000 a month for 60 months, the loan balance will be smaller in month 60 than if you applied $60,000 to the balance in month 60. The reason is that extra payments received early reduce the balance early, which reduces the monthly interest due on all future payments, which increases the portion of all future payments that is applied to principal.

The higher the interest rate, the larger the savings.  This works whether you are buying a luxury home in Great Falls or you are a first time home buyer with a condo in DC!  For example, at 5 percent, paying an extra$1,000 a month on a $300,000 loan will result in a loan balance 3.7 percent smaller after 60 months than applying $60,000 to the balance in month 60. At 10 percent, the balance would be 7.6 percent lower.  Just think what a difference that will make on your next home purchase – all that extra money for a larger down payment!

This principle holds whether the loan is an ARM or a fixed-rate mortgage (FRM), whether it is a standard monthly accrual mortgage or a simple interest (daily accrual) mortgage, or whether the scheduled payment is fully amortizing or interest only.

For more money saving hints, please continue to read our blog or email us at lise@lisehowe.com.

Tags: , , , , , , , , , , , , , , , , , , , , , ,


32 Responses

  1. Adrian says:

    .

    tnx for info!…

  2. Kyle says:

    .

    tnx for info!…

  3. Dave says:

    .

    ñïàñèáî çà èíôó….

  4. clifford says:

    .

    ñïñ çà èíôó!!…

  5. eddie says:

    .

    tnx for info!!…

  6. arthur says:

    .

    ñïàñèáî!!…

  7. Robert says:

    .

    good info!!…

  8. Gary says:

    .

    ñýíêñ çà èíôó!!…

  9. Alan says:

    .

    ñýíêñ çà èíôó….

  10. michael says:

    .

    ñýíêñ çà èíôó….

  11. clyde says:

    .

    áëàãîäàðåí!!…

  12. Melvin says:

    .

    ñýíêñ çà èíôó….

  13. julius says:

    .

    ñïñ çà èíôó!!…

  14. Donnie says:

    .

    tnx for info!!…

  15. Ricardo says:

    .

    ñýíêñ çà èíôó….

  16. Floyd says:

    .

    áëàãîäàðþ….

  17. matt says:

    .

    ñýíêñ çà èíôó!…

  18. marc says:

    .

    ñïñ çà èíôó!!…

  19. Austin says:

    .

    ñýíêñ çà èíôó!…

  20. Robert says:

    .

    áëàãîäàðþ!…

  21. oliver says:

    .

    ñïñ çà èíôó!…

  22. george says:

    .

    ñïñ çà èíôó!!…

  23. byron says:

    .

    ñýíêñ çà èíôó!…

Leave a Reply