prime mortgage rate: Paying a mortgage with a windfall not so simple
“Even though you have a prime rate minus 1 percent interest rate, which is
attractive, we have seen in history that the prime mortgage rate can go very
high and therefore your interest rate can skyrocket to way above the 5 percent
you currently have fixed on your first mortgage,” she said.
By Karin Price Mueller/The Star-Ledger October 14, 2009,
9:15AM found at nj.com
Q. I have two mortgages. The first is $137,000, with a 15-year fixed
rate at 5 percent with nine years remaining. Monthly payments are $1,600, of
which $1,000 goes to the principal. The second is an interest-only line of
credit at prime minus 1 percent, with a $375,000 balance and seven years
remaining on the draw. If I was to get a windfall, which loan should I pay down?
— Lottery lover
A. Deciding to pay a mortgage with a windfall involves many variables, and no
one homeowner will have the same situation.
In this case, there are many unknowns: Is your house still worth more than
the original $575,000 borrowed? How much of a windfall are you expecting to
receive? Have you tried to refinance both mortgages together?
“When you amortize a mortgage, you are paying down an asset’s cost over a
fixed period of time,” said Wayne Tillman of Insight Financial in Bridgewater.
“By using a windfall to pay the cost off faster, you reduce your overall
interest expense, and reduce the total length of your loan.”
Tillman said paying down higher interest rate loans first is always a better
strategy. Since you haven’t touched the principal on your interest-only line
of credit, you will benefit by refinancing both mortgages together to start
reducing your total balance.
He said mortgage interest rates are low right now, so it could be a good time to
refinance. Paying down your interest-only loan first could make sense, said Gail
Rosen, a Martinsville-based certified public accountant.
“Even though you have a prime rate minus 1 percent interest rate, which is
attractive, we have seen in history that the prime mortgage rate can go very
high and therefore your interest rate can skyrocket to way above the 5 percent
you currently have fixed on your first mortgage,” she said.
Another reason is that you have seven years remaining on the draw, which
means that you will have to come up with a way to pay the loan at that time, or
refinance, at whatever rates are available.
Finally, Rosen said it’s possible the interest you are paying on the equity
loan is not tax deductible.
“You can only deduct mortgage interest within certain limits,” she said.
tax-exempt obligations.’’
read also:
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indicate talk of an economic recovery could be premature.
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