Save Big Money By Making Extra Mortgage Payments

Q. Is it true that if a borrower makes one extra monthly mortgage payment each year on a 30-year mortgage that will pay off enough principal to reduce the mortgage by 10 years? If so, what effect would paying two extra mortgage payments per year have on reducing the term of the loan?

A. Yes, you'll shorten the length of your loan and save big bucks - but only if you make that extra payment for the full amount of your monthly payment and mark it "principal only" so none of it goes toward interest. Exactly how much you'll save depends on when during the year you make the extra payment, says Washington Mutual's Vice President of Portfolio Management Peter Struck. For example, if you make your extra payment mid-year from the first year on, your 30-year mortgage will be paid off in just under 23 years. On a $100,000 mortgage at 8 percent, this would cut your total interest paid from $164,000 to $118,000. If you make two annual principal-only payments, one at the middle and one at the end of the year, your 30-year note will shrink to 19 years. Interest on $100,000 drops to $95,000. "One question you have to ask yourself is whether you'd be better off doing that or taking that extra mortgage payment and investing it someplace," Struck adds.

Q. A friend and I have been thinking of buying a duplex together and each living in one side. Is it a good idea? How can we get financing?

A. RE/MAX Northwest associate broker Barbara Korducki says "financing may be the easiest part of the purchase," because both FHA and conventional loans are available for all but the most expensive owner-occupied duplex purchases. Korducki says the appraisal will cost twice as much as for a single-family home, but the remainder of the closing costs will be consistent with a single-family purchase. More difficult is the search process because finding a duplex with two same-sized units of the same quality is hard. "The search could take 12 months or more depending on where you want to live." However that time may be shortened if you're willing to look at houses with mother-in-law apartments," which would mean that one of you would get more space than the other. If you go this way, you might want to divide the purchase costs proportionately.

Korducki says you definitely should have a real-estate attorney draw up a partnership agreement, spelling out such things as how you'll handle common maintenance costs and what you'll do if a co-owner wants to sublet or sell out. "Duplexes appreciate a little bit slower, so you really have to think about holding it a minimum of three to five years to be able to break even if you sell. People don't realize your selling costs can run about 10 percent."

Q. I rented my house out three years ago at a rent roughly 15 percent higher than other area rentals. I haven't raised it since because my tenants are excellent. Now I'm considering a 5 percent increase to keep up with costs (the rent just equals the mortgage payment), but I don't want to jeopardize losing these people. What criteria should I use in raising the rent?

A. There are no set criteria, says Vickie Gaskill, of Bell-Anderson Associates, a Kent property management firm. "What area the house is in is extremely important. If you're in a high-demand, low-vacancy area, you can probably get away with raising it 5 percent. And generally a rent increase that's comparable to the cost of living, like 3 to 5 percent, is accepted by the tenant." But if it's a lower-demand area, your tenants may bolt, and you may lose a month's rent before your place is occupied again. Thus Gaskill says, "in the long run, I've found that not raising the rent and keeping a tenant is more cost effective. If you have a really good tenant, and they've always paid on time, and they haven't been any problem, you're at no loss."

So beat me with a law book: Last week's answer to a bankruptcy-related mortgage question rankled a number of bankruptcy attorneys, who pointed out quite correctly that there's no such thing as 13-year and seven-year bankruptcies. Yes, we meant Chapter 13 and Chapter 7. We'll bypass giving chapter and verse on these chapters, and simply add that anyone who's declared bankruptcy and wants a mortgage should start by talking with their case trustee and several lenders about what's possible. Answers vary depending on the situation.