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Figure Investment Value of Old Loans

November 05, 1989|Special to The Times

QUESTION: You seem to routinely advise against paying off a home mortgage early. But I feel you are referring to fairly new loans. I would appreciate your thoughts about older home loans where the balance is small in comparison to the greatly appreciated-inflated house value.

In our case, our 30-year, 5.5% interest rate, $26,800-mortgage with a monthly $152.17 principal and interest payment is now over 24 years old. The remaining debt is under $9,000 and the house is worth about $200,000. It cost us $33,500 new in 1965. That $9,000 balance is about two-month's worth of our current income. As I am now in my mid-60s and retired, I am tempted to pay off the mortgage. Is this a good idea?

ANSWER: Since your $9,000 loan balance is very small and you have adequate income, you would probably feel much better paying off the mortgage. However, when you do so, you will really be investing $9,000 at 5.5% interest. That's not a very good investment just to save around $495 interest annually.

If the amount of your low interest rate mortgage were larger, I would strongly advise against paying it off. But I presume you have adequate cash and credit line reserves so you won't miss the $9,000.

You are correct that I do not advise making big lump sum mortgage pay downs. Perhaps you recall the homeowner who inherited $65,000, paid down his home loan but didn't get any reduction in monthly mortgage payments, later needed some money, and couldn't borrow except at loan shark rates.

A better alternative for borrowers who want to save home mortgage interest is to make an extra principal payment each month to pay off their loan in 15 years instead of 30 years. Usually, only $50 to $100 extra is required each month; the lender can provide the exact amount needed. The result is saving thousands of interest dollars by cutting 15 years off their mortgage's life.

Low Interest Rate No Bargain If Deal Bad

Q: There is a condo complex in a nearby town which is advertising 8.5% fixed-interest rate mortgages. I am considering buying a two-bedroom condo there. The building was constructed about three years ago and the construction lender foreclosed. The lender added many extras to make the complex attractive.

There really isn't any nearby condo complex which is competitive so I'm having a difficult time comparing it with alternative condos. The local realty agents all knock the project. But when I talked to the saleswoman at the condo she said her company isn't cooperating with the local agents so they criticize the project. The low interest rate is attractive but do you think I might be paying too much for the condo if I buy?

A: Yes. The lender-owner is in a unique position to adjust the interest rate and the prices of the condos. I suggest you listen closely to the local real estate agents in the vicinity to learn all you can about the condo complex.

If it has been there several years, you can be sure the realty agents know its good and bad points. The lender-owner is obviously not very smart, because failure to cooperate with local realty agents is a serious sales marketing mistake.

I can't advise you to buy or not but it sounds like you should be very careful. If you decide to buy, be sure not to close your purchase until at least 75% of the condo units are sold and ready to close. The reason is, you don't want to be one of the few individual owners if the project turns out badly and the lender continues to own a majority of the condos.

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