Will a Big Check Reduce Future Payments? Depends on Your Loan.

Whether the mortgage rate is fixed or adjustable, after the end of the interest-only period, payment responsiveness disappears. After that, it is like any other fixed- or adjustable-rate loan.

If you are considering an interest-only loan and want immediate payment adjustments in response to extra payments, ask about it. Don't expect the loan officer or mortgage broker to volunteer that information. They are not involved in loan servicing, and chances are they will have to ask.

Home Ownership Accelerator: The most responsive type of mortgage is the Home Ownership Accelerator, because it has no required payment, only a maximum balance. As long as the balance is lower than the maximum, the borrower need make no payment at all.

Accelerator borrowers who make lump-sum payments to reduce the balance and want to reduce payments to the fully amortizing level can just do it. The Accelerator servicer will not tell them the new payment. I am told that this will be remedied at some point.

Until then, it is easy to calculate the payment using the fixed-rate-mortgage calculator on my Web site, http://www.mtgprofessor.com (7a on my Mortgage Calculator page). The Accelerator mortgage is an ARM that adjusts monthly, the fully amortizing payment changing a little every month, so borrowers who want to stay on track ought to repeat the exercise periodically.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site,http://www.mtgprofessor.com.

Copyright 2007 Jack Guttentag

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