How to take advantage of lower rates, when you're already locked in.

The other day I had this idea in the shower. It happened as my brain was still waking up in the morning. I find I get the best ideas in those few moments just after waking up and just before falling asleep. Unfortunately I never remember the latter.

I, like many people, have a 5 year fixed-rate mortage. We all have different rates (see my previous post) depending on when we took our mortgage and who our lender is. My rate is at 3.59%.

I'd noticed that rates have come down lately. I would have been in much better shape if I took a variable rate mortgage at say, prime - 0.5, but my partner and I decided that we wanted a fixed rate product so that we could sleep at night, so to speak. Our rate is a bit higher but it doesn't go up over the 5-year period, no matter what happens to the economy.

Each year, I can pay 10% of my total original loan amount toward the principal. So if my original loan was $300,000, I can put $30,000 toward the principal each year. I can also quadruple my payments each month and have the extra money go toward principle. These types of clauses are in every mortgage although the actuals numbers vary. I pay a little extra towards my principle each year, but nowhere near the full allotted amount. THAT GOT ME THINKING, I could take a loan at today's lower rate and max out my principle!!

So here's how it works:

1. Take a fixed-rate loan for the amount that you're allowed to pay towards principle at today's lower rate.

2. Pay that amount towards principle. In my case, it was about $30,000. Now you have the same amount of debt in a fixed interest loan, but with some of it at a lower rate.

In my example, here's what actually happened:

I am just about one year into my mortgage. I have four more years left in my five-year fixed rate 3.59% loan. Oe the one-year anniversary of my mortgage (coming up soon), I'm going to take a FOUR-YEAR $30,000 loan at 3.25% and pay that $30,000 toward my principle on my main loan. Note that this new loan is a four-year loan instead of five. That way it will end on the same date as my main loan. 3.25% is ING's four-year posted rate so my bank had no probem matching it. Now instead of having my whole loan at 3.59%, I have only most of my loan at 3.59% and $30,000 at 3.25%. If rates are still low next year, I'll repeat the process but I'll take a three-year loan. Then the next year I'll take a two-year loan, and so on. Each time I take a new loan, I save about $1000! Not too shabby for 15 mins worth of work signing papers at the bank.

Note that there is one side effect. My monthly payment goes up about 5% as a result. If that's a problem for you, don't do it!