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The smartest place to put your money may be your home

This year's financial ``out'' lists often include borrowing, risky investments, sometimes even the stock market. The ``in'' lists contain things like money market funds, Treasury bills, United States Savings Bonds, and savings accounts. That prudent list might also include higher mortgage payments, shorter-term mortgages, or adjustable mortgages that can be converted into fixed-rate loans. Following the stock market collapse in October and the proliferation of mortgage options, homeowners have found there are many ways to be smarter with their house payments. If they are uncertain about where to put their money, they may decide the best place is in their home.

One of the easiest options is a mortgage prepayment. Instead of adding to a brokerage account or feeding the MasterCard, you simply send the bank or mortgage company some extra money each month. If your lender allows them, the returns on these extra payments may be as good as anything you're likely to find on Wall Street.

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Here are some numbers from the Massachusetts Society of Certified Public Accountants that illustrate the benefits of prepayments: Say you took out a 30-year, $66,900 mortgage a few years ago at 12 percent. Your monthly payments would be $701 a month.

After 30 years, you would have paid off the $66,900 loan, but you also would have shelled out $185,475 in interest payments. By simply adding $50 a month to the mortgage payments, you would cut your loan term to 20 years and save $74,379.

The nice thing about prepayments is that they're flexible. If you want to make larger payments one month, you can. If you don't want to throw in anything extra another month, you don't have to. While you'll get the most benefit if you start prepayments early and keep the house until it is paid off, you'll still be ahead if you sell early, because prepayments will give you more equity.

A year ago, many home buyers were considering a way to force prepayments on themselves with 15-year mortgages. By taking on payments that may have been $100 to $200 a month higher, they could get the house paid for in half the time, or have a lot more equity in it if they sold early. As the year wore on, however, fewer 15-year mortgages were written.

``These mortgages are not for everybody,'' says Robert Van Order, chief economist at the Federal Home Loan Mortgage Corporation. ``Many people can't afford the higher payments,'' the Freddie Mac economist adds. A home buyer that would qualify for the payments on a 30-year loan might not qualify for the burden of a 15-year mortgage. They would be better off taking the longer-term loan and making prepayments if they can afford them down the line.

Another reason fewer 15-year mortgages are being written is that the mortgage rate picture has changed. A year ago, rates on adjustable- and fixed-rate mortgages were unusually close. Normally the adjustable loans are two to three percentage points cheaper than 15- or 30-year fixed mortgages. But for a number of reasons, adjustable loans were only about 1 points cheaper, Mr. Van Order says, so many home buyers were choosing the fixed-rate loans. If they could afford them, they were also choosing the 15-year variety.

But with the return of wider spreads between fixed- and adjustable-rate mortgages, more people are choosing the ARMs again. While rates on fixed-rate loans are averaging about 10 percent, ARMs are going for about 8 percent, says Jane DeMarines, spokeswoman for the Mortgage Bankers Association.

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The difference now, Ms. DeMarines says, is in the type of ARM being taken. ``The big story this year is the convertible ARM,'' she says. These loans allow you to covert from an ARM to a fixed rate anytime after the 13th month and before the end of the fifth year. So if fixed-loan rates come down a few notches, you can convert to the more predictable fixed-rate loan.

Then, if you want to make prepayments, you can adjust the amount you send in every month - and the payoff date of the loan - yourself.

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