Make sure paying off mortgage early is best for you

How would you like to give your poor, cash-starved banker a helping hand?

If you have an old home mortgage, with an interest rate of less than 10 or 11 percent, the banker holding that mortgage may soon be talking to you about ways to pay it off early, if not immediately.

Before going along, however, homeowners should figure out if they could do better investing their money or if the offer might prove costly at tax time.

Banks and other lending institutions that must pay around 10 percent for their money would be a lot happier if they didn't have to carry those old mortgages - some earning less than 5 percent interest - on their books. So they are mounting aggressive efforts to get customers to pay off their mortgage balances early or renegotiate them at a higher rate that is more profitable to the bank.

In a few cases, lenders have tried to take advantage of a clause in some mortgage contracts which gives them the right to ''call in'' the loan and force renegotiation or early payment. When these mortgages were written 10 to 20 years ago, little attention was paid to such clauses, because they had been rarely invoked in the past and it was not expected they would be needed in the future.

But recently, a few institutions have tried to invoke those clauses, requiring people to make much higher mortgage payments, come up with several thousand dollars to cover the balance of their mortgage loan, or sell their homes. Often, the public furor over these demands has forced lenders to back off.

So now, other lenders are trying a friendlier, less forceful approach. The idea here is to present a variety of options that either reduce the outstanding debt or rewrite the mortgage at a higher rate, while providing the homeowner with additional cash and a bigger tax shelter. These enlightened offerings are voluntary; if the homeowner wants to keep the old mortgage and do nothing, they are free to do so.

A few banks are even going to outside firms to keep them from stepping in a public relations hole. One such firm is Mortgage Planning Service of Philadelphia. In the last year, says Richard M. Quinn, its managing director, the firm has managed mortgage refinancing programs for more than 30 lending institutions, including banks, savings and loans, and mutual savings banks.

When his firm takes on one of these programs, Mr. Quinn said, it feeds hundreds of details on every mortgage into its computers. The computers examine such things as the interest rate on the mortgage, the monthly payments, outstanding balance, and the projected payoff date. Using this information, the computer churns out a friendly, unintimidating letter to the homeowner explaining three or four options.

* In one of the options, the homeowner is told that if he will make a large lump-sum payment, the rest of the outstanding balance need not be paid. If there is a mortgage principal balance of $15,000, for example, the bank will consider the mortage paid off with a $10,000 payment, saving $5,000.

While the prospect of owning your home ''free and clear'' is appealing, this option could be costly. First, would the $10,000 earn more in long-term investments, which might include certificates of deposit or bonds, than would be lost by giving up a 6 or 7 percent mortgage? Second, the Internal Revenue Service is studying whether deals like this constitute ''forgiveness of debt.'' If the IRS decides they do, that $5,000 would be taxable income.

* The IRS ruling could also apply to another option. Here, with the same $15, 000 outstanding balance, the bank might ask for an extra payment on principal, say $1,500. In return, $2,000 more of principal might be forgiven. But this $2, 000 may also be considered taxable income. A tax accountant or tax lawyer should be consulted before accepting these offers.

* Another option that could cut the size of your debt involves increasing the monthly payment and having the mortgage paid off sooner than planned. If you are making a $200 monthly payment to principal and interest on a mortgage to be paid off in 12 years, for instance, the bank might suggest a $250 payment, reducing it to eight years.

You might be ahead, however, if you invested that $50 every month. In eight years, that would come to $4,800. Throw in the interest, and you could earn more than would be saved by accepting this offer.

* The other main option being offered has the opposite effect as those designed to reduce outstanding debt. People needing cash for major home improvements or remodeling, college tuition, or other large expenses might welcome an opportunity to refinance their home. Some banks are offering a ''blended rate''; that is, a mixture of the old mortgage rate and current rates. This blended rate is several points below prevailing rates.

Our homeowner with $15,000 left on his current mortgage, for instance, might get an extra $8,000. The new mortgage, for $23,000, would carry a 13 or 14 percent interest rate, but this is considerably cheaper than currently available rates on personal loans. Also, the interest payments on the new loan would be deductible, which could permit many homeowners with old mortgages to start itemizing deductions again. (As mortgages mature, the deductible interest payments decrease and the nondeductible principal payments increase.)

At the Provident Institution for Savings in Boston, says Robert Eisenberg, a senior loan officer, that blended rate can also be offered as part of a home sale. So the buyer of a home could get a 13 percent, fixed-term rate, making the house easier to sell, while increasing the bank's return.

Again, before accepting any of these offers, check with an accountant or lawyer knowledgeable in both financing options and tax law. You may do better with other investments, and the additional debt burden of refinancing may be too heavy for some people.