About five times a month I get letters in the mail from various companies encouraging me to refer my mortgage clients to them for biweekly mortgage payment programs. They offer me an incentive—if my client becomes a client of theirs, they’ll give me a kickback. About fives times a month, I ball these letters up and throw them in the trash can.
If you’re a homeowner, you’ll receive similar letters in the mail. Yours will read along these lines. “Take five to seven years off your 30-year mortgage” “Save $30,000 or more in interest off of the life of your loan.” They’re touted as “Accelerated Mortgage Reduction Programs.” There’s nothing inherently wrong with the concept of biweekly mortgage payments. As a matter of fact, should you participate in a biweekly mortgage payment program, you’ll save money and time—two of America’s most precious resources. How much money and time will you save? Well, that depends on your interest rate. The higher your interest rate, the more time and the more money you’ll eventually save.
I like the idea of you shaving years off of the term of your mortgage and you saving tens of thousands of dollars in interest expenses over the life of your loan. What I don’t like is the idea of you paying an up front fee of approximately $495 and an ongoing fee of approximately $5 each time they withdraw money from your account—approximately $10 per month for something that you can do for free!
A first glance at the numbers, you may think that I’m being penny wise and dollar foolish. So let me spell this out for you. Since a biweekly program will shave on the high side seven years off of the term of your loan, you’ll pay the company $495 one time and $5 26 times each year for the next 23 years. That’s a total of $3,485 for something that you can do for free! Allow me to add in the fact that typical homeowners refinance their mortgage every three years and sell their property every seven years, you’ll more than likely restart the clock on this program over and over, shelling out more money over time.
Here’s how this program work:
•You pay an upfront fee anywhere from $150 to $499 to set up the biweekly mortgage payment program.
•You authorize the company to take money out of your checking account every two weeks.
•Every two weeks they take one-half of your monthly mortgage payment out of your checking account and put it into an escrow account that they collect interest on (not you). They will also debit your account for a $5 administrative fee each and every time they debit your account for the one-half mortgage payment.
•When they collect two half mortgage payments in their account, they make a full mortgage payment on your behalf.
•Two times each year, they will collect two extra half mortgage payments because there are 26 biweekly periods in the course of a year.
•26-1/2 mortgage payments equal 13 full mortgage payments. As a result, in December of each year, they will make an additional principal payment on your mortgage.
Here’s how you’re saving money and time from this program:
When you make regular monthly mortgage payments, you make 12 payments over the course of a year. When you make biweekly payments, you’re in effect making 13 payments over the course of a year. The end result is that you’re making an extra principal payment every year reducing the amount of time that you’re in debt. When you reduce the amount of time that you’re in debt, you reduce your total interest expenses.
Here’s how you can make an extra payment on your mortgage, save time and money, and not pay the mortgage company one dime for doing it:
•Option 1. Divide your principal and interest payment by 12. Send in that extra amount each month with your payment.
•Option 2. Calculate one half of your principal and interest payment. Send in an extra half mortgage payment on the two months of the year that you receive three paychecks in a month.
•Option 3. Make an extra half mortgage payment, full mortgage payment or more whenever you receive a bonus, overtime, tax refund or some other windfall.
•Option 4. Use all extra money to pay off consumer debt first. Upon paying off consumer debt, apply the money that was going to consumer debt to your mortgage.
These ideas can help you accomplish the same thing that a biweekly mortgage payment program will at no extra cost to you.
Just remember that whenever you’re making an extra mortgage payment, write a separate check and mark “apply to principal only” on the memo line of the check.
(Mortgage and Money Coach Damon Carr is owner of ACE Financial. Sign up for Damon’s FREE online “Ask Damon” e-Newsletter @ www.allcreditexperts.com. Damon can be reached @ 412-856-1183.)