Apr 1, 2009

Warning for new mortgage holders: Ignore that biweekly payment invitation

We refinanced our mortgage in January, and that meant we got a new lender. In today's mail was an invitation to enroll in the lender's biweekly payment plan which "does the work" to help me pay off my loan faster by automatically deducting half of my regular monthly payment every 14 days. The way the math works out, I would end up making 13 "full" mortgage payments each year, theoretically without feeling any pain. According to my lender's calculations, I would pay off my loan 4 1/2 years earlier and save over $34,000 in interest.

Um, no thanks. I can manage that "work" on my own perfectly fine. I've planned all along to pay extra principal each month, and now I plan on rolling my debt snowball into the mortgage once my student loan is paid off. That'll result in the mortgage being paid off 23 1/2 years early and over $100,000 saved in interest.

What really staggered me was the cost of the biweekly mortgage plan. The lender must make a fortune off of anyone who signs up. There's a $375 enrollment fee, plus a $1.50 transaction fee with each payment. With 26 payments, that's an extra $39 each year!

I hope no one pays these fees, because they're outrageous. In these economic times, you'd think lenders would actually just be grateful to have a customer who pays on time!


Baker @ Man Vs. Debt said...

Thanks for shedding light on this topic! It always amazing me how much these people think they can charge for this "service".

If you are serious about this, you can do it automatically, not to mention completely free with any bank who offers online bill paying!

Camille said...

Seriously?? They are charging for something you can do all on your own? That's ingenious, really!

Clean ClutterFree Simple said...

To do it on your own, you just need to add extra to each payment. But what you can't do is send your lender two smaller payments--they'll treat each one as pre-payment of principal and it won't count toward your actual monthly payment. Ask me how I found that out!:-)

It's good to get the word out on these programs, as they're such a very bad deal.

Marcia said...

They aren't always a bad deal. I've been doing mine now for 6 years. I've got a good lender though. You really need to check out the program. If they hold the money until all of the payment is there, and THEN apply the payment it really isn't a good deal. If they apply the half payment as soon as they receive it, it is a good deal. I should have my mortgage paid off in 17 years rather than 30, simply by doing this.

Michele P. said...

I agree with you on that! While we haven't been able to pay the extra principal, we have gotten several of those notices too. While it looks good, after reading the fine print it really is not that great of a bargain-especially in these times. Eventually, when we are in a financial position to do so, we will be checking into the pre-payment without penalties/fees etc... and pay some of our mortgage-glad you brought it up!