"Sign the Equity Enhancement Program coupon on your statement and save $25 on your current mortgage payment. The Wells Fargo Equity Enhancement Program provides an accelerated payment plan that is convenient and easy on your budget."
Recommend this product?
That's the come on I just received from my mortgage lender, Wells Fargo Home Mortgage (ePinions needs to get with it. The name changed from Norwest more than a year ago). If you've read my other opinions in the mortgage section, you know I'm against signing up for these so called mortgage reduction programs, and I'd like to use this specific real world example to show you why.
--- Our Current Mortgage ---
We obtained our current mortgage on April 1, 1998. It's a fixed rate, 30-year loan with 7% interest. If we must continue making payments on this loan, our last payment will be on May 1, 2028. The monthly payment is $1,842.89.
--- Wells Fargo Sends Us a Proposal ---
Wells Fargo sent us a letter proposing the following program: We divide our normal monthly payment in half and have them automatically debit it from our checking account every two weeks. By doing this over the course of a year, we more or less accrue an extra monthly payment, all of which goes toward reducing principal. The two benefits are 1) the loan will be paid off 4 years and 9 months early, and 2) we save $65,749.56 in interest.
That sounds like a really good deal, but there is some fine print:
1) If we sign up, Wells Fargo will cut $25 off our current monthly payment. Hey, that's good!
2) They will charge us a one-time program set up fee of $295. Seems like a lot for something that's already set up in their computer, judging by the details in the proposal letter.
3) They will charge a $5.42 monthly "participation fee." That doesn't seem like much, but it adds up to about $1,442 over the remaining life of the loan. It also sounds like a lot for simply making a few electronic funds transfers.
--- What If We Do It Ourselves? ---
My first question was, "couldn't we do essentially the same thing ourselves with no extra cost or involvement from Wells Fargo?" And the answer is, "of course!" We can't really make loan payments every two weeks because the loan requires a monthly payment, but we can increase our monthly payment by one twelfth of the normal amount or $154. That would add $1,848 to our annual payments, a bit less than the additional $1,888 required by the Wells Fargo program.
But the additional savings of doing it ourselves are what convinced me not to buy this program. Doing it ourselves would cut an additional 5 months off the life of the mortgage and save us an additional $5,500 in mortgage interest. This analysis doesn't even consider the $295 set up fee.
--- What You're Really Paying For ---
Given that you can do it yourself and save even more, why would anyone sign up for this program? The answer is that most people don't have the financial discipline to pay an additional amount on their mortgage month after month and year after year. After all, you can spend the money on something else. What you're getting for nearly $2,000 in fees is just someone to hold your hand and make it easy to do something you would have difficulty doing without the extra persuasion. Do you really need that?
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