Don't Sign Up with Companies that Promise to Pay Off Your Mortgage Early
Mar 30 '00 (Updated Feb 25 '03)
The Bottom Line Many financial institutions offer "mortgage reduction" or "equity enhancement" programs. You'll end up paying high fees for something you can easily do yourself for free.
Every six months or so I get a letter from a company that promises to help me pay off my mortgage ten years early and save tens of thousands of dollars in interest payments.
How Do the Offers Work?
Most of these offers require you to make bi-weekly payments of about one half of your normal mortgage payment. By the end of the year you've made 26 bi-weekly half payments, so you've effectively made 13 monthly payments rather than the normal 12. The extra money goes toward reducing the mortgage principal, so your loan gets paid off faster, and you pay less total interest.
Most of these offers are completely legitimate--they do exactly what they say they will do both in terms of taking years off your mortgage and reducing your total interest payments. But, I believe you should shun them for two reasons: 1) they charge outrageous service fees and 2) you can do more or less the same thing yourself for no charge at all.
High Fees
Most of these plans charge a setup fee of between $75 and $300 plus a bi-weekly "automatic payment" fee of $3 to $8 (that's $78 to $208 annually). In addition, they get to earn interest on your money for up to 30 days before they use it to actually pay your mortgage holder. The fees and foregone interest can add up to as much as $5,000 for a 20-year program.
The Do It Yourself Option
You can pay off your mortgage early and save huge amounts of interest payments yourself without any fees or additional hassles by simply adding a little more onto each of your normal monthly mortgage payments. Adding eight and one-third percent to each monthly payment will pay off your loan slightly faster and with a slightly greater interest savings than the typical bi-weekly program. If you already have payments automatically deducted from another account, you can even have the larger amount deducted automatically at no charge. In any case, be sure to tell your mortgage holder that the extra amount is to be devoted to paying down principal. Most mortgage payment coupons have a space for this. You can consult a financial advisor or one of the web-based financial calculators to figure out how much to add in order to take the desired number of years off your mortgage.
Another advantage of the do-it-yourself method is flexibility. You can skip the extra amount in months when you don't have the money or increase it in months when you have extra money. However, discipline is important. You have to keep up the extra payments in order to get the sought after benefit. This is easier if you take the automatic payment route.
Warning: Before paying additional amounts on your mortgage, make sure you are not subject to prepayment penalties and/or fees for handling extra payments. This is the case for almost all mortgages, but check anyway.
Note: Whether or not it makes financial sense to pay off your mortgage faster than normal is a difficult question that you should discuss with a trusted and unbiased financial advisor, that is, one who is not in the business of selling mortgage related products.
For more information on this issue, please see my opinions "Eight Things to Do Before Paying Off Your Mortgage" and "A Dozen Questions to Ask Before You Sign Up for a Mortgage Reduction Program."
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