I recently bought a new house, and I received an offer to go to bi weekly mortgage payments. The company offering the service is my bank, Citibank, but the plan is administered by the FNC Insurance agency. Instead of one monthly payment, they take half each every two weeks. The interest savings, the advertisement claims, over 15 years is $53,000.
But – they want $395. to set up the plan, and .75 per transaction, basically around $19.00 a year to run the plan.
I am asking myself: what’s the big deal to set this up? I call my bank, and tell them that I am paying half my mortgage two weeks early, and the other half on the due date, and ask them how much I reduce the interest in 15 years.
Before I make that call, is there some catch? Can the bank tell me “no” – only our chosen administrator (an affiliate of Citibank) can do this?
And why is Citibank mailing me and urging me to do this? For a total of around $800.00 (set up plus yearly transaction fees for 15 years), they lose 53,000 in interest? Is it because I will do this myself anyway, and they might as well get the $800., or because the resultant cash flow into the bank if thousands of customers do this make it worthwhile to invest elsewhere than my/our $5.75 loan(s)?
I am mostly interested in doing this myself (not why they do it) – what do I say and not say to the bank?
IANA mortgage broker, but I can’t imagine a reason to pay for that “service.”
Also, be aware that the interest savings isn’t because you pay part of your payment two weeks early (though I presume some small savings comes from there) … it’s because you end up making the equivalent of 13 monthly payments per year, instead of 12. 52 weeks / 2 = 26 half-payments = 13 payments.
Unless your note has pre-payment restrictions (unlikely) you can more or less get the same benefits by making one extra payment a year. If you take your monthly payment and pay half the amount every two weeks, then your making a total of 26 half-payments a year, or 13 full payments.
Unless there’s a prepayment penalty, that fee is a complete ripoff. It just doesn’t make sense to pay extra fees to the bank when you can do it yourself for free.
I wonder if they perhaps do this as a way of squeezing extra $$ out of people while they’ve still got the loan in force (given the trend for frequent refinancing in recent years, very few loans are held for their full 30ish years).
The only way I could see this as being at all a good idea is if you feel the discipline of having the bank do it for you, would be beneficial. Another option there would be to see if they can automatically take a few extra bucks out of your checking account (assuming you’ve got automatic payments set up). We did that when we refinanced a year or so back. No fees involved, they just grab an extra 10 bucks a month.
My lender offers this also, but I never investigated it enough to notice any fees. Another way of getting this benefit, without the 13th payment, is to pay a few bucks more a month in principal. (My form allows this.) You can easily compute how much interest this would save you, without any extra postage or a large one time a year payment.
Ditto what everyone else said. Unless there’s a prepayment penalty on your mortgage or something else fishy like that you should be able to do this yourself.
My mortgage statement has a spot for “Extra principal payment” each month; it’s important to identify the seperate additional $$$ towards the principal to ensure that it’s going where you think it is (lest it get applied to interest or something like that).
Suppose your mortgage is $1,000 per month. Making an extra payment per year towards the principal means an additional $1,000 each year. Split that up into 12 monthly payments and it’s $83.33 each month. Add that on to your mortgage payment (and note that it’s only for the principal) and you’re all set. I’ve been doing this and once you get into the routine it’s a painless way to save money in the long run.
I don’t have my little spreadsheet in front of me but on a 30 year fixed mortgage that one extra payment per year pays off the mortgage something like 5 years early.
Like others here have said, if you simply make payments 8% more each month, it will do about the same thing, allowing you to pay off the note in 25 years instead of 30.
However, is this a good thing to do? Mortgages right now are at really low rates - mine is 4.75%. That’s cheap money, and I’m not in any hurry to pay that off. True, its more than I’m earning on my savings now, but in five or six years, will it be?
By the way, if you want to compare the rate that you pay on your mortgage versus the rate that you earn on your savings, you might be tempted to factor in the home mortgage interest deduction from taxes, but you’d be in error to do so. You must compare the stated rates pre-taxes, because the mortgage interest and interest earned on savings both affect your taxable income.
When I was offered that deal, I called the mortgage company to ask about it. They were happy to explain it. I then said what would happen if I were to just go ahead and make a half payment every two weeks without joining “The Plan,” would it not have the same effect?
If you do it on your own (assuming there are no hindrances with this, fees or contract issues), then if you get hard up briefly at any time, you can stop with the $83.33/1000 anytime, and resume later. If you commit to it through their program, you get hit with late fees under the same circumstances.
Most home purchases have a 20- to 30-year mortgage, but the buyer re-sells and moves in say 10 years for one of many possible reasons. The financial reason to do so: your mortgage payments have gone mostly to interest, but your home has increased in value 40% over the 10 years. Example: $100,000 orig. purchase price, $20,000 down payment; after 10 years sell for $140,000, pay off the mortgage for [WAG] $70,000, now you have $70,000 in your pocket for a down payment on another house ($70,000 on a $350,000 home). Pretend the interest payments, commissions, and maintenance expenses would have been rent payments. This has been a cowboy-style analysis, but you see how you leverage your original $20,000 investment.
The real estate increase in value works a lot like the stock market, it can go down as well as up, or stay flat for some years, but over the long range it trends upward. Don’t buy in a bad neighborhood however, unless it has strong potential to be yuppified.
