About 5 years ago when I bought a house, I received a letter stating that the bank may not have made me aware of paying bi-weekly rather than monthly. If I signed up for it, it would save me quite a bit of money and enable me to payoff the loan several years sooner.
I just re-financed the house and received a couple of similar letters stating the same thing. Looking at them more closely I realized that it basically breaks down to making one extra payment a year. For this honor I’m paying the company for something I can actually do myself and more if I want.
So, now I plan on hopping back onto the turnip truck and promise to actually try to use my brain more often. :smack:
**friedo **(“I know it was you, friedo!”), generally they come from whatever company is holding your mortgage. Probably not always, but usually.
I’ve gotten those letters, too - for a small fee (the one on my letters was like $395 or such, so not really that small), they’ll set up automatic payments for you so that you make one extra monthly payment a year. In my case, I figured I could do the math for free: divide one monthly house payment by 12, then add that result back onto the house payment and pay that new total each month. Voila! Same result, much cheaper.
Yeah, I get them with this pitch: “You’re spending $2,000 a month on your mortgage. But if you paid $990 every two weeks, you’ll be paying your house off faster AND SAVING MONEY TOO!!!”
So clever that it will make people think the money they spend on the mortgage every year will actually be less, because two times $990 is less than $2,000, and a month is just two periods of two weeks, right?
Why do they charge you a fee to take an extra payment? That may have been friedo’s question too, but I still don’t get it.
My mortgage payment comes out automatically on paydays. It doesn’t cost me anything in extra fees to make 26 payments a year automatically than it does to make 12 payments a year automatically.
Do you mean to say they would charge you a “$395 or such” fee to set this up? Huh?
Pretty sure I pitted my mortgage company several years back for sending me one of those letters, thus implying I was an idiot (no offense intended). They wanted to charge me $395 plus a small monthly fee to do this automatically. Or…I could just continue what I was doing at the time and pay them an extra $100.00/month towards the principal.
Given that most mortgages explicitly allow you to pay down the principal, this little scam goes a long way towards illustrating why mortgage lenders and banks should be first against the wall when the revolution comes.
We got one of these just after we closed on our house in April. It was not from the mortgage company but a third party thinking I was foolish to pay to have someone do this for me when our mortage company allows extra payments towards principle at any time and we already were to get that sucker paid down.
I know our mortgage states that any amount over the payment due is automatically applied to the principal, but I don’t know if that is universal. Asking to make sure is definitely the right thing to do!
Pre-payment penalties are very unusual for residential mortgages. FHA rules don’t permit them, for one thing. The only times I’ve seen them are for hinky exotic loans, or very large mortgages, for which the homeowner specifically negotiated a penalty in exchange for a lower interest rate.
One easy way to accomplish the same thing while still paying monthly: divide your monthly payment by 12 and add that amount to each payment. for a $1,000 monthly payment that comes to an additional $83.33 per month. Go ahead and go really overboard, round up to $84!
Do, as mentioned above, make it clear that the additional payment amount is to be applied to principal.
We got sucked into one of those schemes a few years ago. The advertising was totally deceptive, and, like you, I thought it meant we’d have 2 payments per month rather than one. But in reality it was adding an extra payment!! Plus as I recall there were service charges.
We argued vehemently once we found out what the scheme was, and they kindly cancelled the arrangement.
It was truly a deceptive ad and I think it should be illegal.
That actually accomplishes more than the same thing. The entire extra payment you’ve snuck in goes to principal.
In other words, instead of shortening your payoff by about 1/13, finishing in 27.5 years instead of 30, you shave off about 7 years, or more than 20% of the time (depending on interest rates and stuff).
You are making 26 ½-payments instead of 12 full payments, so you are making an extra payment each year (already stated above).
By making payments 2x a month, you are paying some of your principal 2± weeks early, which further reduces the interest that you owe.
You can’t do this on your own. I had some extra $ so I paid ½ of my mortgage on the 15th (which they treated as an extra principal payment) when I paid the rest on the 1st of the month, they assumed that I didn’t pay enough, so they hit me with a late fee. My two payments the following month were enough to cover the principal & interest due, but not the late fee, so I was hit with a second late fee. :smack:
It took some time, but I was finally able to straighten it all out & was “told” that I can’t do ½ payments on my own, that they must deduct them from my account. Nope, not gonna happen!
So the $395 fee is for them to do one-time ‘coding’ to switch a flag on your account & the extra cost of them sending ACH (at <1¢/ACH x 360 months = $3.60). Seems reasonable to me. :rolleyes:
It does save you money over the long run. Big money in interest. Because the amount you owe drops biweekly instead of monthly. I’ll let someone else explain it better. But there was no fee or intermediary, we just selected it when we mortgaged. We could also have chosen weekly payments. The amount we paid monthly didn’t change either way!
Is the due date the first or is it the last day of the month? I don’t see why you can’t make two half payments as long as you make them both by the due date, but you said you paid the second half payment on the first of the month which seems like that would be late, even if it was a full payment. Even so, if you really can’t make two half payments on your own you can still do what others suggested and pay extra each month. The only thing you lose that way is a little big of interest, but you’re still putting quite a bit of extra money in each month so it’s a lot better then nothing.
Count me as another Canadian that is surprised that this would cost extra. Canadian banks offer biweekly payment as a matter of course with no extra fees. Chalk one up for the Big Five!
