I received an offer from my mortgage lender today, to participate in a special plan that would allow me to “Pay off [my] mortgage sooner”, “Save thousands in interest”, “Build valuable equity”, and “Achieve financial freedom”. Wow!
The program involves signing up to make half of my mortgage payment every 2 weeks instead of once per month. This results in 13 payments per year, which reduces the principal balance on the loan faster, and would allow me to payoff the mortgage faster. Using some sample numbers, if I had a $300k mortgage at 4% with 25 years remaining, instead of paying ~$175k in interest over the next 25 years, the program would have me paying ~$150k in interest over just under 22 years. Sounds like a great deal… on the surface.
The catch is that the lender wants to charge me $3 per payment ($78) per year, for the opportunity to do something that I can do on my own and in an even simpler way. Without getting into the fact that paying off a tax deductible 4% mortgage early probably doesn’t make sense for most people, if I did want to pay the mortgage off early, I could simply make one extra full payment per year (say double every January) and leave everything else the same. Not only would I avoid paying $78 per year, but I’d pay $1000 less interest over the life of the loan and still pay it off in just under 22 years.
Why pay $78 for something I can do better myself in a simpler manner with the flexibility to change my mind if I need or want that extra payment for something else? Come on [lender who shall remain nameless]. You can do better than that if you want to earn an extra $78 out of consumer’s pockets each year.
Moral of the story: be skeptical of bank “offers”, and avoid special mortgage payment plans that have a fee involved.