Please don’t pay for bi-weekly mortgage acceleration

April 23rd, 2008 | by mbhunter |

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Five Cent Nickel had a good discussion on bi-weekly mortgage payment plans. I’ve received these before. The principle is sound: 26 bi-weekly payments of half your (fixed-rate) monthly mortgage payment will indeed pay off your mortgage years ahead of schedule. Basically you’re sneaking in an extra payment per year, and taken a little bit at a time you hardly notice it.

The fees that they were going to charge me ended up being a couple thousand dollars over the life of the loan, with several hundred dollars within the first few months.

Nickel covered this nicely but I do want to emphasize a couple of things:

  • There is absolutely no good reason to pay for this! Just about any loan servicer will take additional principal each month. Bump your monthly payment up by about 9% and apply the extra as additional principal and you’re doing almost exactly the same thing as the bi-weekly mortgage acceleration. If there’s a prepayment penalty, then you’re stuck, but most of the time there isn’t one with mortgages. Just to be clear: There is absolutely no good reason to pay a third party to do this for you. None!
  • Make sure you apply the amount as “additional principal” for the interest savings. I have three options on my payment stubs: additional principal, additional monthly payment, and additional escrow. The first two are not the same thing. “Additional principal” means that the extra amount is applied to the mortgage balance immediately, and you still owe at least your mortgage payment the next month. “Additional monthly payment” means that you’re paying your next monthly payment ahead of schedule. The lender will have your money, but won’t apply it to your mortgage until it’s due. (On the other side, you won’t have to pay that amount later.) All that this second option does is get the money out of your sight so that you don’t spend it. “Additional escrow” is an additional payment that might need to be made if property taxes and/or insurance is paid by the lender on your behalf. This doesn’t decrease your balance.
  • Consider whether you actually want to accelerate your mortgage payment or not. Paying your home loan down faster isn’t a bad thing to consider doing, of course, but once the additional principal is applied, it’s stuck there until your loan is paid off, and you’ll still have the same monthly payment staring at you each month. Make sure you won’t need the money for other purposes in the near future. That, and a fixed-rate mortgage is a good inflation hedge.

  1. 7 Responses to “Please don’t pay for bi-weekly mortgage acceleration”

  2. By Kirk on Apr 23, 2008 | Reply

    I would also add that you should steer clear of the mortgage acceleration programs like UFirst and others. They don’t really add any value compared to putting all free cash flow into your mortgage.

    As far as your top three points, I agree with point #3. I have seen lots of people who are house rich, but cash poor. There is certainly something to be said for liquidity.

  3. By Ron@TheWisdomJournal on Apr 23, 2008 | Reply

    Sounds like the mortgage companies realize they’ll be making less money, so they are making up for it in the fees.

  4. By Mydailydollars on Apr 23, 2008 | Reply

    Good advice! It’s nice to know that you can get the same results without the extra fees.

  5. By Elizabeth on Apr 23, 2008 | Reply

    I was unaware that there were companies trying to charge a fee for what any homeowner can already easily do themselves. I guess I shouldn’t be surprised.

    My husband and I regularly apply points 1 and 2. We make one extra mortgage payment every year and have it applied to our principal. We’re only 5 years into a 30-year mortgage. I love seeing that principal amount take a $1600 hit all at once.

    occassionally my husband will make a mortgage payment in advance when we have extra monthly income — just as insurance against a month where our expenses are higher than expected or extra income lower.

  6. By JimmyDaGeek on Apr 23, 2008 | Reply

    Most people don’t know that post-tax contributions made to a Roth IRA can be withdrawn without penalty. See http://www.irs.gov/publications/p590/ch02.html#d0e10747. This is one way of investing your excess cash and still having access to it, instead of paying off the mortgage.

  7. By Lee on Apr 23, 2008 | Reply

    Primerica Financial Services through Citicorp Trust Bank does not charge a fee for bi-weekly mortgage payments. In fact, they give the family a interest rate reduction for signing up for it!

  8. By Becky@FamilyandFinances on Apr 24, 2008 | Reply

    I agree that these stink! I signed up for it when it first became popular a couple of years ago. I thought that they’d apply the first half of the payment right away so I’d be saving on interest. Instead, they just held both halves until the end of the month and then made the payment. How does that save me money???? I immediately canceled.

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