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ToYour Wealth November
2005 Biweekly Mortgage Plans |
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Does the
idea of saving thousands of dollars in interest on your mortgage sound like
just the deal for you? You’ve got to admit, such an opportunity is sure to
capture your attention. If you
recently refinanced or took out a mortgage to purchase your home, an offer to
accelerate your equity buildup either has been or will be made to you. Often
these seemingly too-good-to-be-true offers come in the form of a personalized
mailer that comes in an official looking envelope. Funny
thing about offers that sound too good to be true…they usually are just that,
or at least come jammed packed with things you need to consider before
signing up. In the case of these programs, a payment company collects half of
your regular monthly mortgage payment every two weeks. The company holds
these collected payments until your monthly due date and then they remit to
your mortgage company. Naturally the payment company collects a fee from you
for doing this service on your behalf.
On the
surface, it feels like making a payment every two weeks should total about
the same as the monthly payment alternative. Ah yes, but then you realize
there are two months in every year where an extra half-mortgage payment is
collected. That extra payment goes along with your monthly mortgage payment
twice a year, and it’s this extra payment that is applied toward the
principal that allows you to pay off your mortgage earlier. For
example, assume you have a $100,000, 30-year mortgage at six percent
interest. That means you have 360 monthly payments of $599.55. If you signed
with one of the most popular payment plans, the Equity Accelerator Program,
your cost would be a $49 enrollment fee and a monthly processing fee of $9.
The program deducts $299.78 (one half your monthly mortgage payment) every two weeks directly from your checking
account along with the $9 monthly fee and sends in the amount they collected
that month on the due date of your mortgage payment. Twice
each year there is an extra biweekly payment of $299.77 that is included with
your regular monthly mortgage payment of $599.55 that is remitted to the
mortgage company. There is nothing
that this plan (and others like it) do that you cannot do yourself and save
the fees. The
Equity Accelerator Program fees amount to more than $2,600 if you keep the
program until your mortgage is paid off (which amounts to a little over 24
years). The payment company also benefits by the interest they earn on the
“float” or the number of days that they are holding your money before they send
it off to your mortgage holder. By
exercising the discipline of simply sending in an extra monthly payment once
each year (make 13 payments instead of 12) you can accomplish the same end
game – accelerating your equity to pay off your loan earlier. And you can do
it yourself, fee free. To get a
better feel for the real costs associated with having someone else do this
for you, let’s compare how fast the mortgage example above is paid off under
the Equity Accelerator Program. Your 30-year mortgage is paid off in 24 years
and nine months saving you a total of $23,640 in interest costs. By paying
it yourself and adding the fees into each payment along with the $49
enrollment fee charged under the program you would have the mortgage paid off
in 24 years, saving $26,940 of interest costs. The cost of the program is an
additional nine months of payments at the end of the mortgage costing $3,300
of additional interest. There are
true bi-weekly mortgages offered by a limited number of lenders. These are designed
to be paid every two weeks directly to the lender not through a payment
company. Because this goes directly to the mortgage company, this option is a
better deal if you are interested in accelerating your mortgage payoff. Still
there are a couple of things to be aware of with a true bi-weekly mortgage.
First is the lack of flexibility – the payment is taken from your checking
account every two weeks with no “grace period.” Second, fees tend to be higher compared to
a traditional monthly mortgage with the same rate and term. Be sure to check
this out before purchasing a bi-weekly mortgage. Mike Haubrich is president of Financial Service Group, a
registered investment advisory firm in |