Never Pay a Premium to Pay Your Mortgage

by Kevin on January 21, 2009

I recently received a ridiculous offer in the mail from our mortgage company and I thought I would use it as a teaching lesson for my readers. Even if you don’t have a mortgage this post should apply to you, assuming that at some point in the future you will want to buy a home and not pay 100% cash for it.

A mortgage is a big commitment. You are agreeing to pay thousands and thousands of dollars over fifteen or thirty years in order to own your home. On a 30-year mortgage you will likely buy your home twice if you end up living in it for that long. This is due to the interest involved. For example, a $200,000 thirty year mortgage at 5.25% will cost you $197,585 in interest. So you end up spending $397,585 for a $200,000 home. Ouch.

You would think the bank would be content to “just” get this additional money from you.

Alas, they are not. There are a few offers I have received since we bought this house that I thought I would dissect for you.

Never Get a Mortgage with a Pre-Payment Penalty

For starters you should never consider a mortgage with a pre-payment penalty. You would essentially be agreeing to never pay the mortgage off early, or face a fee if you ever had to (you know, like when you sell the house). I can’t believe these type of mortgages are even allowed to exist. The only reason I might ever consider a mortgage with a pre-payment penalty would be if the interest rate were close to 0%. If you see this, move on and find a better mortgage.

Pay Your Mortgage on Payday

This is the mailer I received that prompted me to write this post.

The idea seems innocent enough. The bank offers to let you change when you pay your mortgage from monthly to whenever you get paid — usually half of your normal payment made every two weeks as most people are paid bi-weekly. Thus instead of you making 12 payments in a year (1/month) you end up making 13 full payments. And we all know that making an additional payment per year could knock thousands off your mortgage, right?

This is true. But of course there is a catch. The bank wants $9/month to set this up for you. That’s $108 per year. Not bad, right? It’s just $108.

You can go burn $108 if you want. There’s an easy way to do this on your own — just divide one monthly payment by 12 and add the result to each of your regular monthly payments. For example, if your regular monthly payment was $1,200 you would simply add $100 to every normal payment you made that year.

Result? You still get the benefit of paying down the loan a little bit faster, and you get to keep the $108 in your savings account. Then again you could just apply that $108 on top of the loan as well!

Mortgage Life Insurance

This is another offer we have received in the mail on multiple occasions. I would guess we have mailed at least 24 of these since we bought our home. That equates to a little less than twice per month. Annoying.

Essentially what is going on is the lender is either selling your information to an insurance company, or the information is public and the insurance company is finding out on their own, or the insurance company is just a different division of the lending bank and they’re trying to capitalize on you being their customer. They then proceed to hound you about buying mortgage life insurance. If I had more free time I would consider calling them and giving them a piece of my mind, but I just shred these offers.

The offer is to cover your mortgage amount should you pass away. Just like with life insurance except that this insurance only covers your mortgage payoff amount. This is a terrible idea for a few reasons.

First, you should have life insurance anyways, and it shouldn’t be tied to the amount you owe on your mortgage. I haven’t run the numbers, but I would bet a wooden nickel that the cost of the insurance is above what you would pay for a nice, easy, 20-year term life policy that would cover not only your mortgage, but lots of other expenses as well.

Second, the value of the insurance is going to drop over time as the value of your payoff amount drops. Does the insurance premium drop with it? For some reason, call me cynical, I doubt it.

Never Pay a Premium to Pay Your Mortgage

I’ll say it again. There are thousands of ways companies try to scam you away from your money. Don’t let them do it. You shouldn’t have to pay a fine or a fee in order to pay your mortgage whether it be on time or early. Ditch these offers, run for the hills, and start putting some extra money on that payment so you can get rid of the mortgage faster.

{ 7 comments }

Philip January 21, 2009 at 10:15 am

All those offers and notices did get annoying. I know what they are now, but for a while I started reading trying to tell exactly who was offereing it and if it was of any benefit. The other problem is that I got so many of them I almost got rid of one I got in the mail yesterday, till I noticed it looked different and was actually a check for refund on some escrow!

Thanks for pointing out this info.

Fit Wallet January 21, 2009 at 10:53 am

I’ve probably gotten about that many mortgage life insurance mailers too. The most irritating part is seeing “IMPORTANT INFORMATION ABOUT YOUR MORTGAGE” printed on the front of the envelope, so even if I am 99% sure it’s one of those insurance scams, I still feel the need to open it to check. Ugh!

Start-Up January 21, 2009 at 12:35 pm

I can not agree more that you should never ever get a mortgage that has a pre-payment penalty. In addition to what you wrote, it discourages you from refinancing to a lower rate, which could save your 100’s of dollars a month in mortgage payments.

I also agree with not doing the whole bi-weekly program. I refuse to pay for a service that I can do myself.

Adam January 21, 2009 at 2:08 pm

I used to sell life insurance and those cards go to lead companies. Once you are in their system, insurance agents can then buy those leads. When someone is a warm lead (they sent in the card and expressed interest in life insurance) they are much more valuable to agents and they are willing to pay for them. It’s unfortunate that they keep sending them to you though. You would figure that if someone doesn’t send in the card the first 5 times they are not interested.

My Journey January 21, 2009 at 3:55 pm

NDP,

Many States (I am positive about NY – it was on the bar exam lol) do not allow for pre-payment penalties if it is after 1 year. So even if its in the contract it may be an illegal clause and moot.

Russell Fascenda January 22, 2009 at 5:32 pm

Good post about the make 13 payments a year “service”, as you say just add something to each month’s payment. Or better yet, do what the service will do:

Every 4 weeks put a mortgage payment into your savings bank, and at the end of each month make the normal payment. At the end of the year, you will have one extra payment saved up, plus a little bit of interest. Use that to make an extra payment on your mortgage principal.

You’ll also have the $108 leftover, pay yourself for providing the service! Or put that into the extra payment as well.

Kevin January 23, 2009 at 7:08 am

I mean I would understand if they sent me one or two of each of the flyers. They are trying to increase their revenues. But seriously… bombarding your customers with mailers? Annoying. Unprofessional.

@Adam: thanks for the heads up. That makes sense.

@Fit Wallet: Exactly. 99% of the time it isn’t “important”, but the one time you don’t open it it turns out to actually be important.

@My Journey: Sounds like you live in an intelligent (if not heavily taxed!) state. Not so sure that applies down here in Alabama.

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