As I’ve written before we bought our first home back in September 2007. It’s been a great thrill thus far. Our mortgage payments are well below the upper range of “allowable” debt-to-income ratios. Everything is peachy.
A few months after we moved into the house we started receiving a plethora of offers from companies. Offers to make our lives easier by cutting or fertilizing our grass (wow who knew it was so expensive), to pick up our dry cleaning (we use Dryel, no thanks), to saving us interest costs on our mortgage by accelerating our payments.
Woah, hold up. That last one there makes me pay attention.
You’re saying you can save me money on my mortgage? Legitamitely? Legally? Okay, I’ll bite. I’ll open the envelope.
Imagine the car is your mortgage. Now imagine it accelerating… the smoke is just interest you are leaving behind.
(Photo by dodge challenger1)
How Mortgage Accelerator Programs Work
If you don’t own a home or you threw away all of the marketing materials as soon as you received them, let me give a brief explanation of how a mortgage acceleration program works.
With a typical mortgage you make monthly payments over the life of the loan. A thirty year mortgage is 360 months and 360 payments. Thus, each month once your payment is processed your mortgage is reduced by a certain percentage of your payment.
Obviously to pay off the mortgage faster you need to pay more principle, especially at the front when 90-95% of your payment is interest.
These mortgage acceleration programs promise to set this up for you while also not increasing the total amount you spend each month. So if your mortgage is $1,000 per payment, you’ll still end up paying $1,000 per month yet somehow pay the mortgage off faster.
Sound too good to be true? It is.
How the system works is instead of paying once per month, you pay once every two weeks. The bank receives your payments more frequently, thus you are charged less interest because the principle is paying down the loan more often. Essentially you are saving two weeks worth of interest on a tiny bit of principle and compounding it over time.
Up to this point everything sounds legit and it should work. But wait…
The Catch of the Mortgage Accelerator
There are two major problems to this system.
The first problem is they mention in very tiny print toward the bottom of the letter that this program will actually cost you money to participate. The letter I am looking at right now has a one time fee of $49 and then a bi-weekly cost of $4.15. In the first year you will be charged $156.90 (26 bi-weeks x $4.15 plus $49 one time) just to participate. Ouch.
The second problem is that you don’t make 12 payments in a year by making a half-payment every two weeks. Why? There are 52 weeks in a year. There are 26 bi-weekly periods in a year. If a month has four weeks (or two bi-weekly periods), then divide 26 by two and you get… ta da! 13 months in a year.
No, they haven’t extended time (I would sign up for that!) they have snuck an extra payment in during the year and charged you $107.90 for the service.
What a crock.
Set Up Your Own Mortgage Accelerator
Here’s a simple alternative: create your own mortgage acceleration “program”, don’t charge yourself for it, and pay your mortgage off faster. Sounds good, right?
If you wanted to mimic the program I described above just divide a regular payment by 12 and add that amount to each of your normal payments. If your mortgage is $1,000 per month that would be $83.33 extra each month. So each month pay $1083.33 and be happy to know that you are reducing your principle faster than normal. (And you get to keep all of that fee money, too.)
The best idea is to have a plan. That sound ridiculous I know, but planning is key. Can you afford to pay additional down on your mortgage? Or do you have other savings goals to meet (college education, retirement, credit card debt, etc.). That’s what this blog is about. I hope you’ll stick around.
Hey Readers — are any of you signed up for a mortgage acceleration program? Have you ever received one of these offers? Leave a comment or drop me an email.