Why Pay Hundreds When You Can Do It For Free?
The come-ons sound great. Pay $100 to $300 up front, a small monthly maintenance fee of between $5 and $15 and you will save tens of thousands of dollars on your mortgage. Some unscrupulous companies will even claim that you don't have to increase your payments from what you are currently paying. All you have to do is pay half of your monthly mortgage every two weeks instead of once a month. These plans are marketed as mortgage accelerator programs which are nothing more than bi-weekly mortgage payment programs.
So can simply paying one-half the monthly mortgage payment every two weeks really cut tens of thousands of dollars off your mortgage? The answer is both yes and no. Taking the amount you currently pay each month, dividing it by two and making two payments each month will do virtually nothing to save you money. So how can these companies claim to be saving you thousands of dollars? What they do is play a little math trick.
What the companies do is divide your monthly payment in half and then have you pay every two weeks, not two times a month. If you divide your monthly payments in half and made payments twice a month, you would make 24 payments (12 months x 2 payments a month = 24 payments). What these companies do is divide your monthly payment in half and then apply it to a twice week payment schedule. Since there are 52 weeks in a year, you end up making 26 payments (52 weeks divided by 2 = 26 payments). The huge savings comes not from paying twice a month, but by making the equivalent of an extra monthly payment each year towards your mortgage (and this is why companies that claim you don't have to pay anything extra are not telling the whole truth and should be avoided).
Now even with having to pay the company's fees and an extra month's mortgage payment each year, you'll still be saving tens of thousands over what you would be paying if you went by the regular 30 year mortgage payment schedule. If you look at it that way, it may still seem like a good deal. If you look at it from a SavingAdvice.com perspective, however, it is the farthest thing from it. Why? Because you can do the same thing yourself without paying a company hundreds or even thousands of dollars in fees.
To get the exact same results, all you do is take your monthly mortgage payment (let's say $600) and divide it by 12 ($50). Add that to your regular mortgage payment ($600 + $50 =$650) and make that payment each month. You have accomplished the exact same thing (and will save tens of thousands in interest charges) without paying a dime to a third party. While almost all mortgages will allow this type of prepayment with the extra $50 going to pay down the principle of the loan, it is necessary to confirm with your lender that this can be done without incurring any penalties or extra fees.
Now before you get excited about this, we need to do a little more thinking. Mortgage loans are usually the lowest interest loan type you have. Furthermore, a portion of the interest in most cases is deductible on your taxes. Before you go off and spend that extra $50 towards your mortgage, consider whether there are other loans such as credit cards or student loans on which it could be better spent. It makes much more financial sense to first pay off $50 on an 18% non tax deductible credit card loan than on a 7% partially tax deductible mortgage loan.
If, however, you have been following the
SavingAdvice.com Guerrilla Debt Tactics and no longer have any credit card debt, the next step is to apply the same concepts to your mortgage payments. This falls right in line with the concept of the bi-weekly mortgage payment plan by paying amounts above your required monthly payment. The mortgage accelerator concept of paying more than the minimal payment required is a solid financial concept that will save thousands of dollars on your mortgage, but as you should know, there is no reason to pay someone hundreds of dollars in fees when you can do it just as easily on your own for free.
Bi-Weekly Mortgage Accelerator Program
