Paying for mortgage acceleration
Is a bank's offer to help you pay off your mortgage early worth the price?
This post comes from Rob Berger at partner blog The Dough Roller.
Recently we refinanced our mortgage. With a rate of 3.875% fixed for 30 years, it was just too good to pass up. About a week after the refi closed, we got a letter from our bank offering what it called the EMPP -- Early Mortgage Pay-Off Plan.
The letter promised that we could lower our interest rate with EMPP down to 3.22% without refinancing. Wow! Then I read the fine print. The EMPP is a thinly veiled biweekly mortgage payment plan.
I was a bit disappointed in the trickery, but I read through the information anyway.
How biweekly mortgage payments work
First you have to join the EMPP. The cost is a nonrefundable enrollment fee of $295. Once you're enrolled, one-half of your mortgage payment will be deducted from your checking account every two weeks. If you do the math, it comes out to 13 (not 12) payments a year. Because of that extra payment, you pay down your loan faster and pay less interest.
According to the documents my bank sent me, by paying my mortgage biweekly I'd shave 5.1 years off my 30-year mortgage. And I'd save about 0.66% on my effective interest rate, or $74,850.66. (Post continues below.)
So is the EMPP a good deal?
My initial reaction was no. Instead of joining the EMPP, I could simply divide my monthly mortgage payment by 12 and add that amount to each monthly payment I make. The result would be the same, and I wouldn't have to fork over $295 (plus a $1.50 processing fee for each payment deducted from my checking account) to my bank.
But I'm not convinced that's the right answer for everybody. When I think about financial decisions today, I ask myself how I would respond if a few years from now one of my teenagers was about to make a financial move. In this case, what would my response be if my son or daughter told me about spending $295 to join a biweekly mortgage payment plan?
My first question would be why don't they just increase their monthly payment instead. I would want them to understand that they can do this on their own without a fee. Once I'm comfortable that they understand the program and the alternatives, I'd want to know why they intend to join the program anyway.
One answer to that question could be that they are concerned they won't have the discipline to stick with the increased payments if they do it on their own. They may also like to automate their finances, and an EMPP-type program would do just that. With the biweekly program, they feel confident that they will stick to it. And a $295 enrollment fee is nothing compared with the money they'll save by paying off their mortgage early.
In my case, I won't be joining the program. I don't need the extra discipline, and I like the flexibility of paying whatever amount I want over and above the minimum payment.
If you've joined a biweekly mortgage payment plan, do you think it was a good move?
More on The Dough Roller and MSN Money:
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- Which FICO scores do mortgage lenders use?
- FICO vs. FAKO: Does it matter?
- Calculator:How much house can you afford?
This article's rationale in telling them to "go for it, is still "dumb". If you have a mortgage with a bank that doesn't offer automatic deductions you already screwed up. Divide by 12 - add that to your monthly payment and set up your automatic deduction that way. You're done - no discipline needed. The added bonus is that IF by some unfortunate turn of events, you suffer a setback or loss of income, you can lower your payment without penalty -- if you enroll ... at a cost of $295 ... the programs almost all come with a penalty or make it very difficult to revert back, sometimes requiring a refinance to get out of the program ...
Bottom line is that these programs are not worth it. You can do it yourself cheaper, less restrictve and still have auto deduct to help with any discipline issues. Advice like this from a financial column makes me very uncomfortable.
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