Automatic debit for mortgage payments?

January 2, 2004 8:51 AM

Having bought a house, I'm now faced with paying a mortgage. You save a few bucks (and the effort of remembering to mail a check each month) if you have the payments deducted automatically from your bank account; is there any reason I shouldn't do this (assuming I keep enough of a balance to cover it)?
posted by languagehat to work & money (12 comments total)

I love, Love, LOVE our electronic payment option, and I'd never go back to paying the mortgage by check. I'm sure there's a downside to it, but I've never found it.
posted by anastasiav at 8:56 AM on January 2, 2004

Languagehat - there is no compelling reason to not have the mortgage itself electronically withdrawn. However, one thing to consider is this...when they withdraw your mortgage, they will also likely want to withdraw funds to place in escrow to pay your homeowner's insurance, property taxes, and mortgage insurance if you are paying it. This total amount above and beyond actual mortgage and interest can be less than $100 to several hundred dollars. Those funds are placed in an escrow account which earns interest but not for you. The insurance and tax payments are made a couple times a year.

If you have the discipline to make those payments on your own, then keep that money in your savings account and earn the interest. If you want the no-hassle approach and are willing to pay a few percentage points of income, then include that escrow amount in your mortgage payment.

And if you are paying mortgage insurance, beg, borrow, or steal your way to getting rid of it.
posted by vito90 at 9:13 AM on January 2, 2004

The downside is that you have no control over when the funds are disbursed short of closing your bank account. I like being able to determine when my bills get paid, which is why I still use old-fashioned checks.
posted by MegoSteve at 9:15 AM on January 2, 2004

To address MegoSteve's point - my lender allows me to schedule an electronic payment each month ... its not automatic. I just go on-line and pick a day that the bill is paid and they withdraw automatically on that date. I actually have more control with electronic payment than I have with a check, because there's no chance of the payment going astray or being delayed.
posted by anastasiav at 9:21 AM on January 2, 2004

MegoSteve, LanguageHat, my account gives me the luxury of choosing the date which the payment is taken. This is a good option if you always get paid on the 1st and 15th for example, knowing you will have funds in place. You may have the option of doing the transaction in reverse though. Instead of having the lender sweep your account, set it up so your bank sends a recurring transaction once per month on such and such a date.

Also, if you split the amount of your payment in half, and pay every two weeks instead of every month, over the course of a 30 year mortgage you will save tens of thousands of dollars.
posted by vito90 at 9:24 AM on January 2, 2004

Do you have the option and desire to overpay any of your payments (one strategy to end the mortgage earlier and save on interest)? An automatic withdrawal may not let you do this.
posted by Sangre Azul at 9:37 AM on January 2, 2004

Great points, everyone. I will investigate the possibilities of choosing my dates of withdrawal and excluding the tax and other payments. (I am not paying mortgage insurance!)
posted by languagehat at 10:16 AM on January 2, 2004

One other potential drawback is that if the note-holder screws up (say, makes two withdrawals when he should make one), it could be hard to get them to undo the mistake.

I love online banking and whatnot, but I still schedule all my payments by hand, which takes about 5 minutes a month.

Vito is right about the split-payment thing, but part of the reason you save so much money over time is because you wind up paying 13 months-worth of payments per year. Which is great if you can swing it, just be aware of what you're getting into.
posted by adamrice at 10:19 AM on January 2, 2004

Languagehat : as part of my initial set-up when I bought my house, the lender (WAMU) required automatic withdrawl for the first few months (three, I believe).

After the period was up, I discontinued the service, and for more than a year paid them myself.

Then, out of the blue, the lender began taking payments out again -- month after month. The wreaked havoc on my account, as I didn't notice for a little while. When I complained, it stopped... then mysteriously started again.

Moral of the story: once they have access, they have access -- it's like inviting a vampire into your home.

I would suggest auto payments, rather than auto withdrawl.

I would also suggest making multiple payments during a month.
posted by silusGROK at 10:27 AM on January 2, 2004

I still have a copy of an invoice my company was sent by Canada Post for our monthly courier service. Normally it's $40 to $170 range. This one (just after a computer upgrade on their end) was for $296,400,000. (and coincidentally, the same day there was a report in the paper about the Canadian debt. I assume no correlation.) Now they're asking every company to move to pre-authorized withdrawls. *shudder*

Another story. We set up an auto withdrawl to pay for some office equipment over 36 months. The company was still withdrawing payments after 40 months, until we asked them to stop. Yes, my boss should have noticed after the first extra payment, but still the money was taken.

In short, screw ups can happen. So if you decide to do this, watch your accounts closely.
posted by GhostintheMachine at 11:05 AM on January 2, 2004

Another vote for auto-payments, as opposed to auto-withdrawal. I've added extra zero's to amounts and accidently scheduled multiple paydates, but at least they're my own screw-ups, not some faceless corporation. I can flog myself, but it's very hard to find someone at these companies to flog when necessary.
posted by dness2 at 12:25 PM on January 2, 2004

Vito- regarding the escrow interest pont, My mortgage ecrow interest account does earn interest and is rolled over into the escrow account making the amount I am required to pay slightly less, I of course pay taxes on this interest as well. I believe this is is standard with escrow accounts.

As my wife is a fincial advisor at the institution holding the mortgage we also get a discounted rate (until she leaves or retires (ha!).
posted by DBAPaul at 12:34 PM on January 2, 2004