Monthly vs Every two weeks
August 17, 2007 12:35 PM   Subscribe

My mortgage lender sent an offer in the mail that I could change from monthly payments to payments every two weeks. This would be good for me, bad for them. Why?

Basically it suggests this:

I pay 2000/month right now
I would pay 1000/every two weeks with their offer

Naturally since I would make 26 payments a year instead of 24 I'd end up paying my loan off several years earlier down the road (of course I could do this currently by being disciplined enough to make an extra mortgage payment a year, but I'm not).

I don't even need to refinance to do it. Just sign up for direct deposit, give them my preferred payment dates, and it's done.

So what's the downside for me here? Why would my mortgage lender suggest I pay off my loan faster (thus paying them less total interest over time)? What's their angle?

My skept-o-meter is peaking...
posted by poppo to Work & Money (21 answers total)
It is a way for them to make $. You don't mention it, but there is usually a fee involved in setting this up. To do the same without any fee just add the extra principle payment sometime during each year.
posted by Gungho at 12:39 PM on August 17, 2007

Are they charging you a fee for this "service"? Check the fine print!

My lender generously offered to set up all sorts of complicated automatic payment plans, all for a low, low fee of course. Instead, I just make an extra payment toward the principal of the loan, once a year, for free. Same end result, but easier to keep track of, and easier to stop and start whenever I want.
posted by xil at 12:41 PM on August 17, 2007

They're getting you to sign up for direct deposit?

Maybe the guarantee of on time payment is worth more to them than the couple of years of interest. Processing is probably cheaper, too.

My auto loan lender shaves a few tenths of their rate when borrowers agree to allow them to take the payment from my account automatically. I took advantage of the offer.
posted by notyou at 12:42 PM on August 17, 2007

Thanks gang, the fee is indeed hidden away in some fine print :)

Yes, I know I can just pay extra principal anytime, thanks though.
posted by poppo at 12:43 PM on August 17, 2007

er, from the borrowers' account. I'm only paying for my own auto loan, not everybody else's.
posted by notyou at 12:44 PM on August 17, 2007

Hmm, still and all...As best I can tell even with the enrollment fees, I still seem to be getting ahead. It's, as far as I can see, $49 one-time only, and $9 per month.

Well $9 per month * the 300 or so months I have left only comes to $2749 total, far far less than the amount of total interest I would eventually saved.

Skept-o-meter is again peaking.

Notyou you could have a point as well
posted by poppo at 12:48 PM on August 17, 2007

notyou has it right. The reliability of your payment increases substantially with a direct deposit. They would rather have a good credit risk now than a problem down the line. Especially these days.

I would take the extra $2000 a year you are able to pay and put it into something that yields more than your mortgage rate -- or even something that is marginally less. You will then create your own liquidity in the event of an emergency and would not need a home equity line. You can always use that $ down the road to pay off your mortgage early.

The only catch is that you have to be disciplined to not use the money on anything other than an emergency or early payment. Otherwise, why give it to them to hold when you can hold it yourself.
posted by JohnnyGunn at 12:48 PM on August 17, 2007

Why not just send in $1000 every two weeks _without_ signing up for the special program? I know you said you weren't disciplined enough to make "an extra mortgage payment" every year, but if it were distributed this way, it wouldn't need that much extra discipline, would it?
posted by amtho at 12:54 PM on August 17, 2007

There is some marketing effort built in there - as in "my bank is really looking out for me. I will use them again/recommend them to my sister-in-law/write this on my blog."

They may also recognize that a number of people make additional principal payments each year, so this is a service they can offer that will both automate that (good for customer) and - in addition to the guarantee of direct deposit - put some money in their pockets on the service fees (good for bank).

Finally, the faster you pay down principal the more equity you have to borrow against. May we point you to our low-(variable) interest home equity lines?
posted by AgentRocket at 12:56 PM on August 17, 2007 [1 favorite]

I'll point out that they're charging you $9 a month for a service my bank provides for me for free - online bill payment, which I am free to use to schedule payments that are yearly or daily. My bank might have to cut a check rather than do an EFT, depending on who it's going to, but what the hell do I care?

Really, if you don't see another simple way to do this then paying $9 a month to save more than $9 is certainly worth it. We often pay $9 for convenience in things that DON'T save us money. So if you want to do it, do it. I'd just offer one warning - is there a change fee associated if you change banks, or any other information?

If so it may not be just that $49 once but possibly again down the road.
posted by phearlez at 1:05 PM on August 17, 2007

Why not just send in $1000 every two weeks _without_ signing up for the special program? I know you said you weren't disciplined enough to make "an extra mortgage payment" every year, but if it were distributed this way, it wouldn't need that much extra discipline, would it?

Believe it or not, at the very beginning of the loan I did just this, but their system wasn't setup for it. In other words some 1000 payments would go towards my normal principal and interest payment, the other would go only into prinicipal, and their systems saw me as not making my required payment every month.

Thanks also for noticing my discipline problem in the question.

In fact, I have the discipline to have automatic depositis into two different savings accounts and two different retirement accounts. But I'm no good at saving money manually beyond that, which is why this little offer was so attractive. It's making the extra mortgage payment for me automatically that I can't make myself.
posted by poppo at 1:07 PM on August 17, 2007

There's also the fact that the vast majority of buyers pay off their mortgages early simply because they don't spend 30 years in their houses; they sell them before 30 years are up and move out.

I'm not sure of the math, but possibly they collect more interest if you live in your house only the "average" length of time (say, five years) and make 130 payments in that time, than if you make 120 in that same period. The average American with a mortgage right now will never stay in the same house to the end of the mortgage period, and will in fact probably move within a few years - so in the long run, the mortgage company is betting you won't pay off this particular mortgage. Most of the time they'd be right.
posted by Dee Xtrovert at 1:18 PM on August 17, 2007

For what it's worth, automatic payments and automatic savings has taken me from being a bad saver to having some serious net worth (for a guy in my situation...) I'd do it in a heartbeat if it were me.
posted by advicepig at 1:19 PM on August 17, 2007

Wage earners get paid every two weeks. By making payments sync up with people's paychecks, the holder reduces the probability you won't have enough money to pay your mortgage at the beginning of the month, thereby reducing their default rate.

Reducing default rates, at this moment in history, is critically important for a mortgage holding company to maintain its stock price-- or even stave off bankruptcy.
posted by jamjam at 1:39 PM on August 17, 2007

If I remember right, the average home is lived in for about seven years before it is sold. They aren't looking at the 30-year picture, they are thinking in the 5-9 year range.
posted by Pater Aletheias at 2:17 PM on August 17, 2007

We add extra money to each monthly mortgage payment. For example, say the mortgage is $1365 a month. We send in a check for $1500 each month. The extra comes directly off the principal. You only need to be disciplined enough to remember to "round up" the check when you write it. I suppose you could set up an automatic payment from your bank for that amount as well, and not have to remember to write the check. I did the same with my car payment, but that's paid off now. And when you (not you, particularly, poppo) pay off a car, don't treat the extra money you now have as mad money. You get to spend one car payment on anything you want. The rest you continue to put away as a down-payment on your next vehicle. (Sorry for the lecture!)
posted by Joleta at 2:39 PM on August 17, 2007

The free and easy way to do the same thing is to take your payment amount, divide it by 12, and enclose a second check for that amount every month with your normal payment. Make sure to list this second amount on the coupon in the space that says "additional principle." If your payment coupon doesn't have such a space, write the words "additional principal" in the memo field on the check, along with the account number. You need to do this to make sure your account gets credited properly. Then, check their records periodically to make sure they are indeed crediting you properly.
posted by spilon at 3:04 PM on August 17, 2007

If you get a job with monthly paychecks, would this be a problem? I think the fee is large, compared to the service, but I am a cranky person.
posted by theora55 at 3:23 PM on August 17, 2007

If you wait until the last minute to pay, then you would make more interest holding on to that $1,000 for the extra two weeks. It's not much, but it could buy a nice book or a lunch for a day, depending on the interest rate.
posted by debit at 4:55 PM on August 17, 2007

Here's something no one's suggested yet. Right now you have 12 payments per year to make. I'm guessing that you have to pay a fee or maybe even lose a preferential interest rate if you miss a payment. So, every year, you get 12 chances to screw up and pay them this fee or lose your preferential rate.

They would like to increase this number, giving you 26 chances every year to shaft yourself.

Also, remember this: when you sign up for direct deposit, you are adding someone else's name to your checking account. You agree, among other things, that they can withdraw the entire contents of your checking account, and more, at any time, for any reason they deem appropriate. If you have a line of credit called overdraft protection - a lot of people do - they can draw down an overdraft, max out the overdraft line of credit, withdrawing all of it, and the liability to pay interest and overdraft fees, as well as make up that overdraft, accrues to you. I had this done to me once - it was a clerical error, took my employer 6 months to correct it and there was no compensation for the interest on the overdraft line of credit they triggered - and I have two words about that experience: NEVER AGAIN. Not for any reason. Your mileage may vary.

Finally, you're erring when you compute the total amount of interest paid. You need to take into account the time value of money by using future-inflation forecasts. You're not doing this. Basically every $1000 extra you pay in 2007 is worth more in inflation adjusted terms than the $1000 you pay in 2027.

Something may have changed in your lender's future inflation model to make them want to get cash quicker. But probably they're just facing liquidity problems like everyone else in the business and want to get cash back in their coffers today a little quicker than they had originally planned.

To the people who point out how it's good marketing for this company to do you such a wonderful altruistic favor at no benefit to themselves: I am auctioning off several well-trafficked bridges in the Bay Area area tomorrow at reasonable prices. Please contact me to submit your bid.
posted by ikkyu2 at 5:12 PM on August 17, 2007

So to summarize so far, what the lender gets out of this:

*Fees, and possibly more fees if you need to change back or change dates
*Possible reduced credit risk for the lender, quite valuable to them right now
*Possibly the amortization is different in these payments (the offer letter doesn't break it down). If the lender counts on the fact that I won't stay in this house through the life of the loan, it is possible that I pay them more interest instead of less if I don't stay the full thirty years.

Thanks also for all the extra tips on cobbling together the extra annual mortgage payment
posted by poppo at 5:13 PM on August 17, 2007

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