It doesn't make sense to pay a third party to arrange to pay off your mortgage early. As the housing market continues at a hot pace, many different types of buyers are getting into the market. First time buyers are getting in, some are buying up, baby boomers are looking for retirement homes, and people with other situations.
Also in the market are questionable businesses offering to shorten the length of your mortgage to save you tens of thousands of dollars by paying off your mortgage early. For the most part, you don't want to engage their services. In fact, back in 2015, the Consumer Financial Protection Bureau sued Nationwide BiWeekly Administration Inc. This company promotes a program called Interest Minimizer as a way for homeowners to save thousands of dollars over the life of their mortgages.
In September of 2017, a federal court in California rendered a judgement against Nationwide BiWeekly for a civil penalty of $7 million. The court also ordered both parties to work together towards a resolution that would allow Nationwide to resume the Interest Minimizer program but require it to correct certain misleading promotional aspects.
These theoretically money saving programs seldom make sense for the average homeowner. The main objective of these programs is for you to make extra mortgage payments to reduce the outstanding balance on the loan. When you reduce the principle owed, less of your payment goes towards interest and more goes towards reducing the loan balance. The result is you'll pay off your home sooner. Or have more equity in the home when you sell it.
In reality, few people pay off their entire mortgage, at least people that aren't near retirement don't. First time buyers seldom own their dream house. Most families buy between five and seven homes during their lifetime. At a minimum, most people buy a starter home, then a growing family leads to a bigger home, then gaining financial security leads to a home for entertaining, and finally downsizing at retirement. That means 30-year mortgages are seldom paid off even if additional payments are made.
With interest rates still near record lows, you probably have better uses for the money rather than reducing a mortgage that you'll never pay off. Instead, apply it towards other high interest debt that you can pay off early. Maybe a student loan or a car payment. Or even use the extra money to take a vacation. The bottom line is that gaining a few hundred dollars in equity isn't going to make much difference when you buy your next home.
The reason Nationwide BiWeekly Administration Inc. was sued by the Consumer Financial Protection Bureau is because the program they offer was misleading to homeowners. The CFPB claims the fees charged by the program (average $1,200) will take up to nine years to pay off before any actual mortgage savings begin. Most people will have moved to another home before that happens.
How the program works is Nationwide BiWeekly Administration Inc. arranges with your lender to make half of a mortgage payment every two weeks because many people receive a paycheck every two weeks. You end up making about one extra monthly payment against your mortgage each year. Also, every time you make a payment, you pay down the principle a little, meaning the interest you pay on each future payment is a little less.
However, you can easily make this arrangement yourself. All you need to do is call up your lender and tell them you want to make a half payment every two weeks. They'll be glad to take the extra payment - without charging a $1,200 fee.
You also have several other options. It's easy to get a copy of your amortization schedule online or from your lender. It breaks down your monthly payments into the principle and interest portion of each payment. You can then make an extra principle payment each month to build equity and remove a payment from the end of the amortization schedule. Most online mortgage calculators also have an "extra payment" feature. You can add an extra payment anytime you want. It can be anything you want - $25, $50, $100 extra each month or $500 when you get a bonus.
In the end, you can easily control how much and how fast you pay off your mortgage without handing over a ridiculous administration fee to a sham company. However, first consider if you even want to make extra payments or if you have a better use for that money.
Please leave a comment with your thoughts about paying off mortgages early.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.
Adding a little extra to your monthly mortgage payment--say $25--is the best way to pay your loan sooner without making a dent in your pocket - this money goes directly to paying off your principal saving you money down the road without much effort. Anything else is not worth spending the money on, as you point out.
Good overview for the new homeowners especially!
Thanks Doug. I agree completely that adding anything extra to pay down the principle is the best way to go. The first time I did this (many years ago), I thought an extra payment had to be a complete extra principle payment from the amortization schedule. Actually, any amount above the monthly payment is applied towards paying down the principle. When homeowners understand this, it becomes easy for them to take several years off the payment schedule.