PrePayment Plan for Mortgage?
I consider myself pretty financially savvy, but what to make of this ‘early mortgage pay-off plan’ I recd from Fifth-3rd? It’s to enroll in direct-from-bank payment (fee $295 + $1/payment) and can choose bi-weekly to reduce term from 30->23 years. So why can’t I just send in a extra payment every year (or extra per…
I consider myself pretty financially savvy, but what to make of this ‘early mortgage pay-off plan’ I recd from Fifth-3rd? It’s to enroll in direct-from-bank payment (fee $295 + $1/payment) and can choose bi-weekly to reduce term from 30->23 years.
So why can’t I just send in a extra payment every year (or extra per month) and save the fees? Can they refuse an extra payment if it’s not thru their plan?
There is actually an adavantage to the program of bi weekly payments. Even if you pay extra principal each month your payment is applied to the principal only once a month. Even if you pay 2 weeks early, the principal portion of payment is not applied until the actual due date. So for that 2 week period you are charge intrest on the full principal. With bi weeklyy payments, the principal is lowered every 2 weeks. The end result is less intrest. You can use the biweekly payment calculator at bankrate.com to see what I’m talking about.
@d_luxx
That is just not right at all. Doesn’t matter if it is variable rate or fixed rate, if you pay extra principal (note you need to ensure it is applied to principal), the amount of the fixed payments monthly in the future end up with more of a portion of the total payment going to principal versus interests.
If you want, there are loan calculators out on the web you can use to play and see this yourself. I think Yahoo had some nice ones where you could suggest an extra payment schedule.
Yes, you can make extra payments to your mortgage and apply it to your principle without involving a third party or signing up with a special program; however, the question is whether or not its actually a good idea to do so. I’ve always heard the common wisdom that you will save money in interest over the course of the loan, and was surprised when I recently learned that it’s not true for *fixed rate* loans.
According to my financial planner, the amortization schedule on a fixed rate loan is set and does not adjust the amount of interest charged every month from the original schedule just because your principle is going down faster – The bank makes the schedule in such a way that they will get their money regardless. Therefore, if you have a fixed rate loan, you are better off saving that extra money so that it is working for you and accessible. When you are close to end of your term, or on the last few payments where you are being charged interest, use the money you’ve saved to just pay the whole thing off.
If you have an adjustable rate mortgage, I think its a different story.
For years I have made extra payments on my own. As others have noted, there is no reason you have to pay the bank to set this up for you. In this day of automatic payments on line, you can easily set this up yourself.
All great posts. You do not need to pay them to do this for you. They make money on this program because some people are too lazy to do it themselves.
If you are concerned about them applying your extra payments to principal I would suggest writing them an additional check with the words “principal only” in the memo section of the check.
-Adam Dahill
I used to do this (automatically also) on my previous mortgage. Apparently Fifth-Third does not have an automatic payment plan unless you pay the fee (I asked about it, which is how now they’re sending me this every month or so) or else it’s well hidden.
Thanks for the sanity check.
I’ve been told that if you do that you should be sure you mark it for principal and not interest.
I got one of those announcements from Citimortgage and had the same thoughts you did. If I can just pay extra all the time or any time on my own for no fee, why would I pay $300 to $400 to make it automatic? In fact, my already extremely low opinion of Citi was further lowered that they would even send something like that to me.
We got a note from our bank when we closed about accelerated payment options (Wells Fargo). Most banks do it; you can pay biweekly, monthly, or make extra payments each year. Definitely a non-painful way to hurry up the paydown.