With this month’s mortgage bill, we also received an offer to join our lender’s Accelerated Mortgage Payment Plan. Using it, they claim we can settle our 30-year mortgage seven years early while saving a sizable amount in interest payments. And indeed it would, as we would be paying half our payment bi-weekly – instead of once monthly like now – which is 13 full payments a year (52 weeks bi-weekly equals 26 half payments equals 13 full payments) instead of the normal twelve. That one extra full principal payment does wonders, especially early on when almost everything you pay is eaten up by interest. A little pain up front yields incredible returns later. (That is, if you consider not having a mortgage payment incredible returns. I, for one, do even though I know there are those of you out there who do so love that mortgage interest deduction.)
So sign us up… Oh, wait, better check that fine print:
- Enrollment in the program: $49.99.
- $4.50 per bi-weekly payment – which averages out to $9.75 a month. Because, as you know, automatic payments are so expensive to set up, so they’re helping us out by spreading that cost over the life of the loan…
- Payment held in escrow until the standard payment is due – in other words, at the end of the month – instead of when the bi-weekly payment is actually submitted. Not that it would be an immense difference, but I’d certainly appreciate the few cents of interest being avoided if those mid-month payments were applied immediately rather than a little more interest going into the bank coffers. And, you can be sure the bank is doing something with those funds over the escrow period.
Is it still worth it? Well, by my calculations, for our little bitty house loan we’d save $8,800 in interest at a non-adjusted cost of $2,740 in program costs. Saves us $6,060 when everything’s paid off. So far so good.
Take those same program costs, and drop them in a very conservative investment like our HSBC savings account at 5.05%, and at the end of those 23 years we’d have future value of $5,244. Enrolling still saves us $3,556.
But, the kicker is, there’s absolutely no point in enrolling in their plan at all, especially the way they have it set up. Nothing at all is stopping us from applying an extra half payment twice a year. Same $8,800 savings, just without costing us that $5,244 in program costs. And then, if we’d instead apply that extra $9.50 a month we’d have paid for the program to the loan, we end up knocking off an additional two years, plus the already mentioned seven, on the term of the loan, and save an additional $3,100+ in interest payments.
I think we’re going to have to pass on this offer…
[tags]mortgage,payments,accelerated payments,interest[/tags]
