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A “Service” You Don’t Need!
By JLP | April 9, 2007
Charles, a reader of this blog sent me an email this weekend with a copy of a letter he received from his bank about a program that will save him thousands of dollars in mortgage interest. You can click on the letter to see a larger version. Sorry about the quality.
The Deal
Instead of him paying his mortgage once per month, the bank will set him up so that half his monthly payment is paid every two weeks. This works out to 26 payments per year, which is equivalent to one extra monthly payment per year. According to the bank’s letter, going this route would pay off his mortgage nearly 7 years early and save him nearly $46,000 in interest. WOW! Sounds great! Sign me up!
The Catch
Now, before you sign up, you need to know about the catch. The bank charges a $295 enrollment fee and $5.42 per month for as long as you are using their program. In this particular case, it would cost $1,769 to take advantage of this offer.
Psst… I’m gonna let you in on a little secret:
If this is something you think you would like to do, most likely you can do this yourself for FREE!
That’s right! If your bank won’t let you pay every two weeks, you can just send them an extra payment once per year. Just be sure that you won’t face a prepayment penalty if you pay off your mortgage early.
Banks won’t go out of their way to let you know that you can do this yourself. Instead the’ll send you a letter showing you how much you can save in interest and hope that you’ll think, “Wow, by spending only $295 and $5.42 per month, I can save myself nearly $46,000 in interest. This is a ‘no brainer.’” Only a bank would figure out a way to charge you for something you can do yourself and make you think it’s a smart decision!
Just remember, if a bank is telling you how great a deal something is, there’s most likely a catch.
Topics: Banking, Budgeting, Mortgages | 9 Comments »
April 9th, 2007 at 8:26 am
The savings is a “Huge return on your investment!” Wow! If you do it by yourself it is an INFINITE return on your investment. Last time I checked, Infinite>Huge
What a scam
April 9th, 2007 at 8:33 am
Our lender sent us one of those types of letters a few months after we bought our house. I read it and just laughed, they too wanted around 300 bucks just to enroll.
An even better idea if you don’t want to just send in one payment extra per year, have a bank account with your lender if you can. One of our checking accounts is with the same bank our mortgage is through and the monthly mortgage check payment is taken away automatically. But, we set up an automatic and recurring transfer once a month from the checking to mortgage equal to about 1/12th of the yearly mortgage payment.
Viola, an extra payment per year without their silly fees. The best part is that this method is very flexible as well, we can start it, stop it or change the payment at any time. No need to be bound by their terms.
April 9th, 2007 at 10:00 am
I don’t believe that a bank will not let you pay at whatever frequency you want! You should always pay your mortgage to coincide with your paycheck. If you get paid every two weeks, make the mortgage payment every two weeks the day after payday. If you get paid per week, same thing but weekly. If you get paid per month, same thing again but monthly.
April 9th, 2007 at 10:05 am
CR,
I had a check kicked back to me because I mistakenly paid a smaller amount than what I was supposed to pay (a tabulation error on my part).
April 9th, 2007 at 10:36 am
Or you could just send an extra $100 with your regular monthly payment. There are many ways to get the same effect. JLP is right – the bank here is basically charging you a rediculously high fee for a phantom service that does what you most likely have the right to do anyway for free. This is one of the most eggregious scams I have heard of in a while.
April 9th, 2007 at 10:38 am
Charles should reply with a letter that says if they pay him $295 he’ll agree to make his regular monthly payments when they’re due. And he could put in big letters “WHAT ARE YOU WAITING FOR?”
April 9th, 2007 at 10:40 am
I’ve gotten the same letter… WTF are they thinking? If they paid me, it might be attractive… but if it’s something I can do for free, why pay?
April 9th, 2007 at 11:21 am
If you are paid bi-weekly, then about every 6 months you have 3 paydays instead of 2. So on those months send in an additional half-payment.
Compared to sending in an extra 1/12 payment each month, it takes a bit more effort but makes your cash flow more even.
This is effectively what Jeremy in reply #2 above does, but what you can do yourself if you don’t have his option.
April 9th, 2007 at 11:23 am
One thing I would add is that just the extra payment at the end of the year will not yield the same effect of paying earlier (by doubling the frequency) + an extra payment. So pay more frequently (every 2 weeks), or even as soon as you have the money if you want to save on interest.
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