The Veridian Blog

From time to time, I will get calls asking about bi-weekly mortgage payment plans or making an extra payment every year.  It sounds like a good idea at first glance because of the enormous amount of interest it appears you may save, plus the shorter time period in which your mortgage will be paid off is an added bonus.  But what lenders don’t like to tell you is this:

1. The math is a no-brainer.  Akin to paying down your mortgage, your opportunity cost is what you could be otherwise earning in the market which is almost certainly higher than today’s mortgage rates in the long-term.  Furthermore, that investment rate is being compounded year after year, unlike your mortgage interest which is a fixed amount in a traditional amortized loan program.  When paying down your mortgage, you certainly save on interest, but lose out on earning even more for yourself.  After all, when you send them extra payments – where do you think they put the money?  It goes into an investment vehicle earning a higher rate of return – otherwise they would not be offering the program in the first place, right?

2. Next, if you ever need the money back for loss of income, medical emergency or home improvement, you have to refinance at rates which may be higher than your current rate – even if you’ve always been on time and made extra payments.  Worst of all, it may be difficult or impossible to obtain a loan in a bad market, if your credit has turned for the worse, or if you have lost your job.  Of course, selling the house is always an option, but what if values have gone down and where will you move to where you can buy a house without having to obtain a loan anyway? 

3. On top of these two disadvantages, lenders will actually charge for the service of taking your money early!  Enrollment fees of approximately $10-15/month or one-time fees of $250-300 are common.  If a homeowner insists on making extra payments for peace of mind, then at least do it on your own for free (as long as there are no prepayment penalties)! 

The golden rule that has stood the test of time is this - lenders simply will not go out of their way to save you money.  They are in the business of making money so any program which claims to save you money instead should be highly scrutinized.