Biweekly mortgage payments certainly sound like a great idea. Paying half your mortgage every two weeks instead of a full payment once each month actually can save you many thousands of dollars over the life of a mortgage, and allow you to cut years off that 30-year loan. Sadly, as with many financial instruments that sound great, there's a catch. In fact, there are many. A lawsuit filed by the Consumer Financial Protection Bureau this week against a firm selling biweekly mortgage payment programs highlights all the reasons that signing up for biweekly mortgage could be a very bad idea.
The CFPB sued Nationwide Biweekly Administration for selling a product the firm called "Interest Minimizer" that the CFPB says deceived many consumers, who ended up paying more in fees than they got back in interest savings.
But first, let's get this out of the way. Conceptually, biweekly mortgages can work. Pay half a month's mortgage every two weeks and you'll make one full extra mortgage payment every year. Early payments lower your principal, which lowers your compound interest, so they have a virtuous impact. Here's the key: You can make early mortgage payments yourself anytime. You do need to stay on top of your mortgage servicer and make sure the extra payments are applied correctly to your principal, but if you are the kind of person who makes extra mortgage payments, you are probably the kind of person who can stay on top of how those payments are applied.
Why You Might Not Want to Pay Early
You don't need to pay a third party to manage biweekly payments for you. Some folks feel like signing an agreement ensures they'll keep up with what amounts to a forced savings plan; that's a personal choice. But know there's a cheaper way to do it.
There are other reasons not to commit to a biweekly mortgage. It's always good to maintain flexibility in case something unexpected occurs, such as a medical emergency. And while paying down a mortgage can feel good, it actually isn't the slam-dunk financial choice many black-and-white financial advisers say it is. Huh? Here's just one example: If you have a mortgage at 3.5%, you are going to miss it, and the cash you used to prepay it if — as many experts predict — interest rates on savings accounts soar past 3.5% during the next decade or so.
Back to biweekly payments, and things that can go wrong. The CFPB alleges that Nationwide Biweekly Administration and its owner Daniel Lipsky misrepresented the savings consumers enjoy from their biweekly program. In short, because of set-up fees and ongoing fees, consumers with a typical 30-year mortgage must make nine years of payments before they break even with the program. The CFPB says only 25% of all enrollees at the end of 2014 had even made four years' worth of payments.
Meanwhile, Nationwide collected $49 million from consumers between 2011 and 2014.
Nationwide's set-up fee is $995, and ongoing annual fees range from $84-$101. Scripts for nationwide sales representatives are designed to obfuscate the cost, the CFPB says; sales reps are also told to give homeowners the impression that Nationwide is affiliated with their mortgage company, also a deception, according to the CFPB.
"The defendants know that consumers will pay more in fees than they save in interest for the first several years in the program, and that many consumers will leave the program without saving any money at all," the CFPB says.
Credit.com reached out to Nationwide Biweekly Administration for comment, but did not receive a response by press time. Lipsky denied the CFPB allegations, according to Cleveland.com.
"(Nationwide) recently analyzed their 100 oldest active customers and found that to mid-April 2015, they had saved a combined $3.5 million in interest charges with only a combined $128,000 in fees. This equates to about $27 in interest savings for every $1 in fees, a 2,700% return," Lipsky said.
The firm also helps borrowers find bank errors in their mortgages, he said.
There is no dispute, however, that this logic holds true for every financial instrument: the higher the fees, the more the consumer benefit evaporates.
How You Can Do It Yourself
Biweekly mortgage programs with set-up fees and ongoing costs turn what could be a good idea into a bad one. The odds you'll stay in your current home, paying your current mortgage for the next 10 years, are quite low.
So prepay your mortgage if you like. But do it on your schedule. Make it easy on yourself — divide your monthly payment by 12, and add that amount to every monthly mortgage payment you send. That will work almost as well as biweekly payments, and it's free.
But do it only with money you absolutely, positively, unequivocally know you won't need for another 20 or 30 years. Having a large emergency savings account, and cash piled up to buy a new car or other big purchase, should be higher priority than prepaying your mortgage. Why? Should an emergency arrive, you'll never be able to borrow money at current mortgage-interest rates. Missing a mortgage payment because you can't keep up with a biweekly payment schedule is never a good idea, since it can have a serious negative impact on your credit. You can get a free credit report summary every month on Credit.com to see how your payments are impacting your scores.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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