Wake Up with Wealthtender: July 3, 2020
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When I bought my first home, the mortgage servicer included a pitch with each monthly statement. They called it a “Mortgage Accelerator” offer, which painted a really pretty picture. If I signed up, they would bill me half my monthly payment every other week instead of the usual monthly schedule.
If I did this, their slick flyer said, the mortgage would be paid off years early, saving me tens of thousands of dollars in interest over the life of the loan.
That’s true enough, as far as it goes. If you want to see how it’s supposed to work, enter your own mortgage information into this calculator.
Looks great, right?
Just three problems.
I was unlikely to stay in the house, let alone in that mortgage, for the 25 years or so it would take to pay off the loan under their accelerated schedule. According to a National Associations of Realtors (NAR) report from 2016, “Sellers typically lived in their home for 10 years before selling.”
In this particular case, I sold the home about five years after buying it. Worse, dropping interest rates had me refinance the mortgage twice before selling the house. Thus, the benefit of paying off the mortgage a few years earlier than its original 30-year length was completely moot, and my interest savings would have been minimal.
Still, if this was the extent of my objection, I would have just called it an oversold promise rather than a scam.
As explained here, although pushed aggressively by the likes of Dave Ramsey, prepaying principal on a mortgage is almost never a wise financial move. Between the mortgage interest deduction and the effects of inflation, the real cost of mortgages is much lower than most people realize.
Say your mortgage interest rate is 4.5% and your tax deduction saves you a third of that, your actual cost is nominally 3%. Next, if inflation runs at the recent annual rate of 2%, your real cost is under 1%. If inflation would return to its historic average of 3.5%, you’d actually be making money off that mortgage! Wouldn’t that be sweet – making money off hundreds of thousands of dollars of the bank’s money?
Further, investing the extra cash instead of using it to prepay principal gives you more security against losing your home, since you’ll likely have built up liquid funds that would let you make a few payments if and when you lose your income temporarily, so you don’t lose your house to foreclosure.
Even adding this objection to the first, it still fails to rise to the level of a scam. I’d have called it a financial mistake, most likely due to the lender’s staff knowing far less than they should about how personal finances and inflation work.
Hidden in the small print was a small fee I’d need to pay with each bi-weekly payment!
This one is the real kicker.
In the very unlikely case that I would have for some reason decided that paying on a biweekly schedule was a good idea, I could have set up those payments to be mailed automatically from my bank to the servicer at no additional cost!
Trying to get me to pay a fee for something that I could get for free elsewhere is why I call this a scam.
In short, my lender was trying to make me pay for something that I could get for free through my bank, where that something was unlikely to save me much under almost any circumstances, and where in most situations it would end up costing me thousands of dollars in real terms.
When somebody tries to take my money without providing any benefit, that’s the behavior of a thief or scammer, not a legitimate business.
Anytime somebody tries to suggest that you accelerate your mortgage payments, consider very carefully that they most likely don’t know what’s they’re talking about. Ask them to include in their calculation the effects of both your tax deductions and inflation. Most likely they won’t trouble you again.
More importantly, if somebody wants to charge you a fee for something, check if you can’t get the same service free of charge elsewhere. Even if it’s only a few dollars every other week, over the long term, that can add up to many thousands of dollars that would be far better spent on your retirement needs.
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.