A new breed of promoters would like to charge you $500 to $1,000 to accelerate your mortgage payments -- thereby saving you a bundle in interest charges. Sounds like a fine idea except for one thing. You can easily do the same thing on your own for nothing.
Although the secret has been slow to get out, there is no reason in the world why a mortgage borrower can't make extra payments to principal, thereby dramatically cutting the term of his loan and sparing himself large amounts of interest. Mortgage specialists say prepayment is a fine idea, but paying someone to set it up for you is not.
"I don't accuse these people of being shady. I even hesitate to use the word scam because they're selling a perfectly legitimate service if you're willing to use it. But why would you pay someone all that money for a service you don't need?" asks Marc Eisenson, author of The Banker's Secret, a book that describes in detail the art of prepaying a mortgage or other consumer loan.
Entrepreneurs seeking to profit from the current popularity of mortgage prepayment plans are proliferating throughout the country, says John Barker, an official of the National Consumers League, a Washington-based non-profit organization that is studying the situation.
Mr. Barker explains that most of the prepayment people operate as middlemen, setting up a plan by which mortgage payments are taken directly from a homeowner's bank account and then later paid to the homeowner's lender. The "setup charge" for this service is typically $500 to $1,000 and, in addition, the middleman charges $2.50 to $3 per payment, according to Mr. Barker.
The middlemen usually focus on the "biweekly" mortgage, an especially popular type of prepayment plan. Although the biweekly has taken on a certain mystique for many consumers, it's actually no more than a way to trick yourself into making the equivalent of an extra monthly mortgage payment each year.
And since the extra payment is applied directly to principal, the schedule lets you shave about nine years of payments off a 30-year mortgage, meanwhile sparing you thousands in interest charges by partially prepaying your loan. The way a biweekly works, every 14 days you make a payment that is half of what a regular monthly payment would be on the mortgage.
If the loan is a true biweekly, the lender credits your payments every 14 days. A minority of mortgage lenders in this country have their computers set up to credit mortgage payments on a 14-day cycle. Those who have this computer capacity can make you a bona fide biweekly mortgage.
If you're approached by one of the new breed of mortgage middlemen, he may give the impression that he can offer you a bona fide biweekly mortgage with 14-day crediting. A few can, but most can't, Mr. Barker says. The reality is that many of the middlemen are insurance salesmen, real estate brokers or financial planners with no direct relationship to those who service your mortgage.
Although the "biweekly" mortgage plan you set up through a middleman will have you making payments every 14 days, the likelihood is that your payments will only be credited to your account monthly, Mr. Barker explains. In the meantime, your money will be kept in the middleman's savings account or will be invested in short-term government securities to his advantage. A few of the middlemen pay interest on the money they hold, but most don't.
Granted, the middleman's biweekly mortgage plan will accelerate the payoff of your mortgage, since you'll be putting more toward principal each year than if you followed the usual 30-year mortgage schedule. But prepayment is something you could do just as well on your own, without the middleman's help, Mr. Barker points out.
(If you want to turn your 30-year mortgage, fixed-rate mortgage into the rough equivalent of a mortgage structured as a biweekly, here's the formula: Simply take your principal and interest payment for one month and divide by 12. Then add this figure to your payment each month. Assuming you make such an extra payment from the beginning of the mortgage term, your loan should pay down almost as would a formal biweekly.)
To be sure, the mortgage middlemen defend their practices, which vary from company to company. The middlemen admit that prepayment is something you can do on your own but say few have the discipline to do it. They compare themselves to dieting programs that help people gain self-discipline.
"I believe strongly that biweekly rescheduling is an extremely sound concept," says Haden W. Edwards, president of the New Hampshire-based Bi-Weekly Mortgage Acceptance Corp. (known as "Billie Mac"), a major player in the middlemen's field. Mr. Edwards emphasizes the self-discipline argument.
But Mr. Eisenson insists that anyone with the self-discipline to make regular mortgage payments should be able to make prepayments without someone extracting money from his bank account.
"Anybody who has a mortgage sits down once a month to write his mortgage check. It doesn't take any more discipline to write a second check," he says.