Weighing mortgage options can save money

Herald staff and News Services

A number of banks and mortgage finance companies are offering customers the option of switching from monthly to biweekly payments on their home loans, which speeds up repayment and greatly reduces the interest cost.

Snohomish County banks that offer the option charge an upfront fee of $200 to $300 for the privilege, plus an additional monthly fee.

But consumers can use other repayment schedules – with no fees attached – to accomplish the same goal.

“A customer is better off to pay an extra 50 or 100 bucks monthly,” said Tom Johnson, a senior vice president and Everett branch manager for Snohomish-based First Heritage Bank. “It amounts to an early payoff , (and) it doesn’t cost you any more.”

A biweekly payment works to a consumer’s advantage because the principal on the loan is paid down faster, which reduces the interest to be paid over the life of the loan. You can accomplish the same thing by increasing each of your monthly payments by 1/12th or by making an extra loan payment each year, said Greg McBride, a financial analyst at Bankrate.com in North Palm Beach, Fla.

Banks and finance companies say they’re offering the biweekly mortgage option because some consumers want it.

“We saw it as a great opportunity to enhance our relationship with our customers,” said Brad Ortmeier, who manages Wells Fargo’s biweekly mortgage program from his office in Des Moines, Iowa. About 4 percent of all Wells Fargo mortgages are set up for biweekly payments, he said.

Wells Fargo offers the program for a one-time fee of $295 a month, plus a $5-a-month service fee, or for a monthly fee of $9 a month over the life of the loan, he said.

That is about in line with industry standards. The Chase Manhattan Mortgage Corp., a subsidiary of J.P. Morgan Chase of New York, is offering an “equity accelerator” biweekly payment option for a one-time fee of $299 or a monthly fee of $9.95, plus a $3 monthly service charge.

“People can set up their payment schedules to correlate with when they get paid,” said Chase spokeswoman Charlotte Gilbert-Biro. She added that because the mortgage payments are deducted electronically from a customer’s checking account, “it helps people maintain the financial discipline to stay with the program.”

At the Bank of America in Charlotte, N.C., there’s no fee if you sign up from the start for biweekly payments, but there is a charge if you convert from a monthly to a biweekly schedule, said spokeswoman Julie Davis.

“There are some fees, based on which structured program a customer chooses,” Davis said. “But customers always have the option of making additional payments not through a structured program, and there’s no fee for that.”

Bud Carter, senior director for residential finance at the Mortgage Bankers Association in Washington, said lenders were charging fees for accelerated payment programs to cover the cost of processing additional payments. Still, he urged consumers who can afford to speed up payments to consider doing so.

“Anytime you can save yourself $10,000 or $20,000 in interest payments by making extra payments, it’s probably worth it,” he said.

The savings can really add up. Take the example of a $100,000 mortgage at 7 percent interest, as calculated by Bankrate.com:

If you made the normal monthly payments of $665.30, it would take 30 years to pay off the loan and cost you $139,508 just in interest.

On a biweekly schedule, your payment would be halved to $332.65 every two weeks, but you would make 26 payments a year – the equivalent of 13 monthly payments. That $100,000 mortgage would be paid off in a little less than 24 years at an interest expense of $105,048, a savings of more than $34,000.

Not only does that save hard cash, it means you’re paying off the loan faster, Wells’ Ortmeier said. That’s attractive to some people, who want to clear their debts early.

However, you could accomplish the same thing by increasing your monthly payment by 1/12th, or 8.3 percent. With this schedule, you would pay $720.74 a month, with the interest adding up to $105,368.

If you opted for an extra payment each year, you would make 13 payments of $665.30. Your total interest would be $106,661.

That fact makes biweekly mortgage programs not such a good deal, said John Henderson, the senior vice president and mortgage division manager for Lynnwood-based CityBank.

“I’ve always found it a little questionable to charge a fee for … accepting payments on a mortgage,” he said.

When customers ask about it, “We generally respond by saying, quite frankly, that it’s far more effective to take 1/12th of your (monthly payment) and add it to your (check),” he said. It gives the same benefit “and you’re not paying someone.”

Ortmeier agreed, in part, but said that biweekly mortgages help home buyers maintain the discipline they sometimes lack to stick to the fast-track payment schedule.

“You see more and more customers that can do it,” he said. “But will they do it? No, they won’t.”