Accelerated Mortgage Payment Plans: Don't Waste Your Money

If you own a home, you will likely receive some sort of letter in the mail (or you may already have), telling you about a great new option from your mortgage company that will pay off your mortgage early and save you thousands of dollars in interest. All you have to do is pay a small fee from $200 to $400 to set yourself up on a bi-weekly payment plan rather than your monthly mortgage payment, and your mortgage will pay off years early! Sounds like a deal, right?

Let's take a look at the mathematics involved. Instead of paying one monthly mortgage payment, you are paying a half mortgage payment every two weeks. This means that you're making 26 half-payments, which is the equivalent of 13 monthly payments in a year. In essence, you're making an extra mortgage payment on the principal balance of your mortgage each year. As advertised, you save a lot in interest because you paid extra principal on your money and your mortgage will pay off much earlier as well, however that doesn't make it a great deal.

Since you're writing bi-weekly checks to the marketing company who are intern writing monthly checks to the mortgage company and then paying one extra payment at the end of the year, they are essentially putting your money into an escrow account that earns you 0% on your money, and charging you a $300 fee to do so.

You can do exactly what your mortgage company is offering without paying the huge fee to set it up, and this way, you won't be losing interest to the marketing company that setup the new payment plan. Instead, keep making your standard monthly mortgage payments, and in your monthly coupon, add 1/12^th of whatever your monthly payment is in the extra principal box. If your mortgage was $1,200 you would instead pay $1,300. This way you're still making that extra payment, saving thousands in interest and paying off your mortgage early, but by simply paying extra principal instead, you don't have to pay an upfront fee to make that happen!

Another letter you might get in the mail from your mortgage company or a marketing company that has contracted with your mortgage company is that they'll try to sell you a policy which will pay off the mortgage in the event that you become disabled or die. Don't buy these plans. You end up paying about 10 times the going rate for these policies compared to traditional term insurance, it's just not a good deal because of all of the marketing fees and profit incentives that you're paying for with the policy. Instead, buy traditional term life insurance so that there's money for your family members in the event of your death.