This week I received a long rant from Dan, one our very astute readers. I extracted the following from what he wrote:
Yesterday I received an offer to "Cut My Indebtedness" by shifting over to a bi-weekly mortgage payment, tied to my paydays. The "offer" goes on to show how much I will save over the term of the loan by enrolling in their plan. The kicker is (& here is a reference to an old Country song I remember from years ago, "The Large Print Giveth, What the Small Print Taketh Away") the small print. There is a $9.00 per month "participation fee". A fee to participate? ...my rant. THEY CAN"T STOP YOU FROM MAKING ADDITIONAL PRINCIPAL PAYMENTS.
This has happened to me as well, and if you have lived in your home for a few years or more, it is likely you received a similar offer. Dan raised many valid points in his longer version, but the three main points are that you should focus on the small print, there should not be a fee for paying down your loan, and finally if you have a loan that allows prepayments of the principal amount you can make interim principal payments any time you want.
One feature of bi-weekly payments that Dan overlooks or fails to distinguish, and that homeowners should recognize, is that they reduce the amount of interest you pay over the life of the loan without additional "monthly" principal contributions. That is a real savings, and the bank feels the service of processing this has a cost to them and a value to you. On most loans, the savings of many thousands of dollars would greatly exceed the fee, and the fee does not increase on larger loan amounts. Perhaps it is their presentation of the offer that appears deceitful.
Here is a detailed explanation of bi-weekly payments. The example they give you indicates a savings of almost $58,000 interest on a $75,000 loan. Fees or no fees it provides substantial benefit tothe borrower.
Happy Mothers Day
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.
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Reader Comments (Page 1 of 1)
5-12-2008 @ 6:32AM
al coholic said...
Banking relationships at the local level by large regional banks have changed dramatically in the last few years. Local managers used to have the capability to assess a customer and loan him money, virtually on the spot. It has been my experience lately that bank managers have been taken out of the lending loop in favor of centralized underwriting centers nowhere near where you might live.
Don't believe it? Just go to your local branch of Regions Bank and ask for an increase of $200 to your existing check protection. You will discover that what used to be a one minute transaction between you and the manager has now morphed into a full fledged loan requiring approval from Birminghan Alabama and might take three or four days.
Truth is, local managers of many regional banks can't loan a nickel without obtaining underwriting permission. Their job these days is to pass the donuts give overrides for ridiculously small amounts and oversee the tellers.
5-13-2008 @ 2:45PM
Vijay said...
Banking is an art, learn it