My bank sent me an “Equity Accelerator” flyer. The concept is by paying half my mortgage payment every two weeks instead of the current monthly installment, I will reduce the time to pay off my loan, preserving equity and saving interest payments.
Mortgage math is tricky.
For example, my first loan’s payment was determined by asking the “mortgage lender.” He’d stare back at me, uncomfortable at the question but, seeing I wasn’t going to leave his office without an answer, would slowly slide the top right desk drawer open, make a furtive glance at its contents, pause for dramatic effect, then report a number. You can imagine how much exercise his right arm got when I wanted to vary different parameters like term, points, and downpayment.
I can’t fit the “mortgage lender” or his desk in this blog. Indeed,
the actual calculations I’m about to do are vastly simplified. My friend Jim rattled off four additional considerations that make the real number trickier to pin down. I’ll explore these in the comfort and privacy of my own spreadsheet, but for the sake of today’s discussion, we agree the simplified numbers lead to the same conclusion: don’t do the Equity Accelerator plan.
Accelerated payment plans work because there’s an additional payment each year. On a very simple level, this reduces a 15-year mortgage to 13.8 years:
52 weeks/year / 2 weeks/year per half-payment = 26 half-payments
26 half-payments * 1/2 full amount/half-payment = 13 full payments
15 years * 12 payments/year / 13 payments/year = 13 years, 10 months
The extra 14 payments are applied to the principal portion of the mortgage. I will wave my hands and say that on my current mortgage, this would save me $5,000 in interest payments on the life of the loan — web hosting fees through 2016! This is good.
The reason I say Feh! is the Equity Accelerator plan imposes a lot of fees:
$49 to sign up
+ $9/month to participate * 15 years * 12 months/year
$1539 in fees over a 13.8 years.
$1539 / $5000 = 30% fee.
Many fixed rate mortgages, including mine, permit pre-paying principal. Because I can do this myself, I see no reason to pay the fees for the “convenience.” It’s doubly crummy because I already have direct debit set up with my mortgage company. The program’s name would more accurately be Fee Accelerator.