Should I Pay to Prepay My Mortgage?
Those biweekly payment programs cut back the amount of interest you ultimately pay. But are they worth the fees?
Probably not. We aren't big fans of those "convenient" biweekly mortgage programs. Why? Because you're usually paying a fee for what would otherwise be a free service.
The advantage of paying biweekly is that you end up making the equivalent of 13 monthly payments in one year (since some months are longer than four weeks). That accelerates your pay-down almost effortlessly. But since nearly all lenders allow their customers to prepay their mortgages at no additional charge, there's no particular reason to pay a fee, explains Richard Egan, a certified financial planner at the Redbank, N.J.- based Buckman Buckman & Reid. Assuming your lender does allow prepayment, you can either add a bit extra to your payment each month, send in two payments a month or just send in some extra money at the end of the year.
"Just make sure to identify the extra check with a little post-it note explaining that it should be applied to the principal of the loan," says Keith Gumbinger, vice president of HSH Associates, a mortgage-information provider. Otherwise it might be counted toward future payments.
Another problem is that some of these biweekly mortgage-payment programs are less scrupulous than others. Some of those offered by third-party providers (i.e. not your lender) charge you an initial start-up fee of several hundred dollars in addition to the monthly service charge. At just $9 per month, the one offered by your lender sounds OK. Nonetheless, we bet you could find a better use for that $108 a year.
It's true that prepaying your mortgage even in this simple manner will reduce the amount of interest you pay over the lifetime of the loan and speed up the payment of the principal. Keep in mind, however, that mortgage debt typically comes pretty cheap. Since mortgage interest is tax deductible, if you're in 28% tax bracket, for instance, an 8% interest rate actually works out to about 5.7% when you net it all out. If you have other debt (i.e. credit-card debt or unsecured loans), chances are you'd be much better off working to pay that off, or even investing that money instead. Our worksheet, Should You Prepay, will help you work through the decision.
Of course, one way to significantly save money on your mortgage is to consider refinancing. The rate on a 30-year fixed mortgage right now is a mere 7.1%, the lowest we've seen since January 1999, according to HSH Associates. Refinancing isn't cheap either, but our Should You Refinance worksheet will help you figure out if it's worth it.