I Can Save You $41,911. Interested?
I Can Save You $41,911. Interested?
Marc Eisenson is the author of The Banker's Secret, the book which tells you everything you ever wanted to know about prepaying your mortgage. The following article is reprinted with permission from his quarterly newsletter, "The Pocket Change Investor."
Let's say your mortgage lender offers to save you $41,911 -- if you enroll in its new bi-weekly mortgage conversion program. Your cost? A one-time, non-refundable inexpensive $340 fee. Sounds like a great deal, doesn't it?
But it's not! What won't be mentioned, is that you could pay no fee, and save even more -- by simply asking the lender to automatically deduct an equivalent pre-payment amount every month.
That's exactly what GE Capital is doing ... and not doing! One of the nation's largest mortgage holders, GE Capital is part of General Electric, which is number 7 on the Fortune 500 list and describes itself as an over 70 billion dollar global enterprise.
In personalized letters that include each borrower's potential savings, GE's been trying to get homeowners to sign up for Payoff Plus, its bi-weekly payment plan, which has the genius of simplicity. All you have to do is agree to let GE deduct one half of your mortgage's monthly payment every two weeks, and fork over the $340.
Nowhere in its letters does GE Capital make it clear that it'd be perfectly happy to help you save even more -- for FREE -- by making monthly (not bi-weekly) deductions.
It's outrageous, but I guess it's nothing new. By the time Jesus had cleared the money changers out of the temple, there already were loan sharks, scalpers, unscrupulous bankers, and high pressure salespeople.
Little has changed in the money lending business during the last 2,000 years -- except that advertisers can pitch their wares to many more people, and they can better obscure unnecessary services and products with fluff and fancy names, like Payoff Plus.
Around here, not a week goes by without a phone call or two from homeowners wondering if they should let someone convert their mortgage to a bi-weekly.
THE SHORT ANSWER IS NO!
Please don't get me wrong. GE is not the worst of the bunch. In fact, when it comes to promoting unnecessary pre-payment services, its fee is not the highest and neither is its sales pressure. What gets me, is that nowhere does GE mention that it'll do virtually the same thing for you -- AT NO COST -- if you just ask!
In case one of the many converters hasn't yet pitched you, one surely will soon. Maybe you'll hear from a telemarketer, or get junk mail from some outfit that sounds like it could be a bank.
Or perhaps, in the hope that you could get rich, quick, you'll respond to an infomercial on late-night TV that hawks a multi-level bi-weekly conversion marketing scheme. Or maybe, this being the cyber age, you'll learn about it on-line, via some spam (junk e-mail).
Most disgraceful of all, if you ask me, you may be approached by your own lender. However they get to you, they're trying very hard to market something no one needs. I call it a pseudo bi-weekly.
THE REAL THING
Before I explain how the pseudos work, let's make sure you know what a real bi-weekly mortgage is. Instead of 12 monthly payments, real bi-weeklies require -- and credit to your account -- one half of a 30-year loan's monthly payment every two weeks. That adds up to 26 half payments a year, the equivalent of 13 monthly payments, not 12.
All of that extra month's mortgage payment gets applied to the loan's outstanding balance, which can take about 8 years off the term of a standard 30-year loan, and in the process, slash 30% off the loan's interest costs.
If you're comparing your borrowing options for a new mortgage or a refi, by all means, consider a real bi-weekly -- if you can find one. Around here, only one of the ten banks we called offered bi-weeklies.
Assuming the interest rate and closing costs are comparable, a real bi-weekly might make sense -- if you know you can afford the extra payment every year, and don't mind giving the bank access to your checking account. (For more advice on loan shopping, see 12 Simple Things You Can Do to $ave on Your Next Mortgage, in issue #4 of The Pocket Change Investor.
To my mind, there are two problems with real bi-weeklies: They're rarely available, and your lender will automatically deduct those payments every two weeks, depriving you of the float ... and of even a day of flex if times get tough. Having your money electronically extracted from your account every two weeks is the only similarity between real bi-weeklies and the pseudos.
The telltale sign of a pseudo is someone trying to sell you a conversion for the mortgage you already have. You'll be guaranteed big savings, plus: No closing fees! No reassessments! and No points!
But you'll have to fork over anywhere from $195 on up ... up front. The typical cost these days seems to be $390, which is what GE Capital charged until recently. Now it's down to a mere $340. And there'll be a contract for you to sign, agreeing to the automatic transfer of loan payments from your bank account ... to theirs ... every two weeks.
Then you'll probably be hit with a service charge ($2.50 or more) every two weeks, for the next 20 years or so. By the time your loan is paid off, that'll put another $1,300 or more of your money into the converter's pocket. (At least GE spares its borrowers these extra nuisance fees.)
Although they electronically transfer funds every two weeks from your bank account, the pseudo bi-weekly profiteers simply send the bank your required mortgage payment once a month -- just as you always did (and in my less than humble opinion, ought to continue doing).
Then once or twice a year, the excess that accumulates from your bi-weekly payments will also be sent in. Guess who gets to work that float?
In the case of GE Capital, it'll pay itself once a month, having, as it makes clear in its promotional letter, interest-free use of the bi-weekly drafts from the time we receive them until the first business day of the month.
While pseudo-sellers claim to offer something special, the truth is: Everyone can easily save more without outside help, and without all those fees and charges. If your bank won't credit your payment every two weeks -- and most, like GE, won't -- there's no benefit in your sending in bi-weekly payments.
THE WAY TO SAVE MORE
For greater savings than you can get from a pseudo bi-weekly, all you have to do is divide your current monthly mortgage payment by twelve, and send in that amount as a pre-payment with each month's check.
Say your mortgage is $125,000 at 7.75% for 30 years, and your required monthly payment is $896. Divide that $896 by twelve, and you get $75. Send in a pre-payment of $75 every month along with your mortgage check, and you'll save more than you would with a pseudo.
It comes to exactly the same amount of money each year that you'd pre-pay with GE's Payoff Plus, but you'd keep the $340, you'd get the benefit of the float, and your pre-payments would be deducted from your balance sooner, so you'd save even more.
Important Banker's Secret Tip: If you don't trust yourself to continue sending in that $75 pre-payment (or whatever amount would work for you), just ask your lender to automatically withdraw your pre-payment from your checking account once a month. Most -- including GE Capital!!! -- will do it for free.
That's right. If you have our sample $125,000 loan and it's held by GE, you could call up -- and for FREE -- GE will automatically, electronically deduct your $75 pre-payment, helping you to save over $40,000 in interest.
Yet GE touts its Payoff Plus as a far easier and more disciplined way to pre-pay. Excuse me??? Like I said, it's outrageous.
HERE'S THE KICKER
Say you've been making payments on that $125,000 mortgage for about two and a half years. Every month, you've religiously sent in the required $896, for a total of well over $25,000. Believe it or not, you'll still owe nearly $122,000. That's no typo. You've paid more than $25,000, but reduced your debt by a mere $3,000. Pretty depressing, isn't it?
But then you see a pseudo sales pitch that promises to save you $41,911 -- plus five years and eight months of payments -- assuming you sign a contract and fork over a hefty fee. Your actual savings, of course, will be less than promised, because of that fee and any bi-weekly service charges. Deduct a $340 fee, for example, and your savings will drop to $41,571.
If instead, you pre-pay that $75 a month on your own, you'll save $42,869. And if you reward yourself for avoiding yet another sneak in a banker's suit by investing the up front fee in your loan right now ... the $340 in GE's case ... it'd save you another $1,449.
So now, your actual savings would be $44,318, $2,747 more than you would have saved with the converter's unneeded help.
And if you pre-pay with those $2.50 service charges that most pseudo sellers also transfer to their account, you'll save yet another $2,118. You'd end up with a total of $4,865 more in your pocket than you would with outside intervention.
There's just no need to pay for a mortgage conversion program or a special pre-payment plan of any sort. It's a waste of your hard earned money. I think companies like GE should be ashamed of themselves, and hope that their stockholders will do something about it.
JUST DO IT!
You can pre-pay on your own. I have faith in you! After all, you write out your mortgage check every month, don't you? It doesn't take a whole lot of discipline to write out a slightly larger check. There's probably even a line on your mortgage coupon for entering your pre-payment amount. What could be easier? The larger the checks you write, and the sooner you start sending them in, the more you'll save.
And remember, if you really don't think you can trust yourself to add that $75 every month -- just ask GE Capital or whoever you borrowed from, to electronically extract it. Your lender will be happy to, and it won't cost you a dime!
For the complete story on pre-paying, with lots of tables so you can see how much you'll save, read The Banker's Secret by Marc Eisenson. Often called the bible of mortgage pre-payment, it'll save you a pot full of money. For a copy, send $17.95 to Good Advice Press, Box 78, Elizaville, Or order it online at the Good Advice Press site! NY 12523. 1-800-255-0899.
The Banker's Secret Loan Software ($42.95) lets you crunch the numbers yourself, and create pre-payment schedules that make the record keeping a snap. Also available from the above address and phone number.
The Pocket Change Investor, begun in 1990, is quarterly newsletter published by Marc Eisenson and Nancy Castleman. Each issue focuses on something that costs you and your family a lot of money. Let this team of consumer advocates show you how easy it is to profit from your debts, how to finance your child's education, when to rent ... or buy, and how to teach your youngsters to manage their money.
Learn painless ways to save on taxes, credit cards, closing costs, cars, insurance, appliances, utilites, vacations, trips to the supermarket, and the myriad of other expenses that regularly confront us all.
You can get a free subscription to The Pocket Change Investor at Good Advice Press as well as sample the other money-saving goodies available.
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