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Equity Accelerator? sounds fishy
Dr. Frenchenstein
Registered User regular
Registered User regular
So my mortgage company (Met Life Homeloans, not some fly by night joint) offers an "Equity Accelerator" program, where basically i pay half my monthly payment, 2x per month. It says i'll pay off my loan 5-6 years earlier and save myself 45k in interest. Sounds like a win win, but it also says there is a $295 erollment fee, and a $6/month participation fee. That makes me apprehensive. Even with that, it still seems like a good deal, but my concern is:
if you save so much money doing this, why doesn't everyone do it?
What is stopping me from making 2 payments a month on my own, wouldn't that have the same/similar effect on my balances?
if you save so much money doing this, why doesn't everyone do it?
What is stopping me from making 2 payments a month on my own, wouldn't that have the same/similar effect on my balances?
Dr. Frenchenstein on
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Are you sure it is 'twice a month' and not 'every two weeks'? There is a material difference. And likely it is the latter and you are effectively making 13 monthly payments (52 weeks in a year, payment every 2 weeks = 26 payments) instead of 12. Which sounds about right for accelerated a 30 year mortgage down to a 25 year-ish.
Pre-payment penalties in the contract. Likely this 'plan' would waive those penalties. You should be able to read your mortgage agreement and see what your penalties are or would be.
This isn't really true. They can structure the contract such that you aren't able to just pay off what you want to willy nilly. It is going to depend on the text of the contract.
Edit: It does sound like a bad deal though. Even with language in the contract to prevent bi-weekly payments, usually you can make some sort of early payment (like once a year). So you could acheive the same result in that case by just cutting an extra check before christmas or whatever. But check your mortgage is the relevant advice and see what it allows and disallows.
Good point on the pre-payment penalties. I'm not sure how common they are, but that would change my opinion of the service.
So, provided i don't have any penalties associated with prepayment, i could just throw an extra mortgage payment out of my tax return or whatever, each year, and get the same/similar effect? I'm not sure if i'd rather go without those two months of an "extra" paycheck, or dole out a chunk of my return... hmm.
If you want to know if your loan has a pre-payment penalty, you can call your lender and ask, or you can look on your original documents. The document called a Truth in Lending (TIL) says at the bottom if there is or is not a pre-pay on the loan.
Conversely, you could just divide your monthly payment by 12 and add that amount to your payment every month.
Example: $1,200 a month payment. Want to pay off 5 years faster, make a $1,300 a month payment.
Basically, don't pay your lender to start this program, because if you hit a financial hardship, it also takes a while to make them stop and they would overdraft your bank account.
My mortgage servicer offers the same plan (half payment every 2 weeks) at no charge. Might be a good time to re-fi through a credit union if you haven't already. My current rate is 6 ('05 purchase) and I can get a 20 year re-fi for 4, taking 5 years off my payment schedule and pay less per month than I'm currently paying. Or I could do a 15 year at 3.75 (I think) and pay about $80 more per month.
In this case, you lose $295 up front and $72 a year in order to pay off your mortgage faster. You also pay more per year, since there's more weeks than months (as Saamiel points out). Whether you should enroll or not ultimately depends more on what your current contract/mortgage says and how long you plan to remain in the house.
You would have similar results if you overpaid towards your principal each month, though. If you can overpay without penalty, you may want to consider that (and do your own calculations to compare).
I've been told by an experienced real estate agent that pre-payment penalties are obsolete and not used these days unless your company is kind of shady.
Depends on the specifics of your contract, though.
Pre-payment penalties were most common with subprime, alt-a and other "exotic" mortgage products. They are far from obsolete, but they have become much less common in recent years. If you check your mortgage docs (TIL), or even just call Metlife, you can figure out if that's the case.
Accelerated payment schedules aren't bogus, though everyone who has chimed in so far is right in that if you don't have that penalty you're better off just making principle payments when you are able. Hell, I'd advise that for anyone who has the cash to spare.
As a professional I cannot ever advise someone to allow their servicer access to their bank account. This sort of arrangement can make a bad time worse.
I'd sit down with your docs and try to get a better picture.
I have seen these plans before, a few times, and they almost always waive an existing pre-payment penalty. That said, a mortgage servicers' job is to get your money as quickly as possible.
The mortgage I got last year (up in Canada, from a not-shady mortgage broker) has pre-payment penalties... but they're pretty damned lax. I can pay up to 20% of the original mortgage amount each year without penalty, so long as I pay at least $1,000. Or I can increase my regular payments by up to 20% of the original P and I portion per year, without penalty. And, I can combine either of these two options so long as I don't exceed the yearly 20% prepayment maximum.