I disliked the banking industry for a number of reasons way before the financial crisis ever occurred. Their lack of personal service, ridiculous fees and outrageous charges on things like safety deposit boxes and replacement checks, were just a few areas of contention. This was before I ever considered buying a home and becoming a proud mortgage holder.
Now I’m by no means deficient in the areas of investing and personal finances. That is why it irks me so badly that the banking industry managed to pull one over on me after I did my due diligence by reading all the fine print and even calling my mortgage broker.
My episode of poor judgment began several months after my wife and I closed on our house. One day we received in the mail, a notification that we were eligible for an ‘early mortgage payoff plan’ through our bank. Now in my opinion, just about anything you get in the mail from the bank is sent to help them, not you, so I began doing a little research about early mortgage payoff plans, as well as studying the information I had received in the mail.
Everything sounded good at first. Extra payments going toward your mortgage, reducing the amount of interest you pay over time, and having your payments split into bi-weekly instead of monthly payments. However, I still wasn’t convinced, so I called my mortgage broker to find out more. I guess it wasn’t that she pulled the wool over my eyes; it was more that I just didn’t ask the right questions or didn’t understand clearly enough the way in which she explained the program. Either way, I told my wife we were going to try their early payoff system.
Here’s what I discovered as the process progressed and why I’m kicking myself now.
The first indication that I should have backed away slowly from this idea was the fact that there was a $295 application fee. Considering that only months early I had gone through the entire pre-approval and mortgage approval process without anyone mentioning an early payoff program, should have been a clear indication that this was just another way for the bank to collect fees. But did I back off? No, I forged ahead with the intensity of a banker after his bonus.
The next little detail that caught my eye was the fact that there was a dollar transaction fee associated with each bi-weekly payment. But I figured heck, it’s only a dollar. How much could that cost me? I’ll tell you how much.
$1 x 26 bi-weekly payments per year x 14 years of payments (we had a 15-year mortgage and had already made some extra payments) = $364.
Pair that $364 with the $295 application fee, and you’re looking at a grand total of $659.
I COULD HAVE DONE IT MYSELF!
At first glance, this seemed a small price to pay to reduce the amount of interest we were paying, as well as our number of payments. Wrong! What I discovered soon after enrollment in the program was that after all the rigmarole, the program pretty much equated to making an extra payment each year.
In effect, by cutting the payments into bi-weekly periods, the bank adds two extra half payments. One payment each month equals 12 per year, but since there are 56 weeks in a year, there are 26, not 24, bi-weekly payment, similar to bi-weekly paychecks.
I was kicking myself now, because I realized I could easily have made an extra payment each year myself for free. As our mortgage is held by our bank, and our mortgage payments are deducted directly from a checking account at the same bank, we can make extra payments of any amount we like, at any time, simply by logging onto our bank’s website and making a few simple mouse clicks. It takes about three minutes at most, it’s easy, and more importantly it’s free! Instead, I’m getting charged for this grand service, and the bi-weekly deductions from our checking make tracking our account more difficult than a simple once a month transaction.
Well, live and learn. I just hope that my experience helps you to avoid a similar conundrum.
The writer is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. For financial advice, readers should consult a licensed financial advisor. Any action taken by the reader due to the information provided in this article is at the reader’s discretion.