Ask the Readers: What’s the best way to prepay your mortgage?

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Ask the Readers: What’s the best way to prepay your mortgage?

Recently, Mandy sent a question via our Facebook page (like this site, it’s a really active community with more than 35,000 followers). We turned to our colleague Keith Gumbinger, vice president of HSH.com and a mortgage expert who is regularly interviewed by the New York Times, the Wall Street Journal and many other publications, for an answer to her question. Others who want to pay off their mortgage faster may also benefit from this guidance.

Here’s the question:

I would like to have a weekly withdrawal from my bank account to pay my mortgage payment. My lender offers a biweekly advantage plan, but there is a fee for each transaction. I spoke with a rep yesterday who told me if I send in weekly on my own, the payment will be sent back to me. Even if I sign up for the biweekly, the payment is not applied until the entire payment for the month has been received. How does this save money on interest, other than making the one extra payment (because of two extra withdrawals) toward principle a year? Would you recommend I just pay my monthly payment as normal and make an extra payment each year on my own? I don’t like the idea of paying a fee to try to save money. I am now in a position to try to pay down my mortgage faster, but feel like I’m being held back by the bank and I just don’t know how to do it. Thank you for any help you can offer!

And here’s Keith’s response:

It’s admirable that you want to pay off your mortgage faster. Over the long haul, the savings from doing so can be appreciable.

Please know that your lender isn’t simply being mean in refusing your offer of weekly payments, nor are they trying to gouge you with excessive fees for a biweekly payment plan. It is most likely that even if the lender wanted to take money from you on a weekly basis, their servicing software simply isn’t set up to do this; at most, biweekly is the fastest frequency available.

With regard to transaction fees, it is also likely that the EFT or auto-debit arrangement will have some small per-transaction costs. Some of this may be beyond the lender’s control, especially if the money comes from some other institution. There are also overhead costs which must be covered, too, so provided the fee isn’t much it should not overturn your decision to accelerate the amortization of your mortgage.

Think of it this way: If you could save $50,000 over the next 20 years, and the cost of doing so is $1,000 (2%) — saving $49,000 painlessly still has tremendous value, no?

To know exactly what your savings will be (so you can evaluate this against any costs), you should check out HSH.com’s Amortization Calculator, which will show you your savings from whenever you start your prepayment plan.

Most lender-offered biweekly plans work exactly as you describe; two biweekly payments are accumulated and applied. As such, you are making that 13th monthly payment per year, which as you note, you can do on your own. However, doing it on your own requires discipline, so if you’re diligent about your money management, you can certainly handle this. However, too many folks aren’t good about this, and so the auto-debit arrangement is a kind of mandatory discipline for them — they will save money despite less-than-perfect debt management practices.

Before you consider paying down your mortgage quickly, you’ll want to look across your financial landscape and see if those funds might be put to better use, though. Such uses include retiring higher-interest debt (like credit cards, or student loans), filling up your retirement coffer or building up emergency savings, investing in your children’s education, procuring life, disability or even long-term-care insurance and other uses for spare cash (including some fun ones!).

In the end, how to make these payments is up to you. If you are concerned about transaction costs but have the discipline, there’s nothing wrong with simply sending in an extra payment every year. If the transaction fees aren’t much, you might enjoy the convenience of having this process happen automatically for you. Best of luck.

So, readers, are you accelerating your mortgage payments? What method are you using?