Q: What are the cheapest and easiest ways to pay off my mortgage sooner?
A: Here are three options:
Increase your monthly checks by one-twelfth. The additional money you’re sending reduces the balance of your principal, which is the actual amount you owe on the house without interest.
Make one extra payment a year. This works especially well if you get an annual bonus or always receive a sizable income tax refund. Just add the money to your next monthly payment.
Pay half of your regular monthly payment every two weeks. Although a few lenders allow customers to switch to biweekly payments at no charge, most won’t do that, nor will they accept partial payments.
But you can have the money automatically transferred from your checking account to a savings account every two weeks and then transferred to your lender at the end of every month.
By the end of the year, you will have made 26 half payments, which adds up to 13 full payments — or one full extra payment.
Just remember that paying down the principal on your home loan more quickly will never reduce the minimum monthly payment or allow you to skip a payment.
It simply shortens the length of the loan and reduces the total amount of interest you have to pay.
Q: Should I pay a mortgage service company to help me?
The biggest challenge to following through with a faster payoff plan is maintaining self-discipline. It’s easy to start paying extra — until you have extra expenses or you forget an extra payment.
That’s where mortgage service companies say they can help. When you buy an accelerated biweekly payment plan from one, you’re essentially asking the company to make you pay off your loan early.
They collect your biweekly checks and fine you if you miss one of your voluntary payments.
According to them, the threat of those penalties and the hundreds of dollars they charge in setup and maintenance fees are worth it to save tens of thousands of dollars in the long run.
But they’re not.
Start-up fees start at $300, and many service companies charge processing fees of anywhere from $2.50 to $10, plus monthly or annual maintenance fees.
Some service companies pay interest on the money they’re holding, but that won’t come close to covering the fees.
The U.S. Consumer Financial Protection Bureau recently brought a lawsuit against one company, Nationwide Biweekly Administration, accusing it of misleading consumers about the potential savings from its plans.
Nationwide was charging a start-up fee of $995, plus yearly administrative costs of up to $101.
The protection bureau noted that someone who signed up for the plan with a 30-year mortgage of $160,000 at 4.5 percent would have to stay in the program for nine years to recoup their fees.
Even if you only pay a $300 initial fee and then $10 a month, you will spend $420 in the first year and $2,700 over 20 years. If you don’t make all 26 payments a year on time, you will have late fees added to that and wind up paying even more.