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Are mortgage-savings programs a good idea?

My family recently moved and with our new mortgage came some new mortgage product offerings. One such offering is a mortgage-savings program. If you're unfamiliar with these programs, they promise to accelerate your mortgage payoff by taking weekly or bi-weekly prepayments to apply to your mortgage, in turn saving you thousands.

As I was reading over the letter, an unpeaceful, uneasy feeling started to creep up. Here are some highlights from my letter:

• You do not increase your monthly payment
• You can eliminate more than 10 years of payments
• The equity in your home increases faster

These all sound great. Where do I sign up? What?... There's a catch?

Yep, it costs Kentucky residents an enrollment fee of $245.

Yikes, that is a lot. But I'll get a lot more back in saved interest. What... there's more?

Yes, it costs $3.50 per transaction if you're in the bi-weekly program or $1.95 per transaction for the weekly program.

Ouch. Let's see... 3.5 times 26, carry the one, that's another $91 for the bi-weekly and, hold on — $101 for the weekly. Well, I don't like it but since it's the only way to accomplish this... huh... there are other ways?

Do it yourself.

Do it myself? Uh... how?

Open a bank account from which to pay your monthly mortgage payment every month. Into that account, pay half the monthly payment every two weeks. At the end of each year, write a check on this account for an amount equal to your monthly payment and send it to the lender.

What's even easier is if you add an amount equal to 1/12 the monthly mortgage payment to each monthly mortgage payment. Not only is it easier, you'll pay off the loan a tad earlier than if you pay it bi-weekly.

Well, that's all fine and good, but that requires extra cash flow. This system won't increase my mortgage payment.

That's not entirely true.

It has to be true. Aren't you listening? I already went over this. It's written in this highly-bolded and underlined too-good-to-be-true sounding sales letter: "You do not increase your monthly payment."

It's a shell game. You see, they cut your payment in half, but they are essentially requiring you to pay every 28 days rather than every 30.5. So in total, you're paying more.

I'm confused.

Say your mortgage was $1,000. In a standard payment process, you'd make a $1,000 monthly payment and after a year's time, you'd have paid your lender $12,000, right?

Yes.

Now, instead of $1,000 every month, lets' do $500 every two weeks (ie, bi-weekly). There are 52 weeks in a year, so there are 26 two-week periods (52 / 2 = 26). You with me?

Yep.

So 26 bi-weekly payments of $500 would equal $13,000 after a year's worth of time (26 x $500 = $13,000).

Hey! That's tricky of them... borderline dishonest.

Perhaps. But let me leave you with another piece of info. Does that letter say anything about how the payments are processed?

Actually, it does. How'd you know?

Because I'm your conscience... your gut... your instinct... and when things seem to good to be true, they almost always are. What exactly does it say?

It says, "We process your bi-weekly debits from your checking or savings account, then make your monthly mortgage loan payment when due."

So let's get this straight... they are going to take our bi-weekly payment, but only pay it monthly. So what is that money doing in the meantime?

They're probably getting interest off of it!

That's right... you're catching on. They're getting an interest free loan on roughly 1/12 of a payment each month until they make the 13th payment at the end of a year.

So they're getting an interest free loan, an enrollment fee, and weekly or bi-weekly transaction fees for something we could do without them? What a rip!

Our thoughts exactly.

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