In a serendipitous coincidence, I received an e-mail from CitiBank and noticed an entry on SmartMoney.com the same day last week.
Each concerned the concept of paying off a mortgage early. The e-mail was temptingly headlined:
Pay Off Your Mortgage Years Sooner!
The message went on to promise that the “BiWeekly Advantage Plan® can make it happen while helping you save thousands of dollars in interest.” In fact, by paying half of my regular mortgage payment every 14 days, the e-mail continued, I would save $65,7386.36.
Reason: I would be making what amounts to 13 monthly payments every year. Yaay!
But then I read on and began processing the information.
It turns out that there is a $375 “enrollment” fee, which I could satisfy in installments of $25 each for the first 15 mortgage payments. Well, not exactly. There also would be an additional $1.50 “transaction” fee for those payments. So, I guess it actually would be $26.50 each, or $397.50 for my “enrollment” in the program if I chose that schedule.
Now rises the question of whether I would, in fact, be saving that much interest. Of course not!
My interest rate is a mere 4.375 percent for the next five years, by which time either it resets or I would be happy to move into a smaller place. Thanks to the tax deduction and a situation in which we can expect inflation to rise, my real costs already are lower and may prove to be still lower over time.
The SmartMoney piece provides another point of view. Noting that accelerated payoffs work only for those who have positive cash flow, available cash or both, writer Bill Bischoff maintains:
The idea is only appropriate if you’re looking for a very conservative, risk-free way to invest surplus funds. Obviously, if you think you can earn 8% to 10% on your cash elsewhere, you’re not going to be enthusiastic about an accelerated pay-down, unless your mortgage interest rate is extremely high.
He adds that the strategy is “not foolproof” yet contends that the “really nice thing about paying off your mortgage early is the results are guaranteed and risk-free.”
If you think it might be a good idea for you, either a calculator or software will help you figure out the benefits by adjusting your situation to the example Bischoff offers.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022