Home Mortgage Early Payment Fees Added

From the Warren Reports:

Mortgage lenders are now marketing ways to convince you to pay off your loan early so that they can charge you more fees.

From the post:

Is this a smart deal for consumers? Probably not. ....

First, there is the opportunity cost. What else could you do with the extra money? It (almost) goes without saying that you should first pay down your higher interest debts, such as credit cards. (Caveat: If you are on the brink -- then instead pay your secured debts first.) Once those bases are covered, consider saving or investing the surplus. Remember that your mortgage interest payments are tax-deductible, which means that the real interest rate is 10-35% lower (depending on your tax bracket) than the APR listed on your statement. Can you beat that in the stock or bond market over the long term, based on your risk profile? Quit possibly yes, especially if you have a fixed rate mortgage that you locked in while rates were low, and you are young enough to invest somewhat aggressively. At the very least, in a conservative money market or CD, you might match the cost of money in your mortgage, and thereby create an emergency cushion for yourself.

Second, are the transaction costs. Of course the idea of sending an extra mortgage payment now and then has been around for ages. Indeed, that familiarity is what the mortgage lenders are now trying to capitalize on. But that was too simple. Now paying extra is a “service” that the lenders want to charge big bucks for. I’ve seen two different versions of this appeal. In one, Citimortgage wants $375 to sign you up and then charges $.075 every two weeks. In another offer, a lender wants a $9.00 service charge with each payment!

Third, there is the fine print. Check out the back of one of these mailers. The one on my desk has a Clause 7 which includes, “.... I understand that you [the lender] will have interest-free use of the biweekly amounts from the date they are drafted until the date these amounts are used to make a mortgage payment. ...” And when does that happen? Clause 8 suggests that only after paying 26 of these bi-weekly payments (equaling one year). So, the money is doing nothing for you during this time – only further enriching your lender. (I’ll blog more extensively on the suspense account shenanigans at a later date.)

It gets worse. Clause 8 includes, “I understand that under the terms of my mortgage, my loan may be subject to a prepayment penalty to the extent allowed by law.” That’s right, your friendly lender is soliciting you to do something which they will later penalize you for doing. Prepayment penalties are endemic in the sub-prime lending market. (PDF) Depending on the fine print in your mortgage, that could cost you 4-5% of the original loan amount.