ping: Financial Gurus

[Draft Dodger]

I have a hard time getting my brain around stuff, so maybe some of you smart people can help me out with understanding this...

recently we refinanced our mortgage - no questions on that front. but we've received two offers now from a 3rd party to start doing payments every two weeks instead of every month, and I'm a little confused by it. Basically it seems like, if our mortgage is $1,000, we send them $500 every 2 weeks and then they pay our mortgage company at the end of the month - and somehow this increases the amount of principal being paid. for this, we pay a startup fee of about $200 and about $3 a month. Aside from the slightly increased payments we are making (because of the extra half-month payment switching from monthly to bi-weekly) I don't get a) how the principal we are paying is increasing and b) why theses 3rd party offers this - is it just because they have our $500 to collect interest on for 2 weeks each month?

[QuikSand]

Start with this, very accessible even to non-gurus:

A year has 12 monthy payments
A year has 26 bi-weekly payments (not 24)

You are essentially making a 13th monty paymwent each year, by switching to the new system. Nothing wrong with that, but that's why you're getting ahead with principal.

And yes, the company makes your $200 up front, $3 a month, plus the float off your payments. That's apparently worth their while.

[RendeR]

but when are they making that 13th monthly payment? I don't see how thats getting scheduled in there. Or are they simply making 1000 dolalr payments each time your check comes in and the total in your acount hits 1000?

[QuikSand]

At any time, you as a mortgage holder are fully able to simply send in a payment of any amount to your mortgage company, with directions to pay it toward principal. $100, $1000, whatever you want.

I suspect that this is more or less what this third party outfit proposes to do. There will have to be contractual details, but I suspect that every penny you pay (aside form their service charge) gets sent to your mortgage company. Again - nothing wrong with this, but it's (practically speaking) not something you couldn't do on your own if you had the discipline.

[QuikSand]

Originally Posted by RendeR

but when are they making that 13th monthly payment? I don't see how thats getting scheduled in there. Or are they simply making 1000 dolalr payments each time your check comes in and the total in your acount hits 1000?

Perhaps they even wait until you have been in their program for 6 months... by then you are "ahead" by two weekly payments, and then they send that in as a "partial" payment to your account, for principal. That would give them even more float, as they hold your money as it builds.

[RendeR]

thats true, thanks for helping clarify this =)

[Radii]

There was a big thread on the housing board on the Motley Fool(my favorite finance board) about this and Quiksand's explanation is indeed why you're paying down extra principal, you end up with a few extra payments a year. The general consesus from the mortgage wizards there was that there is absolutely no reason to do this, as you could just pay a little extra towards the principal on your own every month to get the same result.

The board isn't free but here are the relevant comments:

I think that the biggest savings is from the fact that you make more 
payments in the course of a year; 26 biweekly payments (equal to 13 
monthly) instead of 12 monthly. It has been discussed quite a bit in the past, 
but it basically boils down to that you can get about the same result simply 
by making an extra payment each year. The general recommendation seems 
to be to avoid this system if there is any fee associated, but you may like it 
if you get paid biweekly. OTOH, if you go this route, there will be no 
more "bonus months" where you get three checks, but have only two checks 
worth of payments to make. 


My preference would be to stick with monthly payments; if you get enough 
money saved up and want to invest it at your mortgage rate, then you can 
always (well, almost always) opt to pay extra towards principle. If you run 
short, or find a better investment, then you still have the option of not 
paying the extra. If you lock into a program, you lose the option.

The benefit, as dcarper stated, it due to the extra payment you make over 
the course of the year. If you like this idea, you can just as easily add 1/12 
of a payment to each monthly check you submit and request that the extra 
payment be credited to principle.

Also, this bit of info is from a mortgage broker who is well respected over on this board, interesting info:

Mortgage lenders do NOT generally book loan payments according to when 
they actually arrive... rather... as long as they arrive prior to their "late 
payment deadline" the lender books ALL payments on a standardized day of 
the month. Paying early provides no savings benefit to the payer.

[Draft Dodger]

well, that makes sense - I guess I'm not as dumb about this as I thought.

we'd already been planning to set up our direct withdrawals to pay some extra principal ($25 or so) each month, so I think we'll probably skip paying someone to do essentially do this for us.

thanks guys for the help

[Tekneek]

I have been advised in the past to check out these third-party companies thoroughly. There have been reports of people sending in their checks, while this other company was not making the payments properly. If your mortgage does not get paid you are the one left holding the bag to make it right before you get foreclosed.

[damnMikeBrown]

You have to look at the details of the mortage as well. I understand there to be wording in some rare ones such that early payments can incur a penalty. As in, the mortage company doesn't want the principal paid down, they have set up, and depend on the regular revenue stream from your planned mortage. If you were to alter the plan and their revenue stream by reducing capital early, there could be a fine to compensate them.

If there is such a fine, it doesn't mean it's bad to pay off more, just make sure you're paying off enough such that the fine is less than the amount of $$ you've saved by early payment.

(I <3 financial calculators)

[Draft Dodger]

Originally Posted by Tekneek

I have been advised in the past to check out these third-party companies thoroughly. There have been reports of people sending in their checks, while this other company was not making the payments properly. If your mortgage does not get paid you are the one left holding the bag to make it right before you get foreclosed.

that would have been my next question if the first part was going to be favorable. moot now.

[Desnudo]

Originally Posted by Tekneek

I have been advised in the past to check out these third-party companies thoroughly. There have been reports of people sending in their checks, while this other company was not making the payments properly. If your mortgage does not get paid you are the one left holding the bag to make it right before you get foreclosed.

There's something about having another third party to pay the third party that loaned you the money to buy a house that seems slightly ridiculous.

[Tekneek]

Originally Posted by Desnudo

There's something about having another third party to pay the third party that loaned you the money to buy a house that seems slightly ridiculous.

Hah. I think it is because people do not know what they are doing with their own money and they see an opportunity to make some extra money by handling it for them.