Suze Orman

Home Ownership


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Pay Off Your Mortgage Early

BUT NOT THIS WAY

As you all know, I'm a big proponent of paying off your mortgage as soon as possible. But please steer clear of a new bank-sponsored gimmick called an "equity enhancement program" that claims to help you do this. The pitch, when you get it, will probably come as a letter from your bank promising to help you reduce the cost of your mortgage with no refinancing. But it will end up costing you money if you sign up. Here's why.

The program works by requiring you to make two smaller mortgage payments, one every two weeks, in place of the single larger monthly payment you're making now. The bank will deduct the payments directly from your checking account. Fair enough, but let's see how it plays out. Let's say your current monthly payment is $2,241.91 on a mortgage that's a 7.625-percent fixed 15-year loan totaling $240,000. Let's say you have 14 years and 7 months to go on the loan before it's paid off. If you stick with your current plan, you'll pay total interest of $166,534.09. The new program says that by simply taking money out of your bank account every two weeks instead of every month, and paying $1,123.46 each time instead of $2,241.91, the total interest you'll pay will be reduced to $147,047.89. You will have satisfied your mortgage in 12 years and 9 months, and will have saved $19,486.40 in interest.

But here's the rub, in smaller print: There is one-time lifetime program fee. In the case of Wells Fargo's program, it's $295. And there are monthly participation fees that eat up another $5.42 a month. Over 12 years and 9 months, those fees add up to $1,124.42, money that you could be earning interest on. And you can accomplish exactly the same thing by making one extra mortgage payment a year on your own. There are two good ways to do that: You can add one twelfth of that extra annual payment to your mortgage check each month. Or you can simply write a check for one extra payment at the beginning of each year and get it over with. There's no charge for that. So though I'm an advocate of paying off mortgages early, I am not an advocate of these offers you're getting in the mail. Don't be suckered in.

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