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Paying for Self-Discipline on the Home Front

To pay your mortgage faster, you can hire someone else to do it or just do it yourself.

Why pay for something you could do yourself for nothing?

Perhaps you've seen the ads for biweekly mortgages, or equity accelerator plans, which enable you to shave years off your mortgage for a one-time enrollment fee and monthly transaction charge. But these biweekly mortgages aren't loans -- they're payment plans that charge you for something you could do yourself. And their popularity is growing. Go figure.

"We're seeing a huge jump in it," says Chuck Hilbert, content and media manager with Paymap, an electronic payment services company that administers equity accelerator plans for financial institutions such as Citigroup, Banc of America and Washington Mutual. In February 1999 Paymap had 168,500 subscribers for its equity accelerator product. Three years later, 512,500 people have signed up. "As more people hear about it, we get calls asking if they can do it too," he says.

Paymap and other service companies work as middlemen between banks and customers, processing payments and handling the back-office paperwork. Banks get a cut of the revenue obtained from fees that service companies charge homeowners. Because of the profits and increased customer demand, banks have become more interested in Paymap's services. "Three years ago, there were 21 major banks doing this with Paymap," Hilbert says. "Now we have 32."

Countrywide Home Loans offers a biweekly payment service, but instead of using a service provider like Paymap, it administers its own equity accelerator plan. Denise Sandoval, vice president of payment services, estimates the company has 18,000 customers on the service, called PayPlan26, with more than 2,000 signing up each month. "It's growing by leaps and bounds," she says.

Under PayPlan26, Countrywide customers don't have an enrollment expense but do pay a $2 transaction fee per month to cover the cost of the program. The cost-savings benefit of moving lick-and-mail customers into an all-electronic service, combined with the transaction fee, covers the cost of the program. "As far as this being a profit center? I'd say no," Sandoval says.

At Bank of America, about 50,000 customers are enrolled in one of the company's biweekly payment services, according to Julie Davis, a company spokesperson. Davis could not quantify an increase in enrollment but says interest is rising because customers like being forced to budget -- especially during a recession.

Paying Less, but at What Cost?

But equity accelerator plans come with a price.

Here's how it works: Under a biweekly equity accelerator, the regular monthly payment is cut in half and then electronically drawn every other week, for a total of 26 payments a year. And since 26 half-month payments are like paying 13 months in a 12-month span, homeowners pay off their loans more quickly.

Let's say you have a 30-year fixed-rate mortgage of $100,000 at 7%. The loan has an interest cost of $139,508.90 with a monthly payment of $665.30. Under a biweekly equity accelerator, your monthly payment becomes $332.65 every other week, and it takes just over 23 years to pay the mortgage, saving you $34,140.66 on interest.

But a biweekly equity accelerator comes with fees and complications. Under Paymap's standard plan, the Equity Accelerator, customers pay an upfront fee of $295 a month, with a monthly transaction fee of $5.42. This would result in $1,839.70 in additional costs over the life of the loan.

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Depending on the plan, those fees could be even larger. In some cases, they can be as high as $500 for enrolling and $9 per month in transaction fees.

"They're a waste of money," says Nancy Castleman, co-author of

Invest in Yourself: Six Secrets to a Rich Life

. Instead of paying fees, she says, homeowners should set up their own plans for nothing.

Castleman suggests that homeowners take their monthly payment, divide it by 12 and then add that amount to the mortgage payment each month -- the same process most biweekly plans use.

While a structured biweekly payment plan could be good for the undisciplined, she says a self-administered plan would allow for payment flexibility in case of a lost job or sudden medical emergency. Under the bank's biweekly payment plan, funds are automatically drawn every other week.

But homeowners should be aware of prepayment penalties, which some banks impose if you pay off your loan too early. Banks attach such stipulations to mortgages to recoup costs when you refinance. Prepayment penalties can range between 2% and 3% of the loan's cost, says Brad Scribner, housing coordinator for the Consumer Federation of America. He advises consumers to check with their lenders to make sure they're not avoiding one set of fees to pay another.

Another advantage: you can avoid potential scams.

Some service companies have been misleading customers. In mid-December the Massachusetts Division of Banks warned consumers about solicitations from AAA Financial Corp., a third-party electronic payment service company. The Division of Banks said AAA's ads were confusing because they used the name of a homeowner's mortgage company but didn't make it clear that AAA Financial Corp. wasn't working with that homeowner's lender.

"Consumers thought they got it right from their lender," says David Cotney, deputy commissioner with the Division of Banks. "Our concern was that consumers didn't know who they were dealing with."

AAA Financial did not return calls for comment.

Cotney says consumers should examine such offers closely. Besides, equity accelerator plans are useless, he adds: "Why pay for something you can do for free?"