Summary

The article warns against the "Mortgage Accelerator" scam, which promises savings on mortgage interest by paying bi-weekly instead of monthly, but often includes hidden fees and may not be financially advantageous in the long run.

Abstract

The "Mortgage Accelerator" program, advertised by mortgage servicers, claims to help homeowners pay off their mortgages early and save on interest by making bi-weekly payments. However, the article highlights three significant issues with this approach: most homeowners do not stay in their homes long enough to realize the promised savings, prepaying mortgage principal is generally not a wise financial decision due to factors like the mortgage interest deduction and inflation, and the program often includes a fee for a service that can be obtained for free through one's bank. The author, Opher Ganel, argues that the program is oversold and could be considered a scam, especially when considering the potential financial losses and the lack of tangible benefits for the homeowner.

Opinions

The author believes that the "Mortgage Accelerator" is an oversold promise that doesn't account for the typical duration of homeownership.
Prepaying mortgage principal is seen as a poor financial strategy, given the potential tax benefits and the eroding effect of inflation on debt.
Charging a fee for bi-weekly payment services, which can be set up for free through a bank, is viewed as deceptive and indicative of a scam.
The article suggests that financial advice promoting mortgage acceleration often ignores important economic factors and may not be in the homeowner's best interest.
The author emphasizes the importance of considering the long-term implications of fees and the opportunity cost of not investing money elsewhere.

If you have a mortgage on your home…

Don’t Get Taken by the “Mortgage Accelerator” Scam

Sometimes even companies you trust might be trying to de-facto scam you…

When I bought my first home, the mortgage servicer included a pitch with each monthly statement.

They called it a “Mortgage Accelerator,” which painted a pretty picture. If I signed up, they would bill me half my monthly payment every other week instead of the usual monthly schedule.

If I did this, their slick flyer said, the mortgage would be paid off years early, saving me tens of thousands of dollars in interest over the life of the loan. That was true enough, as far as it went. If you want to see how it’s supposed to work, enter your own mortgage information into this calculator.

Looks great, right?

Just three problems.

1. Few People Stay in a Home for 30 or Even 20 Years

I was unlikely to stay in the house, let alone in that mortgage, for the 25 years or so it would take to pay off the loan under their accelerated schedule. According to a National Associations of Realtors (NAR) report from 2016, “Sellers typically lived in their home for 10 years before selling.”

In this particular case, I ended up selling the house about five years after buying it. Worse, in terms of this offer at least, dropping interest rates had me refinance the mortgage twice before selling the house. Thus, the benefit of paying off the mortgage a few years earlier than its original 30-year length was completely moot, and my interest savings would have been minimal.

Still, if this was the extent of my objection, I would have just called it an oversold promise rather than a scam.

2. Prepaying any Mortgage Principal Is Almost Always a Really Bad Idea

As explained here, although pushed aggressively by the likes of Dave Ramsey, prepaying principal on a mortgage is almost never a wise financial move. Between the mortgage interest deduction and the effects of inflation, the real cost of mortgages is much lower than most people realize.

Here’s why…

Say your mortgage interest rate is 4.5% and your tax deduction saves you a third of that. Your actual cost is thus nominally 3% (two thirds of 4.5%).

Next, if inflation runs at the recent annual rate of 2%, your real cost is under 1%. If inflation would return to its historic average of 3.5%, you’d actually be making money off that mortgage!

Wouldn’t that be sweet — making money off hundreds of thousands of dollars of the bank’s money?

Further, investing the extra cash instead of using it to prepay principal gives you more security against losing your home, since you’ll likely have built up liquid funds that would let you make a few payments if and when you lose your income temporarily, so you don’t lose your house to foreclosure.

Even adding this objection to the first one wouldn’t have me call it a scam. I’d have called it a financial mistake, most likely due to the lender’s staff knowing far less than they should about how personal finances and inflation work.

3. They Were Planning to Charge Me a Biweekly Fee!

Hidden in the small print was a fee I’d need to pay with each bi-weekly payment!

This one is the real kicker.

In the unlikely case that I’d have decided that paying on a biweekly schedule was a good idea, I could have set up those payments to be mailed automatically from my bank to the servicer at no additional cost!

Trying to get me to pay a fee for something that I could get for free elsewhere is why I call this a scam.

In short, my lender (who was already making lots of money through the interest on my mortgage) was trying to make me pay extra for something I could get for free through my bank, where that something was unlikely to save me much under almost any circumstances, and where in most situations it would end up costing me thousands of dollars in real terms, even if it didn’t lead to my losing my house to foreclosure if I lost my job.

When somebody tries to take my money without providing any benefit, that’s the behavior of a thief or scammer, not a legitimate business.

The Bottom Line

Anytime somebody tries to suggest that you accelerate your mortgage payments, consider very carefully that they most likely don’t know what’s they’re talking about (even if their last name is Ramsey). Ask them to include in their calculation the effects of both your tax deductions and inflation. Most likely they won’t trouble you again.

More importantly, if somebody wants to charge you a fee for something, check if you can’t get the same service free of charge elsewhere. Even if it’s only a few dollars every other week, over the long term, that can add up to thousands of dollars that would be far better spent on your retirement needs.

About the Author

Opher Ganel has set up several successful small businesses, including a consulting practice supporting NASA and government contractors. His most recent venture is a financial strategy service for independent professionals. You can connect with him there, or by following his Medium publication, Financial Strategy.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

Originally published at https://wealthtender.com.