Welcome to the Age of Non Service Banking, brought to you by the miracle of direct mail marketing.
Bankers, like flim flam artists of yore, are now seeking ways to get you to pay for something you can do for free.
The story starts with a couple that owns two houses— their personal home and a rental house. In one week they received solicitations from both banks that held the mortgages. They were for a trademarked program called Equity Accelerator ® that offers to convert an existing monthly payment mortgage into a bimonthly payment plan.
The offer from Chase Manhattan Mortgage was amazingly specific. “Our customers tell us that they are interested in reducing their mortgage debt.” The letter began in bold type. “Unfortunately, few ever do… the time and budget constraints of everyday life just make it too difficult.
“We can help you. Our new payment option, Equity Accelerator, makes debt reduction convenient and most importantly… easy on your budget. It is a proven savings program which requires no changes to your current mortgage. (their italics) The following chart summarizes how you will personally save time and money by using Equity Accelerator.”
The chart showed that their $210,889.79 mortgage balance would be paid off after 17 years and 8 months if they continued their conventional payments of $1,261.21 a month. A biweekly payment of $633.10, however, would pay the mortgage off in 13 years, 9 months. It would save them $26,321.76 in interest and nearly 4 years of payments.
The cost of this thoughtful service? A “Lifetime Enrollment Fee” of $295 plus $2.50 per payment. That’s an additional $825 over 13 years and 9 months or a grand total of $1,120.
The couple received a similar offer for the Equity Accelerator ® from Nations Bank, telling them they could save interest on another mortgage by converting to a biweekly payment plan. The NationsBank plan had no enrollment fee but cost $3.75 for each of the 26 payments per year. That’s $97.50 a year for a program that could last over 23 years on a new 30 year mortgage.
Many people think there is something magical about biweekly payments.
There isn’t. The magic comes from taking one of your 12 payments, dividing it in half, and making 26 annual payments in that amount (biweekly) instead of 24 payments.
The savings result from a simple fact: you make an extra monthly payment every year. The extra principal payment is what saves interest and reduces the maturity of the loan.
In fact, both institutions are offering a biweekly payment plan for a monthly payment mortgage. The mortgage is not converted to a biweekly mortgage.
“You’d have to refinance to do that”, a NationsBank representative for the program told me.
Instead, the bank makes automatic deductions from your checking account and holds the money. It makes your regular monthly payment and makes an additional payment by the end of the year.
In other words, the bank gets to use some of your money all year at no cost. For a $100,000 mortgage this means you lose the interest earnings on about $350. This amounts to $2.19 a month at 7.5 percent. The same interest free cash would generate $5.25 a month for the bank if used to support an 18 percent credit card program.
Curious, I called the Father of Debt Reduction in America. The title belongs to Marc Eisenson who wrote and published “The Bankers Secret” fourteen years ago and has been telling people how to reduce their debt ever since. (The book is available for $17.95, postpaid, by calling 800-255-0899)
“It’s insane. It’s unfair. It’s not exactly dishonest… but the deceit is in the implication that you won’t save the money (by prepayment) without paying them”, he said, describing biweekly mortgage plans.
“G.E. Capital is one of the biggest companies making this offer. So we called and asked if a borrower could make an extra payment. They said yes. We asked if a borrower could make an automatic extra payment each month. They said yes. We asked if there was a charge. They said no.
“In other words, you can reduce your mortgage any time you want and it will cost you nothing.”
A spokesperson for Chase Manhattan Mortgage said that a person with a Chase mortgage could make additional payments at anytime, at no charge. It was also possible to arrange for an automatic monthly payment that included extra money… at no expense. In a visit to a local NationsBank office I learned that you couldn’t make extra payments by automatic deduction but you could, at no charge, make extra payments in each handwritten check… at no expense.
How, precisely, can you save thousands on your mortgage at no cost?
Easy. Take your monthly mortgage payment, divide it by 12, and add that amount to your monthly check.
That’s the do-it-yourself equity accelerator program.
While Chase Manhattan Mortgage, NationsBank, and GE Capital are eager to “help you” not one offered a simple choice in their customer solicitations: the Equity Accelerator program for a fee, or an increased monthly payment that would do the same thing, at no charge.
But now you know.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Monstera
(c) Scott Burns, 2022