Speed up your mortgage? Consider the alternatives

BOSTON (AP) - "You have nothing to lose and so much to gain - $103,162!"

Like most recent homebuyers getting such pitches, I haven't been enticed to pay my mortgage down faster. The gist is that by switching from monthly to biweekly payments, I can save a bundle from cutting out years of interest payments.

Still, I'm having a hard time forgetting the offer that landed in my mailbox a couple months ago. After all, the projected savings could help put my two toddlers through college someday. And my family is staring at 29 years of payments on a two-family home in a pricey market.

My lender's pitch said I could wipe away the loan nearly six years faster with biweekly payments to a mortgage acceleration program. The only fee would be a monthly $9 service charge.

In a market where you can no longer count on rising home values to boost your equity, speeding up my mortgage offers a way to do it myself. Sure, I'd need discipline and lose some flexibility: Mortgage withdrawals on a biweekly basis add up to a modestly larger cumulative payment per year than a monthly schedule.

But is there more to the equation? In this installment of "Your Money," we look at the considerations.

Q: Who typically gets these offers?

A: Recent homebuyers, who often find the pace of paying down principal on their mortgage frustratingly slow early on. Depending on the loan's structure, 90 percent or more of initial payments can cover interest, rather than chipping away at the principal.

Q: How many people use mortgage acceleration programs?

A: Industry data are hard to come by. The Mortgage Bankers Association and consumer advocates lack any hard numbers.

The programs may look more appealing now because the housing market slump.

"Now, the onus is more on the homeowner to create their own equity by paying down their balance faster," said Greg McBride, senior financial analyst at Bankrate.com.

Q: Do all the programs operate like the one described above?

A: No. Most involve payments to a third-party through automatic bank account withdrawals each time you get a paycheck. Monthly service charges generally run $5 to $10 over the life of the mortgage; many also charge sign-up fees of $100 to $300.

That approach doesn't go as far as a newer type that arrived this country a few years ago, modeled after programs in Britain and Australia. These programs combine your checking account, home loan and home equity line of credit. They essentially become one master "sweep" account that automatically transfers your cash deposits to pay off your mortgage, putting that expense first in line for payment. It's a way to funnel as much of your extra income as possible to pay the loan down quickly and cut interest costs.

Q: What's the catch that's not mentioned in the pitches?

A: Except for February, there are more than four weeks in a month. And biweekly payments mean you're making the equivalent of 13 months of payments in a year.

Under the offer I received, I'd be paying $3,195 more per year. And that's not including the $9 monthly fee. Over the nearly 24 year accelerated mortgage schedule, my fees would top $2,500. So you've got to have the cash to handle the additional short-term income drain.

Q: Are there any tax consequences?

A: Your long-term savings from reduced interest costs could shrink because you'll lose some of the tax deduction you can get from paying mortgage interest in the first place.

Q: Can't someone pay down their mortgage faster on their own, without paying fees?

A: Unless your mortgage restricts prepayments, you can send in more than the monthly minimum. You can do it by simply writing a bigger-than-usual check every few months, or setting up automatic electronic payments above the minimum.

Q: Many people lack the discipline to pay early on their own, even if they have enough cash. If an acceleration program helps accomplish that, doesn't the interest savings offset the fees long-term?

A: Consider what else you could do with the cash used to pay your mortgage faster. Can you commit to paying your mortgage early and still have enough cash for an emergency, like a job loss? Read the fine print on any fees to get out of such programs.

Also, will you have enough to save for retirement or pay for your kids' college? Rather than accelerate your mortgage, consider putting cash into a tax-protected investment account. There, stock gains might earn you more than the savings from cutting mortgage interest.

And with mortgage rates near historic lows, refinancing can be a good option - though it may be difficult in this market. Those low rates also limit the interest savings you'll realize from accelerating your mortgage, because borrowing is inexpensive.

Finally, if you've got credit card debt, it's probably carrying interest at a far higher rate than your mortgage. So pay off the highest-cost debt before enrolling in a program that forces you to accelerate a mortgage.

"If the borrower's concern is their own lack of discipline," McBride says, "chances are they have other fish to fry."

Have a personal finance question you want answered? Send it to yourmoney@ap.org.