Personal Finance Notebook: Expect a fee for biweekly mortgage

Today, The Sacramento Bee brings you a new resource to answer your questions about personal finance. Every Tuesday, Assistant Business Editor Claudia Buck will tap a roster of local and national experts for advice to help you navigate the often confusing world of money matters. Send your questions to Claudia Buck at: cbuck@sacbee.com or by mail: P.O. Box 15779 Sacramento, CA 95852

Q: I read Tom Sullivan's column in The Bee, "It pays to shorten your mortgage," and thought the idea about making mortgage payments every two weeks sounded terrific.
I contacted my mortgage company, CitiMortgage, and was transferred to a subsidiary company that handles CitiMortgage's payment plans.

I was told that they could comply with my request; however, they would charge me a "discounted" one-time fee of $275 to pay my mortgage every two weeks. Is this "normal" in the mortgage industry?

Sandy B., Roseville

A: Yes, it is normal. We received letters from several readers who contacted their lenders after reading Sullivan's column about paying their mortgage every two weeks.

The idea: Make half your mortgage payment every two weeks instead of once a month, resulting in one extra full payment over 12 months. By accelerating the frequency of mortgage payments, you can pay off a fixed-rate, 30-year mortgage far sooner and save thousands of dollars in interest.

As unfair as it sounds, you'll probably pay extra for that privilege. Peter Ogilvie, president of the California Association of Mortgage Brokers, said many lenders rely on a separate company to collect and handle mortgage payments. Those subsidiaries are accustomed to dealing with traditional monthly payments. If you want to switch to a different payment schedule, you'll likely be charged $275 to $350. "That's where they make their money," Ogilvie said.

In the case of CitiMortgage, a biweekly mortgage payment plan is offered by its finance subsidiary, FNC Insurance Agency. It's designed as a check-free, budget-friendly way to pay your mortgage, according to CitiMortgage spokesman Mark Rodgers. The fee to launch the service: $375, plus $1.50 per withdrawal. (Which means your local CitiMortgage office was offering a discounted rate.)

To avoid that charge but still grab some mortgage savings, Ogilvie and others recommend a couple of alternatives:

• Ask for a new payoff date. Call your bank or mortgage lender and ask to set up a new amortization schedule with a payoff date that fits your financial goals. For example, say you want your mortgage paid off by the time you retire in 16 years. You and your lender can calculate how much extra you'll need to pay each month to arrive at retirement -- mortgage-free.

• Pay an additional fixed amount each month. Take your monthly payment and add one-twelfth of that amount to each payment.

For instance, if your monthly payment on a 30-year, fixed-rate loan is $1,896.20, you'd pay an extra $158.02 per month. At the end of the year, you'll have made 13 monthly payments instead of 12. At that rate, your loan would be paid off in 289 months, instead of 360. You'll end up lopping off about six years on your mortgage and save a lot of money in interest.
What's more startling is how those savings add up: $682,632 in interest and principal when paid over 30 years, vs. $595,375 for the shorter term, for an overall savings of about $87,200.
But please note: These suggestions work only with a fixed-rate mortgage, not for borrowers holding an adjustable-rate mortgage.

About the writer:
The Bee's Claudia Buck can be reached at (916) 321-1968 or cbuck@sacbee.com. Questions can also be mailed to: P.O. Box 15779 Sacramento, CA 95852.