Evaluating Mortgage "Pre-Payment" Offers

• Fees that increase the cost of prepayment and reduce net savings. Most plans charge both an initial setup ("enrollment") fee of $200 to $500 plus a monthly service charge ("participation fee") of $1 to $5 or more. Those costs must be considered when determining how much interest you've really saved.
• Payments may not be credited immediately. Though money may be withdrawn from your account on a weekly or biweekly basis, the company offering the plan typically pays the lender only once a month. The company gets the use of your money for free for two to four weeks.
• The later in the loan term you begin to pay additional principal, the less the savings. The interest on a mortgage is loaded toward the front of the loan term. On a typical 30-year mortgage, for example, only about 10% of the principal is paid off in the first ten years of the loan, all the rest of the payments go to pay interest. By the half-way mark of 15 years, the homeowner has paid 67% of interest and at 20 years, 84% of the interest. Those figures mean the later you start prepaying principal the less you save on interest. And don't forget those fees.
• Prepaying advantages may be offset by loss of tax advantages. Because most homeowners are able to deduct mortgage interest on their income taxes, you should consider this potential issue before opting for any type of principal prepayment.
• Plans charge a fee for something most homeowners could do themselves for free. If you have the self-discipline and your mortgage lender allows you to pay down extra principal without penalty, then why pay $1000 or more over the cost of the mortgage to let a third-party do something you could do yourself. See the do-it-yourself options below.