Share this article

print logo

AN EARLY PAYOFF
BI-WEEKLT AND 15-YEAR LOANS SAVE A BUNDLE IN INTEREST BUT THEY'RE NOT FOR EVERYONE

Daniel Beseth's 14-year-old daughter has aspirations of attending an Ivy League school.

He has aspirations of putting her through college without going broke.

The 43-year-old Niagara Falls Bridge Commission supervisor is using a little trick that has become increasingly popular for area consumers. Beseth makes two mortgage payments a month on his two-story Colonial home in Lewiston.

Every other Friday, Lockport Savings Bank deducts half the mortgage from his checking account. The bi-weekly payment results in 13 full payments a year, rather than the typical 12 made on a monthly mortgage.

Beseth will pay his 20-year loan off in about 15 years and build home equity quicker by saving thousands of dollars worth of interest.

He said the thought of college tuition for his daughter and nine-year-old son was a primary concern.

"That was a factor, we wanted to have most of the house paid off before they went into universities," he said.

Beseth has a lot of neighbors in Niagara and Erie counties making two mortgage payments a month. Six of every ten new mortgage customers at Lockport Savings Bank now chose the bi-weekly mortgage.

Other local banks offer a similar product.

A large number of residents also paid down mortgages over the last two years by shifting from 30-year to 15-year mortgages. The refinancing move left many consumers paying $100 or $200 extra a month, but shaving years off their loans.

How good a financial move is paying down the mortgage? The answer differs for various consumers and a lot depends on your financial psychology, said Gary Hutchings, administrative vice president of residential mortgage for M&T Mortgage Corp.

"We see people who want to pay down loans because they don't want a debt on their home. This is where they live and they want to own it free and clear," he said. "Other people come in and they want the biggest mortgage they can get. They'll take the extra money, invest it and capture the tax benefits of the mortgage."

Mortgage interest is tax deductible.

Paul Eberz, a certified financial planner in Williamsville, favors taking the longest mortgage term available to reduce the monthly payment.

He thinks most consumers would be better off directing extra dollars elsewhere, particularly by increasing contributions to a 401(k) or an Individual Retirement Account. Both plans offer tax advantages, and many employers match 401(k) contributions.

Eberz said a good formula for calculating the real cost of mortgage funds is to factor in the tax consequences. The majority of area consumers have a combined income tax burden of 33 percent -- 28 percent federal and 5 percent state, Eberz said.

Taking a third off the 8 percent mortgage rate, which is about the current average for a 30-year-loan, means the real cost of the money after the tax deduction is about 5.3 percent, Eberz said.

So instead of taking extra money and paying down the mortgage to save 5.3 percent, consumers could probably reap a better return investing the money, he said. During the last 15 years, the S&P 500 has returned about 18 percent a year.

"For a conservative person, who is just going to leave their money in the bank, they're better off paying down the mortgage. For the person who is willing to take the risk of the stock market, they're better off taking as large of a mortgage as possible and paying it back as slowly as possible," Eberz said.

The biggest benefit of that 15-year mortgage or bi-weekly payment schedule might not be in the math, but in the psychology. Many consumers do better with the disciplined payment schedule.

"Could you use the money somewhere else? Sure, but you've also got to ask yourself, 'Will I use the money somewhere else?" Hutchings said.

The same thing applies for consumers who dismiss the bi-weekly mortgage, figuring they can always make an extra monthly payment at the end of the year. Few people who intend to make the extra payment actually do, Hutchings said.

For some consumers, the road to financial trouble is paved with good intentions.

Beseth said he would just as soon pay down the large debt.

"If you think about it, who wants to be paying for a home until their late 60's? With the bi-weekly mortgage, you'll be released from that nut when you are in your 50s," Beseth said.

Those psychological factors and consumer comfort level with their financial strategy are important, Eberz agrees.

Beseth, 43, took a 30-year bi-weekly mortgage on a home in Buffalo 10 years ago. Then he and his wife took a 20-year bi-weekly four years ago when moving to Lewiston.

Lockport Savings Bank has clearly made the pay-down mortgage product a part of its growth strategy. Mortgage applicants are required to have the bi-weekly payments deducted from a Lockport Savings Bank account, so the mortgage business spins off savings and checking accounts for the growing bank.

David J. Paonessa, banking officer and production manager for Lockport Savings, said the bank simply explains the advantages, but does not push the product.

"We show them the benefits of it and, once you see the benefits, it's clear," Paonessa said.

Many banks and mortgage brokers had also been touting the benefits of the 15-year mortgage, especially for customers refinancing 30-year loans. But the recent rise in interest rates has cooled the 15-year activity.

"The majority of the customers who are interested in the 15-year mortgage are the refinance customers," said Michael Bonito, president of Multi Source Funding of Buffalo. "With purchases, a lot of people tend to go with the highest loan amount and the highest possible price that they can afford."

There are no comments - be the first to comment