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Many of the ads promote the “Bi-Weekly Mortgage” and generally, do not come from a mortgage lender, even though their email may look very legitimate. Exclamation points punctuate practically every promise they make:

• No closing costs!
• No refinancing!
• No points!
• No credit check!
• No appraisal!
• Save thousands!
• Cut years off your mortgage!

To achieve these wonderful savings all you have to do is allow half of your mortgage payment to be deducted from your checking account every two weeks. It’s easy. Of course, there is the matter of a small “set-up fee” and usually a “transaction fee” with every automatic deduction.

Essentially, the ads are truthful in almost every respect.

They just want to charge you money for something you can easily do on your own, free of charge.

The Basics:

Normally, you make 12 mortgage payments a year. Since there are 52 weeks in a year, a bi-weekly mortgage equals 26 half-payments a year. The equivalent would be making 13 mortgage payments a year instead of 12. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments and generating less interest charges.

You will save money. The ads are truthful about this.

How it Actually Works:

You cannot simply mail in half a payment every 2 weeks to your mortgage lender. Since they do not accept partial payments for legal and accounting reasons, the mortgage company would just mail your half-payment back to you.

Instead, the bi-weekly mortgage company is an intermediary between you and your mortgage lender. They automatically debit your checking account every 2 weeks for half of your mortgage payment, then place your funds into a trust account. Basically, this is just a holding account for your money. In another 2 weeks, there is another automatic deduction from your checking account, and so on. When your mortgage payment is due, your funds are withdrawn from the trust account and forwarded to your mortgage lender.

Since you are placing funds into the trust account faster than your mortgage payments are due, you eventually accumulate enough money to make an “extra” payment. The way the cycle works, this occurs once a year. The extra payment is applied directly to your principal balance.

Potential Problems with the Trust Account:

Because your funds are held in the trust account until your mortgage payment is due, there are potential dangers. Not only are your funds held in this account, but so are the funds of everyone else enrolled in the bi-weekly program. That is a lot of money.

If there are accounting errors, mismanagement, or even fraud, your mortgage payment might not get made. The first hint of a problem will probably be a phone call or letter from your mortgage lender, but not until after your payment is already late. Since responsibility for making the payment rests with you and not the bi-weekly payment company, you may find yourself digging into your personal savings to make the payment directly — even though the bi-weekly payment company has already collected your funds.

The Typical Cost of the Bi-Weekly Mortgage:

• Typical set-up fee of $195-$350
• Transaction fee for every automatic deduction (every 2 weeks)
• Transaction fee when the payment is made to your mortgage company.
• Periodic “maintenance fee”

No-Cost Alternatives to the Bi-Weekly Mortgage:

Instead of hiring a company to manage your bi-weekly payment, you could accomplish essentially the same thing on your own for free. Just take your monthly payment, divide it by 12, and add that amount to your monthly mortgage payment. Be sure to earmark it as a principal reduction.

The first way you save is that you do not have to pay any fees to anyone. It’s free.

In addition to not paying fees the loan would be paid off approximately three months quicker than with the bi-weekly mortgage. The reason you save more is because you are making a principal reduction each month, instead of waiting for funds to accumulate so that you can make one principal reduction a year.

Conclusion:

The bi-weekly mortgage plans do not really do anything except move your money around and charge you for it. In addition, you must trust someone else to hold your money and pay your mortgage on time for you. If you can do the very same thing for free, plus save yourself even more money by doing it on your own, why pay someone else?

The bi-weekly mortgage plan – who needs it?

If your goal is principal reduction and saving money, then it is a good plan. If you do it on your own instead of paying someone else to do it for you, then it is a great plan.

I’m sure most people would not rush out to get the loan described above, but many have been sold to customers, especially in high priced markets.  These loans generally go by a more advertiser friendly term, and if you’ve ever been intrigued by promotions for “Option ARMs” or “Pick-a-Payment” mortgages, be wary.

These terms are usually euphemisms for negative amortization loans – and unless you’re careful with how you use them, they can leave you economically depressed and possibly homeless.

What Are Option ARMs or Pick-a-Payment Loans?

Option ARMs are adjustable rate mortgages that generally have a relatively high fully amortizing interest rate, but has up to four payment option features for you to choose from each month. You will receive a new invoice each month giving you four payment options. These options are (1) a low payment rate of between 1% – 3.99%, (2) an interest only payment option, (3) a 15 year amortization payment term option, and (4) a 30 year amortization payment term option. These terms options can vary, but these are used most of the time.

The first payment option, which most people choose since it is the lowest payment available, has a negative amortization feature. This means that instead of your loan balance going down, it goes up. Here is an example: Mr. Rogers has a pay option ARM loan with a 1% minimum payment. His 30 year feature is at 7.00%. Over the year Mr. Rogers only pays that minimum payment. His balance next year will increase by slightly over 6%, so if his balance was $200,000 at the beginning it will now exceed $212,000 the next year.

Minimum payment options, coupled with negative amortizing introductory rates, helped accelerate the growth of real estate in recent years, especially in hot housing markets where even modest homes are beyond reach to the average buyer.

Pay-Option ARMs where originally designed as a tool for sophisticated real estate investors or wealthy individuals, people who may needed free up cash for other purposes for short periods of time. However, in high priced markets, borrowers often use these loans to buy homes they could not otherwise afford as  partially witnessed by the recent housing burst in many of these formerly hot markets.

The attractiveness of this product is flexibility, but that flexibility can cause problems for the ill prepared.

Option ARMs two risks for borrowers:

Grossly increasing monthly payments: all borrowers with adjustable-rate mortgages face the possibility of higher payments, but borrowers with option ARMs risk a disastrous increase.

The introductory rate, generally designed to reel in the customer, generally last only a few months. After that, it typically adjusted to approximately 5%.  Continue making the minimum payments and the amount of unpaid interest is added to the balance of your loan. Most lenders won’t let you make minimum payments forever. At some point, your lender will “recast” the loan.

This causes a recalculation of your monthly payments, increasing your payments enough to pay off the interest and principal within the remaining term of the loan.

Typically, loans are recast after a set time period, such as five years. But lenders may force the change to come much sooner, especially if interest rates increase quickly. That is because option ARMs include a cap on negative amortization, typically ranging from 110% to 125% of the original loan balance. Once the cap is reached, payments become fully amortizing, even if you’ve held your loan for less than five years.

Paying the standard amortized  rate after the initial introductory rate has expired will help minimize the payment shock after your loan is recast. Some studies suggest, however, that more than half of option ARMs borrowers are making only minimum payments. Most of these borrowers face a larger payment shock than they understand.

What’s worse, the lower the introductory interest rate, the higher the payment shock. A Fitch analysis found that borrowers with a 1% initial rate could see their payments rise by more than 100% in less than four years.

Negative amortization: Some borrowers plan for increasing payments is to just sell the house and move.  “We’ll just start the cycle over in another place” they might say to themselves.  Unfortunately, their plans may run into a problem.

Unlike traditional mortgages, where your loan balance gradually decreases, with a negative amortization loan your balance increases. If home prices in your area stagnate or decline, you could end up owing more on your home than it’s worth which becomes a major problem when you try to sell.  If the principal balance is greater than what the home is worth then you will most likely be unable to sell their home without coming up with the difference, this could easily cost you thousands of dollars.

Even a minute increase in your loan balance could leave you in the hole after factoring in real estate commissions and closing costs, which typically consume about 6% to 8% of the proceeds.

A useful tool

Option ARMs provide flexibility for home buyers with uneven incomes, such as those who work on commission or receive a year-end bonus, or investors who may need to free up cash for short periods of time.  Unless borrowers are extremely disciplined with your finances they may find themselves in a worse place at the end of an pay-option ARM than at the beginning.

Plenty! Some lead generating companies will sell your information to dozens of companies over many months. Meaning you could be swamped with calls about your loan request, or worse, an ID thief may obtain your information, call you and receive all the information they look for to rob you and destroy your credit.

Performing a test sample of five such companies that allowed you to locate the “perfect” lender it was found, when the lenders called, much of the information they had on the prospective applicant was completely incorrect – including incorrect home value, property type and loan amount.

Nearly four months after the initial online application, phone calls with respect to the request where still being received. In total: 54 lenders called. This means the information was sold 54 times. There was no way of determining how many actually of these were actual lenders and how many were ID thieves?

Some of the mortgage lead portal sites do not notify consumers that they are collecting your information to provide to outside lenders, leading consumers to believe these sites are the mortgage company – until you’re blindsided by the phone calls.

Unfortunately, there are lending lead portals that require your social security number. Refusal to provide a SSN would prohibited you from submitting an application. The reputable sites that are out there generally will not ask for such confidential information.

This leads to the much more serious form of these type of sites: Mortgage Phishing…

Mortgage phishing is the way scam artists to try and get your personal information such as social security numbers, account numbers and dates of birth. Once this vital information is obtained they can wreck havoc on your credit and finances. Most mortgage phishing is in the form of emails.

Take for example this nice collection of emails we’ve received on a private email account of one of our staff members. We knew better than to respond and now you do too!

Loan approval department is trying to contact you
You have been pre-qualified for a one-time program that will save you 35% off your current payment.
You could get up to $297,000 for as low as never.
For a no obligation consultation http://justluixdareal.com

To guaranteed low rate please respond asap

Thank you for your loan request, which we received yesterday.
We’d like to inform you that we are accepting your application.
We are ready to give you a $272,000 loan (Approved refinance) for a low month payment. Approval process will take only 1 minute. Please visit the confirmation link below and fill-out our short 30 second form. http://glasseealthh.com

Thank you for your loan request, which we received yesterday.
We’d like to inform you that we are accepting your application.
We are ready to give you a $272,000 loan (Approved refinance) for a low month payment. Approval process will take only 1 minute. Please visit the confirmation link below and fill-out our short 30 second form. http://almodhealthh.com

Your credit history does not matter to us!
If you OWN real estate and want IMMEDIATE cash to spend ANY way you like, or simply want to LOWER your monthly payments by a third or more, here is our best deal we can offer you TONIGHT (hurry, this tender will expire THIS NIGHT):
$306,000+ loan

AND EVEN MORE: After further review, our lenders have set the lowest entire payment! Hurry, when our deal is gone, it is gone. Simply fill in this plain form… Do not worry about approval, your credit will not disqualify you!

http://milliaiemiilia.com/

They promise the world in some of their emails:

• “Refinance all your debt and get thousands in cash in your hand at closing”

• “Borrow up to your home’s appraised value regardless your credit!”

• “Low 1% – 2% interest rate, even with bad credit!”

• “Already approved just complete the application and we’ll close in just a matter of days!”

Individuals in dire straits, weak credit or naive to the pariahs out there will take the bait and complete the application with hopes of getting out of their current situation.

Millions of emails for these mortgage scams are sent out every month. Statistically, it does not take a large response to make phishing a lucrative business. More than two-thirds of email spam is sent from outside the United States, making legal actions difficult.

Those doing the phishing use false emails and fraudulent websites, redirecting your information throughout different countries, creating a difficult if not impossible task for finding them and recovering your money. The websites they use are legitimate looking and often times are clones of well-known banks or lending institutions – even colors and logos can be identical. Hijacking trusted names gives the unsuspecting borrower a false sense of security.

Always remember: If you didn’t ask for it, something phishy is going on.

In efforts to rein in the issue, the Federal Trade Commission has sued mortgage loan spammers. In December 2004, the FTC reached a settlement with the principals of an online operation, 30 Minute Mortgage Inc., that had advertised 3.95% and 30-year mortgages, hoping to obtain sensitive information—including Social Security numbers—from consumers for resale. According to the FTC’s statement, “the settlements also bar the defendants from using or benefiting from personal information that was deceptively collected from consumers.”

A recent report at techweb.com indicates that Phishing scams are growing at a rate of 50% per month, but at any given time there are a greater amount of fraud Web sites on the Internet than there are Phishing Web sites. They went on to report that while the typical life span of a Phishing Web site is under 3 days, fraud Web sites tend to stick around longer (8.5 days) which allows them to get into search engines, offering them some degree of legitimacy.

What You Should Do if tempted by such an offer…

* Call the company (after completing a check through the yellow pages or a reverse lookup online). If there’s no phone number, STOP, it’s probably a scam.
* If there is no street address it’s probably not a legit company.
* If you do locate a live person or company, ask them to mail you the application. Do not fill out an application online.
* Don’t download any “application” or “program” they send with the email, it could contain spyware.

The most important thing you can do for any mortgage “scam”: Use Common Sense. Never give private information to anyone before checking them out first! Never give out private information during an online application unless you know it’s a reputable company.

And if you receive emails that appear to be deceiving such as those shown above, report them to the FTC and get these creeps shut down! http://www.ftc.gov/spam/

If you have an adjustable rate mortgage, called an ARM loan, since the rates are low you should consider refinancing it now to a fixed rate mortgage. You should be able to get a low fixed rate loan and forgo any further potential increases on your ARM loan when the rates go up again.

If you have a sub-prime loan get out as soon as you can. FHA has a program that may help you called the FHA “Secure Mortgage”. This is designed primarily for borrowers who have a sub-prime loan. If you were current when your interest rate increased on your sub-prime ARM loan, you may qualify, even if you are not current on the loan today. This is not a foreclosure bailout mortgage, but designed to help you if you had severe payment shock and have not been able to refinance your sub-prime loan. Some lenders will not approve an FHA Secured Mortgage if you are behind, even if the rules allow them to do so, so try and keep up your payments current until you refinance the loan.

If you have to sell your home soon, then you should put it on the market early and give it more time to sell. This will keep you from having to sell at a steep discount when you are forced to sell it. If it sells quickly, rent a home or apartment until you have to move. This may save you thousands from selling it on the distressed market. Currently, distressed homes sold in volume quantities sell for 50% – 70% of their fair market value. You do not want to compete with that market by selling your home as a distressed property.

Since appreciation will not occur for a year or two, the best way to add value is to lower the loan balance on your loan. To do this look at the interest rate on your home mortgage, if it is above 7.5% and an FHA or VA loan you might want to consider an FHA or VA streamlined refinance. This should not cost you anything out of pocket and if you choose a slightly higher than market interest rate, you will also not have to make your loan amount any higher. This is also called a “no-cost” refinance.

If your savings are sufficient, you might consider a term of 20 year instead of 30 years. Another way to save you money is to borrow at a lower rate and shorter amortization at the same time. If you have a 150,000 loan borrowed 5 years ago at 8% and amortized for 30 years, (assuming you made no principal reduction payments), then you would owe approximately $142,455 today. If you refinanced your loan at 6.5% today for 20 years, many positive things will happen. First you will lower your payments by $38.55 per month and you will pay off your loan five years sooner. This will save you about $54,282 in lowering the principal alone plus save you an additional $9,250 by lowering your payments. Additionally, if you really want to save more money, apply the difference in your payment savings as a principal reduction to the new loan and you will own your home free and clear in about 18 years 8 months. You will then save a total of about $71,242. The best thing is that it won’t cost you a penny.

Why is this important during the mortgage crisis? The answer is simple. You will not see any real estate appreciation for next couple of years, so the best way to add value to your house is by lower what you owe on it. This savings will help you in the event you have a job change and must relocate or need to move for another reason. You will then have more value in your home because of the lower balance owed on your mortgage and this will give you a greater chance of selling it when others may owe more.

There is currently a non-profit group exclusively dedicated to assisting you with mortgage lenders and educating you on mortgage loans and the lending process. They provide more tips and ideas that can save you money on their website at www.mortgagechampions.org. This is a web site owned by Mortgage Consumer Advocates, a Texas non-profit corporation dedicated to consumer education and protection on mortgage loans and lending.

By Howard Wayland Jr.