Scott Burns

You Are Entitled! (To Deceptive Offers by Direct Mail)

Earlier this year my wife and I refinanced the mortgage on our Dallas townhouse, reducing the rate to 4.5 percent. We thought cutting the rate dramatically was reward enough.

Apparently, we were wrong.

Last week we received a kind but deceptive offer from Nationwide Bi-Weekly Administration, a Xenia, Ohio, company that sells biweekly mortgage programs. We were "entitled," the solicitation inside said, to its biweekly mortgage payment program.

The word "entitled" is interesting because it creates a certain anxiety about being eligible for something that might slip away. In fact, anyone who has taken out a new mortgage or refinanced an old one is "entitled."

That's just about everyone. The folks at Nationwide Bi-Weekly Administration obtained the names of people who are "entitled" by searching public records for new loans. They also explain, at the bottom of their solicitation, that "NBA is not affiliated, connected, associated with, sponsored or approved by the lender."

Similarly, most of us are entitled to buy automobile insurance because we own an automobile. We are also entitled to buy food at the supermarket because we are hungry several times a day. And lenders tell us we are entitled to borrow for any purpose because we have a pulse.

Wanting to make sure they got our attention, large print told us the program would "eliminate an average of 7-9 years off your 30-year loan!!"

The opportunity to "take advantage" of this program that "has been the focus of articles in The New York Times and The Wall Street Journal" would only be available for "a limited time."

So I called. While waiting 10 minutes for a living representative, recorded messages told me about the wonders of the program.

They were frank about the frailty of human nature. "Many people ask: Why can't I just add principal to my regular payment?"

Their answer: "You can, but most people don't."

When Alex, the living representative, came on the line I asked if he knew the dates of the articles in The New York Times and Wall Street Journal. He didn't but he could, and did, fax them to me. Several of the faxed articles were about genuine biweekly mortgages that are completely unrelated to the "simulated" product offered by Nationwide Bi-Weekly Administration. Oddly, not a single one of the faxed articles was blessed with a publication date and all cited mortgage rates of 10 percent to 11 percent, a mystery I didn't understand until I did some calculations.

Alex explained that while they collect money from your checking account on a biweekly basis, they don't make biweekly payments. Instead, they hold the money and make your regular monthly mortgage payment. Since that only requires 24 of the 26 payments you make, the extra two payments a year are applied to the principal balance of your mortgage.

In other words, the miracle of a biweekly mortgage is that you make the equivalent of 13 payments a year instead of the usual 12. The cost of helping you with this discipline is a discounted fee of $195 plus a charge of $3.50 for each biweekly transfer from your checking account. That's $91 a year. If you pay off the mortgage in the 21 years they claim, you'd pay a total of $1,911.

I'd like to suggest a free alternative. Call it the Crusty Columnist Mortgage Reduction Plan.

Divide your regular monthly payment by 12. Add that amount to your regular monthly payment. Mail your payment.

Voila! You have just reduced the term of your 30-year mortgage, just like a biweekly mortgage payment plan.

Want to pay your mortgage off faster? Make more extra payments a year. Here's how much time you'll cut off the mortgage for each additional monthly payment a year, assuming a 5 percent interest rate:

-- One extra payment cuts your mortgage to 25.25 years, 4.75 years cut;

-- Two extra payments cut your mortgage to 21.9 years;

-- Three extra payments cut your mortgage to 19.4 years;

-- Four extra payments cut your mortgage to 17.4 years;

-- Five extra payments cut your mortgage to 15.8 years;

-- Six extra payments cut your mortgage to 14.6 years.

Some readers will note that my free plan cuts only 4.75 years off a mortgage for an extra yearly payment while Nationwide Bi-Weekly claims an "average of 7-9 years" for doing the same thing.

How do they get those extra years of reduction?

Simple. In their sample calculation, they use a $110,000 mortgage with a 30-year term and a $1,000 monthly payment. Converting to a biweekly payment of $500, their example shows, will reduce the term of the loan to 21.9 years, a saving of 8.1 years.

The interest rate on their sample mortgage is conspicuously absent.

My calculator shows it to be 10.42 percent, a rate that hasn't been seen in about 15 years. That's also the rate cited in all the faxed, but undated, newspaper stories. The mathematical truth Nationwide Bi-Weekly doesn't mention is that when interest rates were high, an extra principal payment had more power. Today, when interest rates (and monthly payments) are much lower, an extra payment doesn't help as much.

Nationwide Bi-Weekly Administration Inc. makes its sales claims based on mortgage rates from 15 years ago. You won't get the results it claims.

4520 Main St., Kansas City, Mo. 64111; (816) 932-6600

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