Q: My husband and I built our first home last summer and signed the loan papers last September. We have a fixed 30 year mortgage at about 6.09 percent.
Recently, a financial advisor from a different company came to our house and showed us a way to consolidate our debt, including credit cards, car loan, and the house loan.
He said that we could reduce our interest over the years quite a bit by paying bi-weekly, instead of monthly like we do now, because they reconfigure the loan balance every 14 days instead of at the end of the year.
But the interest would be at 9 percent instead of 6.09 percent. How is what he claims possible if the interest rate is almost 3 percent higher? Couldn’t we just make one extra house payment a year and pay bi-weekly through our bank and get the same reduction?
A: You haven’t given me quite enough information in your letter to know whether you’re being offered a fair deal (did you acquire $50,000 in credit card debt since you bought your home) or getting scammed. My guess is your gut instinct is probably right on the money. I just hope you haven’t signed any papers.
First, as you suspected, you can do your own “bi-weekly” mortgage by making one extra monthly payment per year. On a standard 30-year mortgage, you’ll cut your mortgage term by about 7 years simply by making that one extra payment.
Next, in a year where mortgage interest rates are hovering at 40-year lows, the interest rate you’re being offered — 9 percent — could be the sign of a predatory lender. Unless you have just dreadful credit and need to refinance your home to take cash out to pay some big bills, I can’t imagine why you’d trade a 6 percent mortgage for a 9 percent mortgage.
Even so, you’re far better off taking a second or third job and keeping the great interest rate you already have.
The best thing to do is shop this lender’s offer with other quality lenders you trust. Consider visiting a couple of big lenders like Countrywide Home Loans, Bank of America, Sun-Trust or a respected online lender like Eloan.com. If top-rated companies like these can help you figure out a way to cut your payments by consolidating your mortgage and other debts, then you should consider doing it.
But your neighborhood lender sounds like someone you should never again invite into your home. If his deal turns out not to be a good one, you can consider filing a complaint against him with your state attorney general’s office.
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