Is Wells Fargo mortgage ripping us off?

HardDrive · 10-31-2007, 11:12 AM

A couple years ago, my wife called Wells Fargo, and had them setup Bi-Weekly payments. My understanding was that this helped reduce your over all cost in 2 ways.

1) This would lead to extra payments being made in the months when you paid 3 times.

2) By paying 2 times in the month, you pay the loan off slightly quicker, thus reducing your overall cost.

Its the second part that I seem to be wrong about.

Lets take this month as an example. WF took out 2 payments, one on the 5th, and one on the 19th. However, these payments will not post until Nov. 2nd, appearing as a single payment on our statement. I called them today, and asked, "Where is my money from October 5th until its posted on November 2nd". Their rep told me that it sits in a 'holding account' until then. I was stunned. I pointed out that WF is drawing interest on my money for nearly a month instead of posting it to my account. The rep denied this, saying (spanglibonics gibberish....), "Naw, thats not was Well Fargo is all about, we just trying to save you money. Sir, no banks post twice a month, they all only post payments once a month."

Questions:

A) Is it true that NO mortgage companys post twice a month

B) Where the *feck* is the interest income going that is being drawn on MY MONEY when its sitting in the 'holding account'. The rep denied that the money was accruing interest in the 'holding account'. OH REALLY? Thats funny, I've never heard of a bank that would let millions of dollars sit in holding accounts and not attempt to make money off it, either for their benefit or for the customer.

legion · 10-31-2007, 11:18 AM

Yes, they are ripping you off.

I get the same offer from National City in a mailing every month. They even charge a monthly "convienence fee" of $50. (Which in my case all but wipes out the extra equity of those two payments.)

Truth is, you'd be better off just dividing those two extra payments by 12 and adding that amount to each month's payment. Make sure you specify that the extra is to go to principle or they will put the extra in a "holding account" for the full year!

It's really a scam for people who don't understand math and can't budget well. In your case, it has no harm and no real advantage. Might make sense for people that can't figure out how to save out of one paycheck and would otherwise always be late. In my case, it's a blatant ripoff.

Rick Lee · Rick Lee's Garage

HD, stop this service immediately and demand they make it right. Then do as Legion says. There is no reason in the world to pay any kind of fee for this unless it's less than the cost of the extra stamp you'll have to buy if you want to mail in your payments twice a month. Better to just add 1/12 or 1/6 of that extra amount to each monthly check and write in the box "extra principal".

dtw · 10-31-2007, 12:28 PM

Our mortgage was sold to WF years back. We are now set up on their automatic draft program each month. It includes a field to set up additional principle payments, automatically. We're doing that. Our principal balance has really started gaining momentum after paying extra every single month since inception.

Always read the fine print on those biweekly payment 'offers'. They usually want an enrollment fee for the 'privelege', and there is minimal if any impact on the amortization.

Porsche-O-Phile · Porsche-O-Phile's Garage

"Is Wells Fargo ripping me off?"

Probably. Yes, it sounds like it.

HardDrive · 10-31-2007, 01:41 PM

Quote:

Originally Posted by Rick Lee

HD, stop this service immediately and demand they make it right. Then do as Legion says.

Done.

Thank you for the advice guys.

Amazed that this kind of crap is legal. What a total scam.

red-beard · red-beard's Garage

Quote:

Originally Posted by HardDrive

Done.

Thank you for the advice guys.

Amazed that this kind of crap is legal. What a total scam.

This pisses me off as well, but I also believe in reading every single word and understanding them before signing. If I can't understand it, then it is time to pull in the guns to read it and explain it, or just say: ****ing forget it.

Joeaksa · 10-31-2007, 11:29 PM

You can do this yourself. Just pay the normal payment at the 1st of the month, then send in an additional payment on the 15th. If you are short that month, then skip it.

Signing up for that bi-monthly payments locks you into doing something that you can do yourself a lot easier.

911Rob · 911Rob's Garage

Great advise so far

Your extra payments are suppose to go directly to the principal of the loan; which is effectively like making once extra monthly payment per year. This does pay down the loan quicker, however it is less effective than simply reducing your amortization period.

You should not have a mortgage loan greater than 20 years and strive for 15 if you can handle the monthly payments? Anything longer greatly increases your overall interest paid.

Here's a mortgage calculator that you can play around with and test the optimal amount for yourself; but take it from me, go for the 15 year amortization and join the ranks of the debt free!

Calculator: http://www.kentredekop.com/3276_mortgage_calculator.jsp
The calculator is on my companies website, which I AM an owner of, fyi.

motion · 11-03-2007, 07:51 AM

This got me thinking.... what if you don't pay your mortgage when its due, on the first of the month? I wonder if additional interest is being piled onto your account balance? Seems it might... its a 2-way street, right? Any thoughts?

tshore · 11-03-2007, 11:29 AM

Is the loan you are talking about a 1st mortgage, or a home equity loan?

Most first mortgage loans work on a "scheduled/scheduled", aka "periodic payment" basis. This means that if your payment arrives before the "grace period" ends (usually about 10 days after the due date), it will be treated as if the payment were made on the due date. The amount of interest accrued will be the "scheduled" amount, and the amount of principal amortization will be the "scheduled" amount. Interest does not continue to accrue during the 10 day grace period. The downside is if you pay a little early, you get no benefit, because the payment will be treates as if it were made on the due date. Most people pay a little late, so most people are in effect getting a "free" few days of interest (which the banks price into their rates). The effect of this is that if you make all of your payments, whenever they actually arrive, the loan will exactly pay down by the maturity date.

Most home equity loans, by contrast, are "daily simple interest", or "actual/actual". Interest accrues from the time of the last payment until the next one is made, with interest accruing each day. If a payment is made a few days early, there is less time between payments, so less interest accrues, and more of the payment is applied to principal, paying down the loan faster. If you pay late, more interest accrues, a little less principal is paid down in each payment, and the loan pays off a little bit slower. For these loans, if you typically pay a few days late, the loan will not completely pay down by the maturity date and there will be a small (maybe $20 on a $100,000 original loan) extra balance to be paid off with the last payment.

If you have a "scheduled/scheduled" type loan it is probably not doing you much good to make biweekly payments as you are doing. The bank is not ripping you off...the loan you have is simply not set up to work that way. My advice would be to take advantage of the effective free float you have: make monthly payments a few days late and they will be treated as if they were made on time. If you want to pay your loan off faster, send an extra check in, maybe every few months, with a note saying you wish to apply the extra amount to principal reduction. The bank should be able to do that, and the loan will then pay down faster.

jorian · 01:11 PM

Caveat: I am a mortgage broker working in Vancouver, BC

With all due respect to those posting here:

The Wells Fargo guy is full of it. The moment your payment lands in their account, it starts to accrue interest. The mortgage documents must disclose the terms of the contract and should include a section on priveleges (making extra payments - early payout etc). Maybe you aren't allowed to make extraordinary payments. Maybe the mortgage is securitized (sold after funding)

Most mortgage payments are calculated semi-annually and not in advance. This means it compounds twice per year and is due at the end of the month rather than the beginning.

Also if you choose a 15 year amortization, you are locked into paying that higher amount. Not a good thing if you suffer a financial setback. Set up the mortgage on a 25 year amortization but schedule your payment size to mimick that of a 15 year amortization. If, at some future date, you need a lower payment you can fall back to the contracted minimum payment. With many institutions this also creates a possible "payment holiday" where any payment over the contractual minimum counts towards future payments. KInd of nice if you want to skip a payment around the Christmas holidays or if things tighten financially for you.

pwd72s · 11-03-2007, 04:55 PM

Quote:

Originally Posted by motion

This got me thinking.... what if you don't pay your mortgage when its due, on the first of the month? I wonder if additional interest is being piled onto your account balance? Seems it might... its a 2-way street, right? Any thoughts?

As the kids say, "well DUH!"

This thread makes me glad that I married a numbers cruncher. Now we only pay rent to the local government for our "paid for" abode....

Alas, it's not really paid for. IMO, you never "own" property. You rent it from the Government...

This is one factor that made me decide to quit being a landlord. With real estate, the government knows exactly what you have, where it is, and it decides what you are going to pay...and pay...

Once I had that figured out, the only real estate I'm interested in owning is the real estate I live on. There are better investment methods. But that's just my opinion. To each his own...

p911dad · p911dad's Garage

You might try calling your State Banking Division or whatever your state calls the state agency that oversees those banks doing business in your state. They may have a very different take on what Wells Fargo is pulling on you. Might be worth a call or email. In this state the Banking Dept has control over such things and generally looks out for the little guy.
Years ago we had similar mortgage and paid it every two weeks(biweekly, or 26 payments per year), but we were continually reminding the bank to apply to that extra portion directly to the principle. They would have it going right for a while, then some new clerk would screw it up again.

RickM · RickM's Garage

Why not make one extra payment at the end of the year. Also, it's less of a hassle than adding a little extra each month. Why? Because the lending institution may not apply the extra payments towards principal....no matter what you request. Have fun straightening that mess out. It's easier to track one extra payment than 12.

Porsche-O-Phile · Porsche-O-Phile's Garage

Quote:

Originally Posted by jorian

Caveat: I am a mortgage broker working in Vancouver, BC

With all due respect to those posting here:

The Wells Fargo guy is full of it. The moment your payment lands in their account, it starts to accrue interest. The mortgage documents must disclose the terms of the contract and should include a section on priveleges (making extra payments - early payout etc). Maybe you aren't allowed to make extraordinary payments. Maybe the mortgage is securitized (sold after funding)

Most mortgage payments are calculated semi-annually and not in advance. This means it compounds twice per year and is due at the end of the month rather than the beginning.

Also if you choose a 15 year amortization, you are locked into paying that higher amount. Not a good thing if you suffer a financial setback. Set up the mortgage on a 25 year amortization but schedule your payment size to mimick that of a 15 year amortization. If, at some future date, you need a lower payment you can fall back to the contracted minimum payment. With many institutions this also creates a possible "payment holiday" where any payment over the contractual minimum counts towards future payments. KInd of nice if you want to skip a payment around the Christmas holidays or if things tighten financially for you.

This is good advice, although I'd disagree with the "15 year or 20 year only" part. That only works in situations where people are buying in a "normal" market (which most of the U.S. is not in), people are fabulously wealthy and have huge amounts to put down and earn exceptionally high amounts relative to the price of the property or they're buying a very small place such as a vacation home outside their area.

The reality is most people HAVE to go 30+ years now JUST to barely afford the extremely overpriced costs. When things stabilize in a few years and prices have dropped 40-50%, then this will be useful advice for most people. Until then, it only applies to lotto winners, trust fund babies or those buying their 5th or 6th property with a ton of equity $$$ to throw at the purchase. It certainly doesn't apply to "normal" buyers - especially first-timers.

That said, I completely agree with the "overpay" strategy. It's always best to give yourself the flexibility to cut back monthly expenses when needed due to an unforseen bill, layoff, etc. Just make sure when you sign up that there's none of this "prepayment penalty" crap. You can use the same logic for car payments, credit card payments (who ever pays the minimum on those things anyway?) etc. The downside is people who know they have this extra "cushion" built in may either (1) cut into it and revert to paying minimums (or close to them) even in good times so they've got extra play money and (2) overextend themselves saying "Oh, I can go buy those jet skis (or whatever) because I'll just stop overpaying on the house, the car and the student loan". Either scenario is bad. It only works for those who are disciplined, but it works very, very well for those who can do it. AND it'll bolster your FICO score quite a bit.

RANDY P · RANDY P's Garage

it's a lot easier just making a double payment once a year, same thing. No fees, and much, much easier to track the balance owed with that method.

rjp

motion · 11-05-2007, 06:17 PM

The latest issue of Men's Health has an article on how to retire early, yadda yadda. It mentioned that you should always pay your mortgage on the 1st, because otherwise the bank will charge you interest on the unpaid balance after the first. I have a LOT of mortgages, so this set me into panic mode, as I have never heard anything like this before. Glad to hear (and reaffirms my hunch) that its false. Whewww

legion · 11-06-2007, 04:14 AM

I pay my mortgage between the 1st and the 15th (when it become past due). Why would I give my money to the bank early?

Because this is my first house, I also had to do escrow. Every year, the bank underestimates my property taxes (by $100-$300). Every year I'm sent a letter telling me that I can pay the difference immediately, or I can have the deficit spread over my 12 payments for next year interest-free. (Illinois State Law: if the bank underestimates escrow expenses, they have to provide an interest-free loan on the difference. If they overestimate, they have to refund with interest.)