Bank charge of the day, mortgage-payment edition

January 5, 2012

It makes sense, for lots of reasons, to make your mortgage payment on the day you get paid. Most salaried Americans, however, get paid every two weeks. Which means, to all intents and purposes, that you need to be able to make one mortgage payments out of every two paychecks. And that in turn raises an intriguing possibility: if you take half of your mortgage payment out of every paycheck, you’re going to end up making 13 mortgage payments a year. Which will pay down your mortgage faster, and could save you thousands of dollars.

Enter the ever-helpful Citibank, with a product which does just that. It’s called The BiWeekly Advantage PlanĀ®, and it’s essentially an automated mortgage payment, of half your monthly mortgage payment, which comes out of your account every two weeks. Easy. There’s even a Savings Calculator to see how much less money you might be able to end up paying.

And then, of course, there’s this:

There is a one-time non-refundable enrollment fee of $375 and a transaction fee of $1.50 for each draft.

That’s an up-front fee of $375, plus another $39 a year, just for the privilege of making your mortgage payments every two weeks rather than every month.

I asked Citi about this, and got a statement back from spokesman Mark Rodgers:

The BiWeekly Advantage program is completely optional. Borrowers may make additional payments on their principal balance independently anytime they like. Some customers, however, prefer the convenience of a disciplined payment plan that is administered for them. The one-time enrollment fee is reasonable and competitive for a service that requires processing more than double the number of standard payments and can save the customer many thousands of dollars over the life of the loan. We find high customer satisfaction rates among those enrolled in the program, demonstrating that these borrowers appreciate the value proposition of the service.

And it turns out that simply setting up Citi’s own online banking to make the same payments would not do the same thing after all. The reason is that CitiMortgage has a rule that it will only accept a full payment once per month. If you want to pay every two weeks, well, you can’t.

Which helps to reveal another fact: it turns out that Citi is making significantly more than $375 plus $39 per year for this service. Here’s the FAQ:

Payments are remitted to your mortgage company monthly.

The payments are made in arrears, of course. You make your half-payment, and then wait two weeks, and you make your second half-payment, and then the two are bundled up and sent off to the mortgage company (which in nearly all cases is CitiMortgage itself) as a single monthly payment.

Which means that for roughly half the year, Citibank is sitting on an amount of money equal to half your mortgage payment. That money has left your account: it’s not yours any more, and Citi can do with it as it pleases. And Citi gets the float from all that money until it gets around to sending it off to pay off the mortgage.

Basically, Citi is getting a big advantage from you making half your mortgage payment two weeks early — and then it has the chutzpah to charge you hundreds of dollars for the privilege. They even charge you $1.50 per extra transaction, as though that costs them any money at all. (It doesn’t.)

I can still see why people might want to sign up for this service: Citi basically makes it impossible to replicate it on your own, without going through an enormous amount of hassle. But the price is eye-watering, especially given that the service would make Citi money even if it were free. Think for a minute about all the things you can buy with $375. Then ask yourself how Citibank can possibly justify charging that much for this very small, if handy, service. It defeats me.


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