Bank charge of the day, mortgage-payment edition

By Felix Salmon
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.

20 comments

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I’m wondering how Citi’s shareholders can allow idiots to run their company. This service is a complete ripoff.

You might compare/contrast this to the ING Direct Easy Orange Mortgage terms.

Posted by donhalljobs | Report as abusive

Good piece Felix. I’m a mortgage banker and I’ve always been against fees for biweekly plans, but the savings of a biweekly schedule is real. Here’s a piece I did last year explaining how borrowers can get the benefit without the fees: http://thebasispoint.com/2011/05/01/biwe ekly-mortgage-payment-plans-ripoff-or-sm art/

Posted by TheBasisPoint | Report as abusive

Felix? Seen this? http://www.nakedcapitalism.com/2012/01/y es-virginia-brokerage-firms-keeping-clie nt-ripoff-provisions-in-customer-agreeme nts-in-the-wake-of-mf-global.html
Fun stuff… (Brokerage Firms Keeping Client Ripoff Provisions in Customer Agreements in the Wake of MF Global)

Posted by Foppe | Report as abusive

Citi is hardly the first with this product. It’s been around at least three decades.

Posted by RZ0 | Report as abusive

PNC offers the same stupid plan. We got a letter every week or so for the first two years of our mortgage.

The simpler solution is a dedicated checking account for the mortgage…one with no fees if you have direct deposit. I have (over) half of my monthly mortgage payment deposited from each biweekly paycheck. Set up automated payments and viola…the same effect.

Posted by DMC-Indy | Report as abusive

What I don’t understand from the story is whether the mortgage holder is actually getting the benefit of biweekly payments since Citi is remitting the monthly.

Posted by SaulTann | Report as abusive

But remember, we don’t need to get a Consumer Financial Protection Bureau up and running in some kind of unprecedented power grab, with unchecked, almost dictatorial powers to regulate business in America with little or no oversight from the peoples’ representatives in Congress.

Posted by Curmudgeonly | Report as abusive

Try that in Australia.

After being stoned by your customers and pillioried by the government, the regulators and news organisations would be after you.

Weekly, fortnightly, whatever payments – is always free to give the bank cash. Note, most banks here is Australia hold the mortgages themselves.

Posted by tqft | Report as abusive

I’m not surprised that they charge you to set up a regular biweekly payment, but I am surprised that “CitiMortgage has a rule that it will only accept a full payment once per month”. I believe that means this is a nonconformant mortgage, i.e. Fannie and Freddie should be unwilling to underwrite it, because conformant mortgages allow unlimited prepayment. Perhaps it is okay for them to only accept a payment against interest once a month, but you should be able to make principal payments as often as you want.

Posted by DCWright | Report as abusive

Once I noticed that Chase Manhattan Bank was charging me a monthly “Inactivity Fee” on my checking acct (think how Orwellian that is), I figured anything is possible with these Banks.

I say, break ‘em up — before they ruin us.

Posted by leoklein | Report as abusive

If you don’t like it, then don’t bank there. It is really and truly that simple. Don’t do business with Citibank. Don’t do business with BoA. Find a local bank, a credit union, some place where they treat you honestly.

Anybody who still patronizes a big bank surely knows the game by now and has no excuses if they don’t like the rules.

VOTE WITH YOUR FEET!!!

Posted by TFF | Report as abusive

I think I’d also like to hear more information about only being able to pay once per month. What exactly does that mean?

Posted by spectre855 | Report as abusive

TFF, moving savings, checking, money market, etc to a small institution is definitely a great thing to do, but there isn’t much point in going out of your way to move your mortgage to a small bank because they will likely sell it to one of the big banks in a heartbeat. That’s what happened when we refinanced with a small bank a couple of years ago.

Posted by trnc | Report as abusive

This is absurd and assumes a person has zero cushion in their bank account and has no concept of opportunity cost. Given the math there is no sane reason to pay bi-monthly. The borrower would be better off paying once per month and electing to prepay a few dollars extra which would get one back to a 25 year plan. So you pay a big bill at the beginning of the month, in the middle of the month you don’t pay and your monthly finances are back in line. This plan makes no sense…

Posted by Sechel | Report as abusive

This is nothing new. I’ve been shredding those offers for years.

Posted by BboBob | Report as abusive

FWIW, GMAC doesn’t charge for this. Indeed, you can make payments every day if you want to…though i think they only apply the payments to the mortgages 2x per month. (From what i can tell.)

Posted by amr2002 | Report as abusive

Why in the world ANYONE does business with Citibank, is a complete and total mystery to me.
When did the business world evolve from “The customer is always right” to the new business model: “Suck every last drop of blood out of their veins”?

Posted by dhunger | Report as abusive

I’ve been laughing myself silly over these arrangements for ages. I understand why people enroll in these things, though.

First, some people are bad at math.

Second, some people understand the math, but still find it a valuable committment mechanism.

But look, the “enormous amount of hassle” it takes to replicate this thing on your own?

It’s called a BUDGET. There’s really nothing more to it than that. Write your budget around two bi-weekly paychecks, and you get a “bonus” paycheck twice a year. We generally use one for summer vacation and one for Christmas, but if you want to be virtuous and use them to accelerate your mortgage, go right ahead. Who’s stopping you?

For anyone on Earth who isn’t living with a budget, keeping track of expenses, and balancing the books at the end of the month, the very best financial advice you can get is to start doing that right now. No gimmicky program will ever do as much good as that; and once you’re doing it, you find you don’t need the gimmicky programs anyway.

Posted by ckbryant | Report as abusive

When my husband and I bought a truck, the dealer tried to sell us on a third party service to do much the same, though the fees were lower. Seemed crazy to me at the time, since we could, and do, replicate the process on our own. But Citi’s kicker of preventing you from replicating it is obscene.

Posted by AbigailCField | Report as abusive

This is really off topic, but Citi has a branch here in Bangkok. About ten or twelve years ago a friend of mine was working for a U.S. State Department program helping to resettle illegitimate children of American servicemen, so he worked alternate months in Bangkok and Hanoi. A Vietnamese asked him to help her with a transfer of money to a branch of CitiBank in Texas. My friend went to the Bangkok branch, and after several hours of trying to find someone who knew how to do this thought he had succeeded. A couple of months later the Vietnamese lady told him the money still had not arrived in Texas. My friend went back to CitiBank, and after about six hours of looking for the right person was told that the money had not been transferred because no one at the branch knew the ABA code for the branch in Texas. When he asked why they had not notified him of their failure, they said they did not know how to contact him. He pointed out that the request for transfer had included his telephone number. Eventually, I believe, while sitting with the manager in his office he took out his cell phone and called the branch in Texas and got their code. They did not, of course, offer to reimburse him for the extra expense.

Posted by Acharn | Report as abusive