Stepping Up Mortgage Payments Can Mean Big Savings

Q. I work in a large office. One of my co-workers has a part-time job where she sets up biweekly mortgage plans for homeowners. She showed me how I can cut my 30-year mortgage down to about 20 years and save thousands of dollars of interest. The catch is her company will convert my mortgage into a biweekly loan and a national bank will automatically withdraw a loan payment from my checking account every two weeks. But it will cost me $475 to set up this program. Do you think it is worth it? Is this plan a scam?

A. Why pay someone else to do something you can do for yourself? There are many biweekly mortgage-conversion programs being marketed. It is true you can save thousands of dollars by paying off your 30-year mortgage as if it were a 20-year mortgage. Better yet, if you can afford the increased payment you could pay off your mortgage in 15 years and save thousands of dollars more.

To illustrate, suppose you have a $100,000 home loan for 30 years at 10 percent interest with a $877.58 monthly payment. If you want to pay off that loan in 20 years, increase your monthly payment to $965.03. However, if you prefer to pay off the mortgage in 15 years, the monthly payment will be $1,074.61, or almost $200 per month more than you are now paying. The savings will be considerable.

But you don't need your co-worker's help to do this. Just ask your lender how much you need to increase your monthly payment to pay off your mortgage in the number of years you desire.

The idea behind the biweekly mortgage plans is you make 13 monthly payments each year instead of 12, thus paying off the loan in just over 20 years. But why pay someone $475 to set up the plan and let a bank earn huge profits on your money while it is being accumulated for the 13th payment? Since your mortgage is not really converted into a biweekly loan, the bank which withdraws money automatically from your account profits handsomely while holding your money.

Is this a scam? Probably not. But in my opinion you don't need to pay $475 to your co-worker. All you need to do is increase your monthly payment, with that extra amount reducing your mortgage principal balance, to pay your home loan off more rapidly.

Q. After reading your excellent columns for some time, my husband and I have decided to buy and fix up run-down houses in our city. My husband retired a few months ago and he is already tired of playing golf every day. He told me hanging around with those old men on the golf course is very depressing. Since our area has many run-down houses which we can buy and rehabilitate, we think this will be the perfect investment for us. Do you think we should form a corporation to limit our liability?

A. No. There are many drawbacks to corporate ownership of real estate, especially for small investors. Taxwise, you won't be able to enjoy all the tax deductions available to individual investors. As for limited liability, just carry a $1 million or more umbrella-liability insurance policy, and liability coverage on each property.

There is no more satisfying and profitable activity, if you do things right, than fixing up run-down houses. Incidentally, an outstanding book to read on how to fix up houses is ``Housewise'' by Suzanne Brangham, available in stock or by special order at local bookstores.

Q. I own a house which I have had listed for sale more than three months. The asking price is reasonable, based on comparable sales, but I haven't had any good purchase offers yet. There is no mortgage on the house, so I can be very flexible. Some time ago I recall you said a lease-option can get action on any house. How should I advertise my house on a lease-option?

A. Just run my famous classified ad under both ``houses for rent'' and ``houses for sale'' in the newspaper want ads. Pay extra to have the first line in big bold type such as: ``$5,000 MOVES YOU IN! Lease with option to buy. Half your rent applies to down payment. Beautiful 3 BR, 2 BA home, family rm. Great neighborhood. $1,500 per month. Call Mark at 999-9999.''

Then stay home and get ready for your phone to ring. Or do as I do and don't list your phone number, but just say in the ad ``Open Sunday 1-3 p.m.'' and include the address. Unless you get greedy and charge too much for the non-refundable option money or the rent, you will have lots of action on your house.

Q. I have a large trust account at a major bank. The trust officer sent me a prospectus on an out-of-town apartment building limited partnership offered by an unknown syndicator. I can invest $25,000 or $50,000 and the yield is projected at 16 percent, but the syndicator will take half. What do you think of this 10-year investment?

A. Not much. Frankly, I am very surprised a bank-trust officer would recommend such a highly speculative investment far from your home at such a low yield of 8 percent. You can do better than that in a bank CD.

The days of real estate limited partnerships were killed by the 1986 Tax Reform Act, so such investments are rarely offered today. But perhaps you are a very wealthy man who can afford to lose $25,000 or $50,000 petty cash. If so, don't say I didn't warn you about the high risk.

(Copyright, 1990, Tribune Media Services Inc.)