MORTGAGE ACCELERATION

Rick Schulz: ‘Periodically my mortgage company offers a deal to set up bi-monthly payments, automatically transferred from my bank account to theirs. The advantage: it pays down the principal a little faster and thereby saves interest. However, they charge a one-time ‘set-up’ fee of nearly $300, and a monthly fee of $4.95 to accept the bi-monthly payment. I would like to pay down the mortgage faster but the fees seem high. What do you advise?’

☞ Prepaying principal is a good way for many to save. But having to pay these big fees? Ridiculous. Why not send an extra $1,000 or $2,000 payment once a year (clearly marked, ‘to pay down principal on Loan #1234567890’ on the check and in a cover note, keeping copies in your file)? That would accomplish roughly the same thing – making the equivalent of 13 monthly payments a year instead of 12, and cutting the term of a 30-year 5% mortgage to just over 25 years. (Back in the days of 10% mortgages, prepaying principal this way cut the term to 21 years. The higher the interest rate, the greater the advantage in not paying it.)

There’s no magic to this. Whatever rate of interest you’re paying on the mortgage is the rate you ‘earn’ on the principal prepayments. But it’s a good safe way to earn that rate, and brings you ever closer to owning your home free and clear (or building equity in it for your purchase of the next one) – a nice feeling.

Check with your bank to be sure you are allowed to make principal prepayments without penalty.

UMBRELLA COVERAGE

David Baker: ‘Even though one may not have vast assets to protect, who wants to deal with a lifetime of court, liens and litigation? You don’t have to be a millionaire to do a million dollars worth of damage. Why not plan for accidents that can be major instead of minor? And what about living in an apartment on the 18th floor and letting your tub overflow to the ground floor? Wanna deal with paying for that that on your own – let alone the litigation? No one sues for $250,000. anymore. A $1 million in umbrella coverage even if you own a vehicle is just $200-or-so/year in New York City! (And if you need to “up” your underlying limits in order to obtain an umbrella, you probably needed to do it anyway for the sake of good basic coverage. As you mention, coverage gets cheaper as the limits get higher.’

Erich Riesenberg: ‘Regarding an umbrella policy, one interesting excess umbrella policy is from a Berkshire Hathaway company.’

☞ Yes. Click here. This is probably a better deal for Warren Buffett than for you, but he’s got to eat, too, so I don’t begrudge him the profit. Basically, Berkshire will double whatever umbrella coverage you have now for 90% additional premium. So if you’re paying $200 a year for $1 million umbrella coverage that sits atop your basic $500,000 automotive and homeowner’s liability coverages (say) . . . well, Berkshire will, for $180 (90% of $200), write an additional $1 million in coverage that kicks in if all else has failed to adequately cover you.

Berkshire has no sales or underwriting cost to speak of, because you came to them direct from the Internet, and because they know someone else, whose risk is greater, determined you were worth insuring for $200. Slim as the chances are that you’ll need the first $1 million in extra coverage, they are even somewhat slimmer you’d need the second. Ah, but if you ever did, you’d be very glad you had it.

(Before going this route, ask your own umbrella insurer what their charge would be to double the coverage.)

Tomorrow: I bring music to your life!

 

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