The Great Mortgage Money Shuffle

For as long as I can remember, I have been paid bi-weekly.  This has generally worked out well, because I could pay half the bills early in the month with my first paycheck, and the other half of the bills with the next paycheck.  However, with a huge mortgage payment of almost $1400 due on the first of each month, it can put a wrinkle in the whole process.

The obvious solution is to leave about $700 in the bank from the first paycheck (Don’t spend it!), and then go ahead and add another $700 from my second paycheck and send the mortgage payment in.  However, when your family has well-documented issues with tracking their spending, keeping $700 in the bank can be quite challenging.  When we first bought this house, I tried that method for several months, but we always seemed to be completely broke after making the mortgage payment at the end of the month.

Many mortgage companies will let you send in half a payment, twice a month.  Their systems are intellegent enough to figure out that the two payments together will take care of your principal and interest.  Some of these companies actually encourage this by allowing the first (half) payment to lower your total amount due, and thus leading to a smaller interest calculation.  Unfortunately, my mortgage company doesn’t offer this option.  Instead, they direct their customers to something called the Equity Accelerator Program.  I utilized this program for a number of years until we refinanced last fall.

The Equity Accelerator Program advertises itself as a way to pay your mortgage down more quickly.  Basically, they will withdraw money from your account on scheduled intervals, and will hold the money for you in a “staging” account.  The selling point of the program is that in addition to the amount needed for your mortgage payment, they withdraw an additional 1/12 of a  payment. The net effect is, over the course of a year, you will be making 13 payments instead of 12, and you will drive your principal down more quickly.  This concept certainly isn’t a bad idea, but there is a major catch to the way that they implement it.  They charge $50 to start the program, and then $9 per transaction!  Those are some hefty fees for something that you could just as easily do yourself.

Back before we had our financial epiphany and started this website, the idea of spending a little bit of money to save a little bit of money seemed like a reasonable thing to do.  But the new Jefferson decided that instead of utilizing the Equity Accelerator program, I was going to make my own.  I opened a second checking account with ING Direct, and set up automatic transfers from my day-to-day checking account to my ING “staging” account each payday.  Of course, one of the beautiful things about dealing with ING, is money that is sitting in my checking account actually collects interest.  I then set up my mortgage account to automatically pull from this ING account on the first of the month when the mortgage was due.  The great mortgage money shuffle had been set into motion!

After experimenting with this for a few months, I realized that this was working out very well.  I decided to increase the amount of money being automatically transferred on payday by half a car payment, and half a credit card payment.  A little spreadsheet tracking ensured that the math would work out, and I would have the correct amount of money in my account at all times to cover these payments (see below).

In the end, I elected not to “accelerate” my mortgage payments, and to instead just pay the amount due each month.  It seems pretty foolish to spend extra money paying down the mortgage at 5% interest, instead of directing that money to a credit card payment at 20% interest.  Once we are out of credit card debt, then will be the time to start accelerating those mortgage payments once again. And I can easily direct the $350 automatically being thrown at credit cards towards mortgage principal, if I am so inlcined.

Below is the specifics of how my “shuffle” program works.  The balance shown in the right column is what will be in the “staging” account at any given time:

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