Homeowners being inundated with information about saving money through biweekly mortgages might want to look twice before signing up.
These increasingly popular programs do save borrowers money. They can shorten the life of a 30-year mortgage by more than seven years, eliminating tens of thousands of dollars in interest.
But the programs might not be all that some homeowners expect.
With a typical biweekly mortgage, a lender debits a borrower’s bank account twice a month. Because there are 26 two-week periods each year, borrowers make the equivalent of 13 payments a year–including one whole payment toward principal, which reduces the interest paid.
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However, borrowers do not benefit from making the first half of their monthly payments early, something that would further reduce interest payments. Lenders hold onto that money until the single monthly payment is due.
Lenders say they have no choice, because firms that buy their mortgages such as Fannie Mae and Freddie Mac do not have an appetite for mortgages with true biweekly payments.
Clyde Ensslin, a Fannie Mae spokesman, said his company would accept mortgages with mandatory biweekly payments. But it would not pay lenders as much for those loans, because they would not fit easily with other mortgages that Fannie Mae sells to investors.
Cleveland-based National City Corp. is piloting a Fannie Mae program in Illinois that debits borrowers’ accounts when they are paid, meaning some people will be debited each week.
The program is meant as a budgeting tool, said Linda Harris, a sales specialist at National City, which, unlike some lenders, pays 2 percent interest on the money it holds for payment each month.
Bank profits sliding: As if falling stock prices and plummeting market shares were not enough, banks are faced with their lowest profitability in almost eight years.
The industry’s average return on assets, a key profit measure, fell in the second quarter to 0.99 percent from 1.25 percent in the year-ago period, the Federal Deposit Insurance Corp. reported.
It is the first time since late 1992 that the industry’s ROA has fallen below 1 percent, a benchmark for healthy profits. The FDIC cited unusually high expenses at several large banks as the main culprit for the recent profitability slide.
“The FDIC has been saying that yellow caution lights are flashing,” said FDIC Chairman Donna Tanoue. “This report shows that some are flashing brighter.”
Chicago connections: Firstar Corp.’s plan to acquire Minneapolis-based U.S. Bancorp for $19 billion won’t strongly impact Chicagoans. The deal boosts Milwaukee-based Firstar’s market share in the Chicago area to just 1.74 percent from 1.38 percent.
But history buffs might be interested to know that both banks helped change the landscape of banking on Michigan Avenue.
In 1994, Firstar acquired Chicago’s First Colonial Bankshares Inc., which owned Michigan Avenue National Bank. The following year, U.S. Bancorp–then called First Bank System Inc.–bought Boulevard Bancorp Inc., which was based in the Wrigley Building.