Experts say these programs can work for the well-heeled, but for most, putting a house on cards is as financially flimsy as a house of cards.
For consumers, credit cards and home mortgages used to be like oil and water: They didn’t mix. However, some programs rolled out recently by credit card companies are starting to blend the two.
Two companies have begun to let customers pay their mortgages with credit cards; other companies have instituted rewards programs that allow customers to apply rewards points toward their mortgages’ principal balances.
While such programs can provide significant perks to conscientious, well-heeled consumers, experts warn against leaning too heavily on such programs. For most, they say, a house on cards is as financially flimsy as a house of cards. “For every borrower who could actually benefit from this kind of program responsibly, there will likely be five more who should avoid it altogether,” says Lisa Peterson, vice president of Texas lending for Shelter Mortgage LLC.
Put your house on plastic
The American Express program allows customers with prime mortgages at certain companies (currently, just IndyMac) to set up automatic payment plans with American Express when refinancing or closing on homes. The program costs $395 to set up.
CardIt, which launched in September 2007, offers a variation on the theme: for a fee of $19.99 plus 2.49 percent of the mortgage payment, users can make one-Fparty services that shift the card fees back to the consumer can profit by offering credit card payment options.
Proponents argue that the smart consumers can benefit, too. Not only do consumers build up their rewards quickly by putting mortgage payments on credit cards, they have a fallback plan during short periods of financial difficulty. CardIt founder Philip Mikal says his company’s service is ideal for small business owners who get substantial but irregular payments from their clients. “We’re seeing the majority of people using it as a cash management tool to offset problems when unexpected things come up,” he says.
Eric Tyson, a syndicated personal finance columnist, says the extra breathing room that such services can provide may make sense for some people. “Making your mortgage payment on time is important,” he says. “Fall behind on your mortgage payments and you can end up in foreclosure.”
For those who have good credit scores, a healthy cash reserve, and an ability to pay bills on time and in full, the American Express program can pay off handsomely. Assuming that each dollar spent nets a point worth one cent, the break-even point is $39,500. Someone with a $3,300 mortgage would start profiting after just a year; for someone with a $1,650 mortgage, the payoff would begin after two years.
That said, it’s easy to get into trouble with a credit card that allows you to rack up significant charges each month.
“People should ask themselves their motivation for doing this,” says Tyson. “This isn’t something you’d want to do if you carry a balance. If you want to sign up to make sure you don’t pay late, you might just want to ask your mortgage provider if they can set up an automatic payment system in which money is drafted from your bank account.”
The programs prepayment penalty may mean you’re also on the hook for sizable fees if job relocation or other circumstances force you to sell your house shortly after you buy it.
Even if you do pay the balance, just having a few thousand dollars on your card may ding your credit score and make it more difficult for you to obtain competitive rates on future loans. If putting your mortgage on a credit card means you’ll surpass 50 percent of your limit, that could negatively affect your credit score.
Tyson says programs such as those from CardIt and American Express can give current and future homeowners the opportunity to look at their financial situations holistically. “If you’re using such a program because you’re struggling to pay your monthly costs, it’s time to do something about the underlying problem,” he says. “Putting your mortgage on a credit card can help put the fire out, but you need to know how it got started in the first place.”
Make your last payment
The new credit card programs for mortgage payments are not the only ways to put your house on plastic. If you’re in the final months or years of a mortgage and you have a card with a limit greater than the balance of your loan, paying off the entire loan with a credit card check or cash advance is an option.
For people who have a high interest rate on their mortgages and much lower ones on their credit cards, it’s an option that makes sense. Though homeowners forgo tax benefits by shifting their home loan to credit cards, those benefits are likely to be fairly insignificant, since the final few mortgage payments will be almost all principal and very little interest.
You’ll also have to consider any fees from the transaction: Some cash advances can cost 4 percent of the total advanced, which may offset any savings from the switch. And paying late just once may hike up interest rates to a higher level than the mortgage was at the outset.
As always, says Tyson, the key is to crunch the numbers before you jump into anything. “You need understand the costs that are associated with a decision,” he says. “You want to make sure they don’t wipe out the value of the benefit.”
Pay down principal with rewards
If you’re not eligible or don’t want to pay your mortgage by credit card, there are rewards programs that can help you have an impact on your mortgage. Several card issuers have started offering rewards programs in which points can be redeemed not just for merchandise and gift cards, but for payment on the principal of your mortgage.
With the Citi Home Rebate Platinum Select MasterCard, for example, cardholders earn a 1 percent rebate on all eligible purchases. Once a year, the rebate is sent to your mortgage company and applied to the principal. Similar programs can be found for specific mortgage companies, including the Countrywide Rewards Platinum Visa ($50 payment to principal for every 2,500 points), and the GMAC Mortgage Equity Rewards MasterCard ($25 payment to principal for every 2,500 points).
Paying down principal is better than paying ahead on your mortgage: By paying down the principal you lower the total amount of interest you pay, and you may be able to shorten the duration of your mortgage by months or even years on a typical 30-year mortgage.
For consumers who are tired of airline miles or find their rewards gift cards gathering dust, this can be an ideal way to cash in on rewards. However, Lynnette Khalfani Cox, author of “Zero Debt” and “Your First Home,” says if the rewards program is only going to encourage you to spend more on things you don’t need, it’s best to avoid it.
“Consumers should recognize these programs for what they are: marketing devices to entice people to become more active consumers,” she says. “If you continue to spend as you normally would and pay the card off promptly, you’ll reap the benefits. But if you spend more, there probably won’t be a financial advantage.”
4 questions to answer before joining
Using a credit card to pay the monthly mortgage may be an appealing idea for many, but the program will be most effective for a relatively small number of people. According to experts, you should ask yourself these four questions before you sign up for a program. If you can’t answer yes to all four, it’s probably best to pay your mortgage the traditional way.
1. Will I be able to pay off the balance in full each month?
Monthly interest charges will rack up quickly on high-cost items such as mortgages. The interest on your home mortgage can be written off on your taxes, but any additional interest charges you accrue on your credit card cannot. If you carry a balance from month to month, the convenience will be too costly to be worthwhile.
2. Do I always pay all my bills on time?
Even one or two missed or late payments can cause interest rates to spike, and may cost you hundreds of dollars in interest.
3. Will adding a mortgage payment to my credit card negatively affect my credit score?
If your mortgage payment will eat up half or more of your available credit, your credit score may take a hit.
4. Will I use the rewards?
If you’re always letting your airline miles languish and you can’t remember the last time you redeemed a gift card, it’s probably not worth it to sign up.