Citibank program helps pay down your mortgage faster
Citibank is offering a new niche mortgage that could help some people pay their loan off faster.
Here's how the new Offset Mortgage works:
In order to qualify, you not only have to get this mortgage from Citi, but you also have to have a Day-to-Day Savings Account with the bank.
The bank pays a special form of interest — Citi calls it an "offset reward" — each month on your savings account. But rather than returning that interest to your account, it's instead used to pay down the principal on your loan.
The rate you earn on your savings account is equivalent to the interest rate on your mortgage. In other words, it's a much higher yield than any deposit account available today.
And the rate is locked for the life of the loan.
In an example provided by Citi, if you have a $500,000 loan at a 3.75% interest rate and $50,000 in your savings account, the bank will credit you with an offset reward of about $156 a month ($50,000 x 3.75% = $156.25 per month).
The $156 shows up on your next mortgage statement as an additional principal payment.
This does count as interest income, and Citi reports your credits to the IRS.
In this example, the customer will pay off his loan about two years faster, saving more than $32,000 in interest over the term of their mortgage, assuming he keeps the $50,000 in his account the entire time.
Although there are no minimum balance requirements on your savings account, your offset reward cannot be more than 10% of the unpaid mortgage balance each month.
One thing to note: The offset credit doesn't reduce your minimum monthly mortgage payment.
While this product does seem overly complicated at first, I think it's a pretty clever idea. Imagine getting credit for making additional mortgage payments, saving you money in the process, without actually having to make those payments.
Not only that, but you'll essentially be earning 3.75% (or whatever your mortgage rate is) on the money in your savings account.
There's also no additional fee for this program. Many so-called biweekly mortgage programs, which enable you to pay down your mortgage faster by making additional payments, often charge hundreds of dollars.
Interest rates are the same as for regular Citi mortgages that you might qualify for.
So what's the catch?
For one thing, this only works if you park a lot of money in your Citi savings account for a very long time. While there are no penalties or restrictions on your adding or withdrawing money from your savings account, the less you keep in your savings account, the smaller the offset credit.
For example, if you keep only $10,000 in the bank, your credit will be reduced to $31.25 a month.
To be eligible, your mortgage must be set up to receive automatic monthly debits from a Citibank checking account.
It's also only available to customers in the New York tristate area. Depending on how successful it is, a bank spokesman says it may be rolled out to a larger audience.
One last caveat: When shopping for a mortgage, your main considerations should always be paying the lowest fees and interest rates that you can qualify for.
Compare Citi's offer with those from at least four or five reputable lenders, including those offering mortgage interest rates, in our extensive database.