This one is new to me...

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Submitted by Next in Line on January 17, 2007 - 6:44pm

I'm sure most on this board have heard of "rapid mortgage payment plans". These are usually bi-monthly payments - they generally same 5+/- years of time (and interest payments). I recently came in came across one the purports to allow for a mortgage pay-off in a soon as 12 - to 15 years using a HELOC as a primary checking account. All expenses (including mortgage) are paid out of this HELOC and your income is regularly deposited to pay down the HELOC. There’s some complicated software that signals you to make periodic additional payments to principal. Has anyone else heard of this? Tried this? Does it work? Legal? What are the shortfalls in this approach? Given peoples debt levels this – on the surface – seems like a good option for those with some with equity ( a real equity builder loan). I am considering this myself - any input is greatly appreciated.

Submitted by lindismith on January 17, 2007 - 10:47pm.

We're all pretty fiscally conservative on this board, so I would guess most of us have actually not heard of this type of loan.

If the loan comes with a software program, I'd say it's pretty complicated, and buyer beware!

We occasionally have some mortgage brokers on this board. They disappear pretty fast though when we start asking for stories from the 'good ole days' (last year). But, maybe one will chime in and tell you the truth about this type of loan.

Submitted by PoppaKoppa on January 18, 2007 - 9:01am.

HELOC's to Money Merge Accounts

The proposal of rapid paydown of mortgage principal makes alot of sense, just like on-line bill pays... move that "mortgage banking interest float" into YOUR "home equity pocket" as fast as possible!

Their consumer budgeting software system supposedly was tested for two years by 400 "happy comsumers" in the Salt Lake City area... Front load fee of $3500 for membership and on-line serving seems high for homeowners to pay.

I am checking thru to "the founders" for actual/local users. I am an experienced Realtor, Loan Officer and Investor with skepticism. Please keep me posted. charles@poppakoppa.com

Submitted by svferris on January 18, 2007 - 9:12am.

A realtor mentioned this option to me when I was considering buying a house a couple years ago. Here is a site that has more information:

http://www.cmgfs.com/partner/#

I think the idea behind it is that your money normally sits in your checking account earning little or no interest in preparation for paying upcoming bills. Instead, you have your direct deposit go into a checking account that is tied to your mortgage payment. As the money sits in there, it accrues a decent interest rate, which helps to automatically pay down the mortgage.

This will only really work for people who have more money coming into the account than leaving it. A direct deposit automatically pays down the principal, but should you need to then pay a bunch of bills, it's the equivalent of taking out a HELOC.

Seems like an interesting idea and I'd love to hear from anybody that has actually looked into or had one of these.

Submitted by no_such_reality on January 18, 2007 - 9:20am.

It's shell game with a little bit of arbitrage.

Basically, the only way to pay off a 30 year loan in 15 years is to make 40% larger payments.

There scenario requires two basic things, over 20% equity in the home and over 10% savings rate.

I think that rules out many.

Submitted by FormerSanDiegan on January 18, 2007 - 9:32am.

It's really doesn't have to be this complicated. They are taking a simple arbitrage and making it seem complicated.

A simpler system to pay off debt sooner:

1. Budget an additional amount (e.g. 5 -10% more) each month towards your debts.
2. Look at all your debts and apply this excess payment to the highest rate debts first.
3. (optional) Keep your checking account near zero, with the balance in money market, ING, or HSBC accounts earning 4-5-5% (as opposed to checking's 2-3%).

Check out the book "Downsize Your Debt," by Andrew Feinberg. I read this over a decade ago. The ideas seem obvious to me now, but it certainly helped me back then.

Submitted by Next in Line on January 18, 2007 - 10:55am.

That's exactly the system. I'd love to know if it works. It seems logical that (and someone maybe no_such_reality) stated that you need to spend less than you earn at least a roughly a 10% savings rate. A little discipline would go a long with this as well. I like the rational skepticism on this board and figured someone could tease out the BS.

Submitted by kicksavedave on January 18, 2007 - 3:40pm.

Or you could just... set a strict monthly budget, stick to it, and send all your excess to the mortgage company with each paycheck... how would this be any different?

It seems some people need to have handcuffs on to save money. Like my wife, who prefers to let the IRS sit on her money and give her zero interest, so she can get a nice fat return in April. I ask her "Why not you keep the money each month, do something productive with it, and turn April 14th into a non event?" She says "I'd just spend it on something"

??? huh?

Anyway, how is sending all your excess to the lender any different than depositing your whole paycheck, and taking back from them what you need each month? I'd rather have the control myself.

Submitted by Next in Line on January 18, 2007 - 6:03pm.

kicksavedave,

You are correct on all points. In reviewing the responses on this board I realize that I might have 2 distinct questions. The first is does this concept of the Money Merge (Using a HELOC as your checking account)work or is it a gimmick. Second is has anyone used one and from what companies (I'd like to explore a known entity rather than and unknown? Thanks.

Submitted by DCRogers on January 18, 2007 - 6:13pm.

I'd be nervous giving most people a direct link between a HELOC and their primary checking account... good intentions aside, it would make it too easy to avoid normal financial crunch-times (the ones that make us perform the needed minor adjustments to our spending habits) and instead cover consumption with a loan.

Submitted by sdcellar on January 18, 2007 - 6:14pm.

Could be my myopic perspective, but I don't see how using a HELOC as a checking account could provide you any benefit whatsoever. HELOCs take your money, most checking accounts earn you at least a little money.

The only way this would seem to make sense was if you had a HELOC already, then yes, it makes sense to try to pay it down as quickly as possible (all the while not really making a dent in your first mortgage). When it's paid off, close it.

So, Next in Line, is the gist of this thing that you obtain a HELOC to get it going? If so, then I would consider it a bad idea.

Submitted by kaycee on January 18, 2007 - 6:53pm.

I think this is a facinating concept. But I agree with others that the hard part would be not "respending" the equity you've already paid down. However, I love the concept on paper. My checking account earns about a 1-2% interest rate. (1.56% last month) On that interest I pay about 33% to Uncle Sam and another 6% to Maryland. (Where I don't even live, but my husband works). So what is my total take 3/4% ? Maybe? I'd much rather save between 6-7% on that money. But this wouldn't work unless you are incredibly disciplined.

Submitted by an on January 18, 2007 - 7:06pm.

I agree, this program is probably designed for the people who are very disciplined. I mean, you have to be disciplined to try and pay off your mortgage early, right? So this definitely is very interesting program if it works.

Submitted by PerryChase on January 18, 2007 - 7:36pm.

I too can't understand how getting a HELOC can save money unless you already have one.

Submitted by no_such_reality on January 18, 2007 - 8:12pm.

PC, it doesn't. If you have a 10% savings rate, redirect that to paying off the home without an HELOC, you actually pay it off faster.

I know they are applying your savings to the loan for one simple reason, if you change the rate of savings on their simulator, the payment shortens. Shortens dramatically. If you change the expenses so there is little savings, it errors and takes 29.7 years.

i.e. If you have a $400,000 loan on the simulator with $120K income and 10% savings rate, you can pay the loan off in 17.2years. Of course, if you just apply that $1000/month "savings" to the loan, you'd actually pay it off in 14 years 10 months. If you double your savings rate to 20%, then you could pay off in 10.9 years. If you actually applied $2000 surplus to loan, you'd pay off in 10.1 years.

If you go in adjust the expenses so there's less excess cash, say only $300/month, the payoff results in 29.5 years (6 months early), however if you'd just pay $100/month more on a $400K loan, you would actually pay it off in 27 years.

Submitted by PerryChase on January 18, 2007 - 8:47pm.

I see now. At first I was thinking why do I need a Heloc? I guess the Heloc is to allow you to "re-access" your money if you need it? The plan seems complicated.

But why do you need THEIR plan? Can't you just make the additional principal payments yourself? With electronic payments you can make principal payment whenever you feel like it. Combine that with a Heloc and you achieve the same thing.

Submitted by no_such_reality on January 18, 2007 - 10:16pm.

It's careful marketing spin. And IMHO, slight of hand and I see spin similar to that of an payment option ARM.

It appears that they're taking your whole loan and rolling it into an HELOC set to LIBOR.

Your spending stays the same. repeat that. repeat that. repeat that.

Spending stays the same. (Note savings isn't spending)

$400,000 HELOC, $10,000 monthly pay direct deposit, $9000 monthly spending.

I crunched a spreadsheet and almost thought they had something then realized I wasn't "spending" my savings into my savings (brokerage). Adding savings as a expense and wallah, balance goes up up up... if the HELOC rate is mere 1% more than your fixed. Even at 6.5% Heloc vrs 6% fixed, it pushes your paid off date to 33 years. If and Helox rate is fixed at the same rate, the floating might save you two years in my scenario. ( I don't that's too likely though)

IMHO, these look worse than an option payment ARM. I wonder if people really realize they are paying more interest to prepay their loan as an HELOC.

As you said, you could more easily open a HELOC, not use it and pre-pay a $100 or so a month more and easily beat this program with lower risk.

Submitted by Next in Line on January 19, 2007 - 11:18am.

My feel is that - as with all things - discipline is the key. The main idea is the company wants to sell its proprietary software at inflated prices and capitalize on a down market. That being a given...

Example:
If I have a 300,000 dollar mortgage and I net 5,000 dollars a month and have fixed expenses of 4,000 dollars per month. My discretionary income is 1,000 per month. I either have or open a HELOC. Month 1: I make a lump sum payment to principal of say 3,000 dollars. Now my HELOC balance is 6,500 dollars (Lump sum payment + cost of software 3,500! – outrageous I know). I then deposit my total income (5,000) as a payment to the HELOC – now the HELOC balance is 1,000 - this is the amount I owe and additional payment towards – but everything else is paid. Month 2 (this schedule is for example purposes only) I don’t make additional payments to principal I just draw fixed expenses from the HELOC and deposit my income as payment to the HELOC. Month 3 I make additional payment to principal of 2,000 dollars. So the idea is without any change to my current standard of living I can rapidly pay down my mortgage – and the overpriced software holds-my-hand through the whole process.

Upon hearing this concept which on the face seemed to the skeptic in me said too good to be true…why wouldn’t this be more widely used? The company says banks don’t what you to know – but that’s what I expect them to say –us against the banks.

Submitted by sdcellar on January 19, 2007 - 11:47am.

You are paying interest on the balance in the HELOC (whose interest rate is higher than the 1st mortgage interest rate). Why in the world would you want to do that? Paying money to save money? They're getting you coming and going (cost of the software and HELOC interest). Why wouldn't you put your money in money market account, earn interest on that and pay your mortgage down?

I just don't get it. I'd say banks are dying for you to know. Perhaps someone can explain this to simple old me.

Submitted by sdcellar on January 19, 2007 - 12:05pm.

Okay, so I finally got off my butt and checked out the link that svferris provided. I see now that you first convert your conventional mortgage to a HELOC.

I ran the simulator and the thing that stuck out to me (beyond the dubious claim of projected savings) was the full 1-percent increase in the interest rate that will be applied to my effective mortgage. Brilliant! Let's pay more interest. That should help me pay off my house sooner! STU-PID.

...and svferris, I'm not knocking you for providing the link. I know you where just trying to be helpful.

Submitted by kaycee on January 19, 2007 - 12:23pm.

I think you are all missing the savings from compounding interest. For example; Let's say that you take out a 100,000 mortgage at 6%. Your payment is $599.95. Here are your first 5 payments:

# Prin Int
1 99.55 500
2 100.05 499.50
3 100.55 499.00
4 101.05 498.50
5 101.56 497.99

If you add just a $100.05 sent principal payment to your 1st payment, you will save 499.50 in interest. Because that $100.05 collects interst for THIRTY YEARS.
If you add just $101.05 to your third payment, you will save another $498.50. Any amount that you can pay off at the beginning of a mortgage, even a small amount, saves you 3 - 4 times that in interest over a 30 year period. So that is how, even having unused money sitting in the account, even for a few days, could save you hundreds when multiplied out over 360 payments.

I have an account where I transfer money every month for my kids' tuition payments. It is my way of turning a 9 month pymt plan into a 12 month. But the money just sits there a lot of the time, earning a tiny bit of interest that I have to pay tax on. I would rather have it sit in a HELOC and save years of intersest for the few months that the money sat there.

The benefit becomes less though the closer you get to the end of the term.

Submitted by sdcellar on January 19, 2007 - 1:53pm.

I can only speak for myself, but I'm not missing the savings based on compound interest. I'm just saying that you won't realize near the benefit by managing this through a HELOC and some silly software.

Even if you wanted to keep an open zero-balance HELOC in case of emergency (like the purchase of a plasma television), you'd do better to put all your paychecks in a money-market account, establish a low-water mark for that account and pay all your expenses out of there including everything you can against your mortgage until it's down to the low-water mark. Then rinse and repeat (i.e. re-fill and pay down).

The scheme hawked here is actually taking advantage of people's lack of understanding regarding loan amortization and compound interest, making it seem like it's the scheme that saves you money rather than simply choosing to pay down your mortgage (and instead the scheme costs you more).

Submitted by Real Buyer on January 19, 2007 - 1:52pm.

how is sending all your excess to the lender any different than depositing your whole paycheck, and taking back from them what you need each month?

The difference is, your money saves you interest while waiting to be spent. Say, you deposit $1000 to your regular checking account at the beginning of the month, and you spend it all at the end of the month. You earn 2%/12=0.16% or $1.60 in the process.
If the same money is deposited in that 6% HELOC account at the beginning of the month, you will earn 6%/12=0.5% or $5 a month.

Multiply that by the amount that enters your checking account each month to get the picture.

Additionally, depending on your tax situation you might be able to save some money in taxes by not paying income tax on interest earned.

The catch is, the interest rate on a HELOC will be significantly higher than that of a regular mortgage. That, and the enormous origination fees effectively turn the whole thing into a bad idea.
It is an interesting model, however; let's hope that one day the associated costs will become more reasonable and it will become meaningful for some buyers.

Submitted by sdcellar on January 19, 2007 - 2:02pm.

Real Buyer-- Another way to think about it is this:

One might infer from your example that it seems like the higher the interest rate of the HELOC, the better your return. I mean why not shoot for a 12% HELOC and get $10 a month!

Of course, as you so rightly mentioned, the higher interest is actually a deal killer. It could possibly work if the margins worked out just right, but I suspect for most consumers, they would simply never pay off this HELOC. How cool is that!

Submitted by kaycee on January 19, 2007 - 5:18pm.

I agree that most people would never actually pay it off. I think the ability to continually borrow money you've already paid down would be too great for a lot of people to resist.

As far as the interest rate though, I may have misunderstood. I thought, like many Heloc's, it was simply tied to the Libor, and therefore would vary monthly instead of being fixed.

Obviously, right now, there is a lot of upside potential. But historically, the rate would be as likely to tick down some months as it would to tick up others. Am I wrong?

Submitted by no_such_reality on January 19, 2007 - 6:49pm.

It's real simple, if you don't prepay your loan, you merely do debt arbitrage.

If the HELOC rate runs 1/4 of percent higher, you need an excess cash flow above your loan. If you currently have a $400K loan at 6% with a $2400/mnth payment, you would need $9600 excess cash per month in expenses to breakeven on the HELOC if the HELOC rate is 6.25%.

If the HELOC rate is 6.5% you need $21000 excess cash flow above your mortgage payment each month. Yeah, that's right, you live in a house with a $400K loan and have a take home of than $250K /year.

If the HELOC rate is 7%, you need $42,000 of excess cash flow a month to break even.

The only reason it appears to pay off the loan faster is because you prepay the loan with extra cash you already have each month.

Submitted by sdcellar on January 20, 2007 - 1:00am.

kaycee-- Sure, it appears to be fairly high margin adjustable rate loan, at least according to what they present in their simulator. It brings the effective interest rate about a percent higher than the conventional loan you would be transferring over.

Given that rates are considered to be at historic lows, the rate is most likely to increase in the future which presents tremendous downside potential.

Submitted by Next in Line on January 24, 2007 - 11:28am.

See the attached article I just found. I understandit will work with any HELOC you can shopthebest rates. However the automatic payment is anot a featureof the programIwas told about called "Pay-It-Early" from UFirst Finantial.

http://articles.moneycentral.msn.com/Ban...

Submitted by no_such_reality on January 24, 2007 - 11:52am.

Again, 1/16th of a point difference in the rate wipes out any "savings" in their example.

Submitted by sdcellar on January 24, 2007 - 12:18pm.

Next in Line, Please consider what no_such_reality is trying to tell you.

Also keep in mind who the article was written by: Don Taylor, Bankrate.com. It's just possible he might have somebody elses interest in mind (ever so slight pun intended).

Find some real borrowers using this program and I'm confident you'll find that it actually ended up costing them money.

Submitted by Andrast on January 30, 2007 - 5:26pm.

I did some research on these programs to try and figure out why they are so expensive ($3,500). Basically, $1,000 of that goes to the company and the remainding $2,500 is a commission structure. The more loans you sell, the more commission you get. And, if you can get people to work for you, you get a percentage of all of their deals including people that work for them. Supposedly this is a structure used in the insurance industry, but it sounded like a pyramid-type structure to me.

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