What good is a service like United First Financial? Why pay off my mortgage early?
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Free registration at the forum removes this block.Pay Off Your Mortgage?
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MJ DeMarco
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It appears to be a service for those who lack discipline, or, lack the knowledge that most mortgages allow principal reduction payments at anytime.
The benefit of a principal payment is an immediate ROI based on the interest rate you are paying for the mortgage. Also, payments made early in the term (ex. 30yr fixed) have the bigger benefit since 30yr amortization is mostly interest in the early years.
For example, if your mortgage is 6% -- a principal reduction payment is like depositing money into an interest bearing account at 6%. If you have other investments available that return greater than 6%, you should avoid paying principal. Likewise, if you have other debts which carry higher interest rates, like credit cards, you should pay those first as that return is the Credit Card rate.
The benefit of a principal payment is an immediate ROI based on the interest rate you are paying for the mortgage. Also, payments made early in the term (ex. 30yr fixed) have the bigger benefit since 30yr amortization is mostly interest in the early years.
For example, if your mortgage is 6% -- a principal reduction payment is like depositing money into an interest bearing account at 6%. If you have other investments available that return greater than 6%, you should avoid paying principal. Likewise, if you have other debts which carry higher interest rates, like credit cards, you should pay those first as that return is the Credit Card rate.
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I wrote a detailed post about how this works on my blog in Dec 06. Here is the post cut and pasted:
A new type of mortgage plan has been floating around lately. These plans are called mortgage accelerators (also called money merge) and they claim to save you thousands in interest with you paying additional money. You will know when you are pitched these plans because they consist of a HELOC and a computer program.
These plans cost about $3,000 to enroll in. If you understand the concept you can do it yourself for the simply cost of opening a HELOC. The way these programs work is they have you open up a new HELOC and you use this HELOC as your main checking account by depositing your paychecks into it and paying all your monthly bills with it.
So do these programs work? and if so, how do they work?
With a regular mortgage you cannot choose to pay part of it on the 15th of the month and the rest on the 1st. You are basically saving up your money until the end of the month and then writing one check. It doesn’t matter if you’ve saved up the mortgage payment by the 21st of the month. If you write your mortgage company a check on the 22nd it doesn’t save you any interest. Most of us get paid every two weeks and we keep our money in our checking account until the bills roll around at the end of the month. What is this money doing for us while it’s in a checking account? Nothing.
So how do we take advantage of that?
The interest on a HELOC is calculated daily. This means that if you borrow money on the 15th, you are charged interest on the 15th. However, if you pay it back on the 20th, they stop charging interest on the 21st.
Mike has a $100,000 mortgage at a 30 year fixed 10% interest. His payment is $877.57 a month. Of this payment roughly $833 goes to interest and $44 goes towards principle. If Mike pays his mortgage normally, in 1 year he would have paid a total of $10,530 with $9,975 going to interest and $555 going to principle, his balance would be $99,445.
Mike makes a decent living to afford a $100k mortgage and gets paid $2,000 twice a month, on the 1st and the 15th. However, Mike is barely making it by month to month. His living expenses are so high that he has no money left over for savings. He spends $3,123 on utilities and monthly expenses. $4,000 - $3,123 - $877 = $0 savings.
Now this is an extreme example; Mike gets a HELOC for $100,000 at a 10% interest rate. He withdraws the full $100,000 and uses it to pay off his entire mortgage. HELOCs only require interest only payments in the first 10 years. So his HELOC would be asking him for an initial monthly payment of $833.
It’s the first of the month and Mike’s paycheck of $2,000 is directly deposited into the HELOC account. This paycheck pays his $833 interest payment and the rest $1,167 goes to principle. So his balance is now $98,833 on the 2nd day of the month. On the 15th of the month his second paycheck of $2,000 is deposited into the acount. This payment is all applied to principle lowering his balance to $96,833. On the 25th his bills are due and you pay your bills of $3,123/mo. So now his balance has gone back up to $99,956.
Let’s see what happened in that month. At the end of the month, Mike has paid $44 in principle to his HELOC. This is the same as if he was paying down a regular mortgage. However, the difference is what happened during the month!
From the 1st to the 15th, the HELOC balance was only $98,833
From the 16th to the 25th, the HELOC balance was $96,833
From the 26th to the 30th, the HELOC balance was $99,956
Because HELOC interest is calculated using simple interest, you only pay interest on the money you have borrowed. It turns out that Mike borrowed an average of $98,353 over the course of the month. So his new HELOC statement in month 2 will be asking for only $820. Basically, Mike saved $13 in interest by taking advantage of the HELOC simple interest. That interest savings is going directly towards principle!
In month 2, Mike follows the same exact plan. From his first paycheck, $820 goes towards interest and $1,180 to principle. His second paycheck of $2,000 goes entirely to principle and he pays out $3,123 to expenses. At the end of month 2, Mike’s HELOC balance is $99,899. Month after month, Mike saves a little interest. This savings can add up after a while.
After month 12, Mike will have a balance of $99,235. If you compare that with making regular mortgage payments, his balance would be $99,445. Mike has paid down an additional $210 in principle without making additional payments!
This example is not how the program works. I’m just trying to explain the concept behind how you can save money by using simple vs. compounding interest. If you have no money for savings after all your expenses, you should not be doing this.
Ok, now you may be asking what is this computer program and how do you save tons of interest. The computer program comes into play if you have leftover money for savings at the end of the month. If you’re like most people, you save a certain amount per month and put that into a CD or savings account.
John has the exact same mortgage and expenses as Mike, however John makes $2,200 per check. John opens a HELOC for $100,000 at a 10% interest rate. According to the computer program, it calculates that John has an extra $400/mo leftover that he normally puts into a savings accounts. The computer calculates that this $400 can pay for a $8,000 loan at 10% and that a payment of $400/mo will pay that loan off in 2 years. So this computer program instructs John to withdraw $8,000 from his HELOC and to use it pay down his principle on his regular mortgage.
Let’s see what happens in month 1. John’s paychecks are going directly into the HELOC account as did Mike’s. On the 1st of the month, John withdraws $8,000 from the HELOC and pays down his mortgage. John gets a paycheck of $2,200 and makes a regular $877 mortgage payment as usual. The rest of his check goes the HELOC. On the 15th, John’s second check is deposited into the HELOC. On the 25th, John spends $3,123 on expenses.
Day 1, Mortgage balance $91,955 ($8000 + $45 principle paydown on regular payment)
Day 1, HELOC balance $6,677 ($8,000 - Paycheck 1 $2,200 + mortgage payment $877)
Day 15, HELOC balance $4,477 (Paycheck 2)
Day 25, HELOC balance $7,600 ($3,123 spent in expenses)
From the HELOC standpoint, you can see that every month, John’s extra $400 is paying down the HELOC. Within 24 months, his HELOC balance will go down to zero. He will also be saving additional HELOC interest as Mike did above because his average balance is below the $8,000 he borrowed.
But now let’s look at what happens to your mortgage. You just paid $8,000 towards principle. Now the amount of your payment that goes towards principle is greatly increased. You are saving interest on every mortgage payment for the rest it the loan’s life.
In 24 months when your HELOC is almost paid off, the computer program will calculate and tell you when you should withdraw from the HELOC and put it towards principle again. This cycle continues until you’ve paid off your mortgage.
I don’t feel that you need to purchase the program for $3,000 if you understand how it works. I do believe that the math works, however you must remember that HELOCs are variable rates and are generally higher than your mortgage rate. I haven’t run the numbers to see if this program would work if the HELOC rate was higher than your loan rate.
A new type of mortgage plan has been floating around lately. These plans are called mortgage accelerators (also called money merge) and they claim to save you thousands in interest with you paying additional money. You will know when you are pitched these plans because they consist of a HELOC and a computer program.
These plans cost about $3,000 to enroll in. If you understand the concept you can do it yourself for the simply cost of opening a HELOC. The way these programs work is they have you open up a new HELOC and you use this HELOC as your main checking account by depositing your paychecks into it and paying all your monthly bills with it.
So do these programs work? and if so, how do they work?
With a regular mortgage you cannot choose to pay part of it on the 15th of the month and the rest on the 1st. You are basically saving up your money until the end of the month and then writing one check. It doesn’t matter if you’ve saved up the mortgage payment by the 21st of the month. If you write your mortgage company a check on the 22nd it doesn’t save you any interest. Most of us get paid every two weeks and we keep our money in our checking account until the bills roll around at the end of the month. What is this money doing for us while it’s in a checking account? Nothing.
So how do we take advantage of that?
The interest on a HELOC is calculated daily. This means that if you borrow money on the 15th, you are charged interest on the 15th. However, if you pay it back on the 20th, they stop charging interest on the 21st.
Mike has a $100,000 mortgage at a 30 year fixed 10% interest. His payment is $877.57 a month. Of this payment roughly $833 goes to interest and $44 goes towards principle. If Mike pays his mortgage normally, in 1 year he would have paid a total of $10,530 with $9,975 going to interest and $555 going to principle, his balance would be $99,445.
Mike makes a decent living to afford a $100k mortgage and gets paid $2,000 twice a month, on the 1st and the 15th. However, Mike is barely making it by month to month. His living expenses are so high that he has no money left over for savings. He spends $3,123 on utilities and monthly expenses. $4,000 - $3,123 - $877 = $0 savings.
Now this is an extreme example; Mike gets a HELOC for $100,000 at a 10% interest rate. He withdraws the full $100,000 and uses it to pay off his entire mortgage. HELOCs only require interest only payments in the first 10 years. So his HELOC would be asking him for an initial monthly payment of $833.
It’s the first of the month and Mike’s paycheck of $2,000 is directly deposited into the HELOC account. This paycheck pays his $833 interest payment and the rest $1,167 goes to principle. So his balance is now $98,833 on the 2nd day of the month. On the 15th of the month his second paycheck of $2,000 is deposited into the acount. This payment is all applied to principle lowering his balance to $96,833. On the 25th his bills are due and you pay your bills of $3,123/mo. So now his balance has gone back up to $99,956.
Let’s see what happened in that month. At the end of the month, Mike has paid $44 in principle to his HELOC. This is the same as if he was paying down a regular mortgage. However, the difference is what happened during the month!
From the 1st to the 15th, the HELOC balance was only $98,833
From the 16th to the 25th, the HELOC balance was $96,833
From the 26th to the 30th, the HELOC balance was $99,956
Because HELOC interest is calculated using simple interest, you only pay interest on the money you have borrowed. It turns out that Mike borrowed an average of $98,353 over the course of the month. So his new HELOC statement in month 2 will be asking for only $820. Basically, Mike saved $13 in interest by taking advantage of the HELOC simple interest. That interest savings is going directly towards principle!
In month 2, Mike follows the same exact plan. From his first paycheck, $820 goes towards interest and $1,180 to principle. His second paycheck of $2,000 goes entirely to principle and he pays out $3,123 to expenses. At the end of month 2, Mike’s HELOC balance is $99,899. Month after month, Mike saves a little interest. This savings can add up after a while.
After month 12, Mike will have a balance of $99,235. If you compare that with making regular mortgage payments, his balance would be $99,445. Mike has paid down an additional $210 in principle without making additional payments!
This example is not how the program works. I’m just trying to explain the concept behind how you can save money by using simple vs. compounding interest. If you have no money for savings after all your expenses, you should not be doing this.
Ok, now you may be asking what is this computer program and how do you save tons of interest. The computer program comes into play if you have leftover money for savings at the end of the month. If you’re like most people, you save a certain amount per month and put that into a CD or savings account.
John has the exact same mortgage and expenses as Mike, however John makes $2,200 per check. John opens a HELOC for $100,000 at a 10% interest rate. According to the computer program, it calculates that John has an extra $400/mo leftover that he normally puts into a savings accounts. The computer calculates that this $400 can pay for a $8,000 loan at 10% and that a payment of $400/mo will pay that loan off in 2 years. So this computer program instructs John to withdraw $8,000 from his HELOC and to use it pay down his principle on his regular mortgage.
Let’s see what happens in month 1. John’s paychecks are going directly into the HELOC account as did Mike’s. On the 1st of the month, John withdraws $8,000 from the HELOC and pays down his mortgage. John gets a paycheck of $2,200 and makes a regular $877 mortgage payment as usual. The rest of his check goes the HELOC. On the 15th, John’s second check is deposited into the HELOC. On the 25th, John spends $3,123 on expenses.
Day 1, Mortgage balance $91,955 ($8000 + $45 principle paydown on regular payment)
Day 1, HELOC balance $6,677 ($8,000 - Paycheck 1 $2,200 + mortgage payment $877)
Day 15, HELOC balance $4,477 (Paycheck 2)
Day 25, HELOC balance $7,600 ($3,123 spent in expenses)
From the HELOC standpoint, you can see that every month, John’s extra $400 is paying down the HELOC. Within 24 months, his HELOC balance will go down to zero. He will also be saving additional HELOC interest as Mike did above because his average balance is below the $8,000 he borrowed.
But now let’s look at what happens to your mortgage. You just paid $8,000 towards principle. Now the amount of your payment that goes towards principle is greatly increased. You are saving interest on every mortgage payment for the rest it the loan’s life.
In 24 months when your HELOC is almost paid off, the computer program will calculate and tell you when you should withdraw from the HELOC and put it towards principle again. This cycle continues until you’ve paid off your mortgage.
I don’t feel that you need to purchase the program for $3,000 if you understand how it works. I do believe that the math works, however you must remember that HELOCs are variable rates and are generally higher than your mortgage rate. I haven’t run the numbers to see if this program would work if the HELOC rate was higher than your loan rate.
Good write-up and info Biophase, speed+!!! 
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Great post biophase ++
The timing of this is great.
If you were calculating the simple interest vs compounding interest, how would you determine the cutoff? I ask because I will be buying a personal home soon and I am looking for aggressive ways to pay it off.
Currently 1/3 of my paycheck goes towards retirement 401k and Roth IRA. I am contemplating directing all that money towards paying down a house. I'm trying to decide the pros and cons of both, but I need to do the math. Correct math never lies. Basically I have 3 options. Keep investing in my retirement, redirect all that money towards paying down the loan, or using the heloc method to pay down even quicker. Makes me wonder what I can save. It also depends greatly on the interest rate of the heloc. Home loans right now are at about 6%. I have no idea what the interest rate on a LOC is. Lots to ponder, some spread sheets to generate.
The timing of this is great.
If you were calculating the simple interest vs compounding interest, how would you determine the cutoff? I ask because I will be buying a personal home soon and I am looking for aggressive ways to pay it off.
Currently 1/3 of my paycheck goes towards retirement 401k and Roth IRA. I am contemplating directing all that money towards paying down a house. I'm trying to decide the pros and cons of both, but I need to do the math. Correct math never lies. Basically I have 3 options. Keep investing in my retirement, redirect all that money towards paying down the loan, or using the heloc method to pay down even quicker. Makes me wonder what I can save. It also depends greatly on the interest rate of the heloc. Home loans right now are at about 6%. I have no idea what the interest rate on a LOC is. Lots to ponder, some spread sheets to generate.
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That's what I didn't get. Ha!
Everyone I know is telling me to kick in a little extra every month on my mortgage. Ha! Why? At 5.75%, I'd be better off paying toward student loan debt. It's simple math, so it surprises me that "services" like this can even exist.
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Peerless what interest are you paying on your student loan? Mine is 2.7%. It doesn't make sense to pay it off. I have made investments that pay the payments for me.
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I have read this post about 4-5 times in the last 3 days. Thats the part that makes little sense to me. Why use a heloc to pay off the mortgage if your heloc is higher interest rate? Why couldn't a disciplined person just put that extra money towards the principle? I think I'm still missing a key element here.
Also couldn't folks use a credit card that is interest free for the first 12 months?
Say you know you will have $200 extra a month. aka $2400. You use the credit card and pay $2400 towards your mortgage principle. At the same time your putting that extra $200 into some sort of interest bearing account. You pay the card off in full at the end of the year plus a have some extra money from that interest bearing account. I might be in left field with the credit card (I avoid them and therefor know little about them.) I know the advanta has 50k credit limit with 15 month 0% APR. Seems to me you could save a ton in interest. If I am off here, please let me know. I wanna know where my error in thinking is.
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Because your payment into your mortgage is stuck there. What you are doing with this plan is using your utility, grocery, car payment money during those days inbetween your payday and bill due date to lower your principal on your loan to save on interest.
Let's say you have $800 for a car payment on April 3rd. The car payment isn't due until April 20th. You can't stick that into your mortgage from April 4th to April 19th. In fact, even if you could you wouldn't get any benefit from it because they don't calculated your interest daily.
Now if you pay that into your HELOC on April 4th and then take it out on April 19th, you just saved interest for 15 days by lowering your principle $800.
Yes you can do that with a HELOC. But remember there is a balance transfer or check fee usually equal to 3%. If you are disciplined and good at math, there are many ways to save on your mortgage interest.
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Good point, I am a little confused as well.
Their ROI shouldn't matter, as long as you are happy with your ROI.
So he is basically sticking in his checks to cut his balanace down, correct?
Say the home was $100k he gets paid 4k the 1st of every month. Now, say all his bills were due on the last day of the month. He would basically be lowering the balance of his mortgage by $4k each month, right?
If the full 100k were @ 6% it would be $599.55/month. $500-interest 99.55-principal for the first month
Now say the heloc was set .5% higher.
He gets a 100k heloc @ say 6.5% and put $4k down immediately, making his balance $96k.
His monthly payment is $606.79. $520-interest 86.79-principal for the first month
This is assuming that he doesn't pay interest on any of the "$4k in paychecks". With the interest set at .5% higher he is paying $7 more and putting almost $13 less towards the principal in the first month. Even at only .25% higher, it wouldn't make sense to me.
If I am missing something or misunderstanding everything please let me know.
not sure if you can get the same in the US but down under you can get this service with most standard mortgages if you ask for it...
To add to the effects use you amex of other cc to pay all your bills which will likely give you up to 60days interest free and then meanwhile 100% of your pay is fending of interest in your mortgage account then pay your cc bill on the last day from your mortgage account...rinse and repeat
To add to the effects use you amex of other cc to pay all your bills which will likely give you up to 60days interest free and then meanwhile 100% of your pay is fending of interest in your mortgage account then pay your cc bill on the last day from your mortgage account...rinse and repeat
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hatterasguy
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Needless complexity.
If you want your mortgage gone sooner just pay more to principle. I think just two extra payments a year on a 30 fixed will cut it to 17, etc, etc.
Than we get into the never ending debate of pay off the house, vs suck the money out of it for better yeilding investments. Both viewpoints are valid, it comes down to personal preference.
If you want your mortgage gone sooner just pay more to principle. I think just two extra payments a year on a 30 fixed will cut it to 17, etc, etc.
Than we get into the never ending debate of pay off the house, vs suck the money out of it for better yeilding investments. Both viewpoints are valid, it comes down to personal preference.
I can't think of an easier way of explaining other than biophase's post.
For what I saw during my research about this last year, this is not the same as the bi-weekly payment plan, and it does cut the total time way more than the 30yr-fixed. It does make a difference.
And yes, you are right, the should I or not is another debate, and I think has been debated a lot in the past.
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Basically, instead of putting the money that you use to pay your monthly bills in a checking account. You use that money to pay down your HELOC while its waiting to be used. Then when your bills are due, you pay them by writing checks from your HELOC.
By doing this you cut down the days that interest is accruing on your HELOC and save money that way.
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I think this is pretty simple. What you avoid by using the heloc is having your mony stoped in your account waiting for the end of the month.
End result is similar to what it would happen if you transfered your balance to an interest paying aacount similar to your mortgage interest rate and then transfered it back in time to pay your bills/mortgage.
If you leave your money in a non interst paying account you're giving the bank a free ride (they are loaning your money, getting interest on it and not paying you anything).
End result is similar to what it would happen if you transfered your balance to an interest paying aacount similar to your mortgage interest rate and then transfered it back in time to pay your bills/mortgage.
If you leave your money in a non interst paying account you're giving the bank a free ride (they are loaning your money, getting interest on it and not paying you anything).
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hatterasguy
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Wouldn't you be better off using the HELOC to say invest? Your business would probably give you a better return on that HELOC than paying off the mortgage would. Plus you lose the tax write off.
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Many people here have a couple HELOCs. Just because you have one doesn't mean you should or have to use it. Someone with a low interest rate HELOC or any LOC can use this method to save a little money.
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