I have a rental property that had a mortgage with a dozen years left to go. The remaining balance, $72,000 and a rate of 5-7/8%. I recently got a letter from Chase telling me they’d offer a refinance with little effort on my end, no appraisal, no income check. It would cost $1800 in fees, however. The new rate, for a 10 year loan would be 4-3/8. So, a back of napkin calculation tells me I’d save just over $1050 in interest the first year, and would break even by the second year. By pulling the remaining time down to 10 years, combined with the bank adding the $1800 fee to the mortgage, I wind up with a slightly higher payment, $62/mo higher. But in the end, it’ll be worth getting rid of this mortgage two years sooner and seeing the rent check as an income. That’s what I did yesterday afternoon, talk to Chase for a half-hour or so, and scan/email some forms back and forth.
A week ago I wrote Dave Ramsey Scares me, for the fact that he forecasts the US stock market to grow at 12% as far as the eye can see and I think his disciples are ill-served by such prognostications. Over the past week, I thought some more on this. This is the same guy that talks about being debt free, paying the mortgage off as though it were a deal with devil. But wait a second, Dave, if I can borrow at 5% but get a 12% return on my money, why not just let that mortgage be, and start investing sooner? Let’s see what would happen if we did that.
I tried to keep the numbers simple here. A 5% mortgage even though rates are actually lower right now. A $250,000 starting balance. Simple means I ignore the mortgage tax deduction, I don’t need it to prove the point. If we do the math, we find the difference in payments between the 15 year and the 30 year terms to be just under $635. If you go with the 30 year mortgage, you’ll still have a balance after 15 years of $169,709.77. This is simply the nature of mortgages, the balance is not linear, it can’t be. The interesting thing is that if you invest that $635 and get an annual return of 5%, after 15 years you’d have exactly $169,709.77, the exact amount remaining on the mortgage. Dave however, believes 12% is the norm, so let’s skip right to that line on the chart. At 12%, you have over $317,000 in your account. This isn’t just more than the remaining mortgage balance, it’s so much greater that if you withdraw just the amount due on the mortgage, it’s still growing faster than the withdrawals. Of course, 12% per year is 1% per month, and 1% of this balance is $3,170 against a payment due of $1342.05. (Note – I also showed the account balance if the market only does 6,8, or 10% vs Dave’s 12. Still, some impressive numbers.)
I know there’s a reason Dave doesn’t recommend this approach, I just don’t know what it is. I continued to do the math, no more money out of your checking account to pay this mortgage, it all comes from the saving that $634. After another 15 years, you’d have just over $1.2 million sacked away. I’d really like to know the flip side of this, how one can reconcile a 12%/yr forecast and the maniacal payback of this low interest debt.
The Questions to ask:
- How Much Can I Afford?
- What Are My Financing Options?
- How Much Do I need For the Down Payment?
- How Much are Closing Costs?
Read my guest post Your First Home: 4 Frequently Asked Questions at American Express’ Currency Blog for the full article and join the conversation.
Joe
Some interesting news on the mortgage acceleration scam by UFirst Financial.
Tracy Coenen, author on fraud investigation and blogger at Fraud Files, broke the news that UFirst may be looking to cash out and are seeking a buyer.
Tracy published a note that recently went to upper management at U1st Financial:
I know you’ve already met with Sorensen Group, but we still need them to sign the attached NDA. In fact each private equity / venture capital buyer that you talk to needs to sign this NDA.
Any leak to the field that the company is going to be sold will be devastating. We do not want anyone, including potential buyers discussing this.
Thanks.Rex H. Huang
General Counsel
United First Financial, LLC
Note: NDA means non-disclosure agreement. And I believe this means the beginning of the end. Of course, as Craig Hansen asks, “Where’s the value in UFirst? What would a buyer want? It’s not the technology they’ve developed – that’s crap. I supposed all they have going for them is some ongoing MMA payments, but whoever buys them out would presumably have to keep the MMA servers up and running in order to demand the payments keep coming in. And, they would be associating themselves with UFirst, whose name is now toxic. Who would touch that deal with a 10 foot pole?” Good questions my friend. I’ve been asking this myself.
Joe
A small bit of news to share today for those who have been visiting here to get more information on the Money Merge Account, a so-called mortgage accelerator which does little but line the pockets of those at the top of the pyramid MLM (multilevel marketing) company that sells it.
From a fellow nay-sayer (read that – someone else who is able to see the obvious, that one can pay their mortgage off on their own) comes these details. From a total 30,500 systems sold, these are the data regarding customers who have logged in each month:
v3:
Jan 953
Feb 896
Mar 891
Apr 787
v4:
Jan 7534
Feb 7328
Mar 7401
Apr 6968
What is the point? Very simple. Fewer than 25% of those who bought into this program are actually using it. This is the system that requires a log in to their system for any income or expense, at a minimum, once per pay period to properly use its features. For all of the claims of satisfaction by the agents, it appears that most customers are abandoning the system soon after purchasing it. If this system were any good, would you expect 95%+ usage rate? This company is dying a slow death, and there’s no evidence to suggest otherwise. Good riddance.
Joe
The Pyramid is Collapsing. And I’m happy to show you what a collapsing pyramid looks like courtesy of my Fellow Nay-sayer, Tracy Coenan. At her Fraud Files Blog, she recently posted;
Sent: Thursday, July 01, 2010 10:59 PM
Subject: Proposal for a New Company!
From: Richard Schaffer
Everyone,
In lieu of all the challenges and difficulties that we have all been struggling with over the last 12-18/m, I genuinely believe that it is time that we all accept a few very harsh realities. But before I get into that, the primary reason for this e-mail is that I have an idea, a proposal really, that I truly believe with everything in my soul can absolutely change the direction of our Company moving forward!
What I am about to say is not intended for anyone (nor has it been shared with anyone) not included in this e-mail. But I think it’s time that someone said what everyone is already thinking – but everyone is apparently afraid to actually say out loud. Let me begin by trying to set the stage with 10 main points regarding what is really happening, how everyone (actually) feels, and what is going to inevitably occur if we don’t take some very drastic measures fast!
The ‘Network’ is dead, and it’s not coming back. This is not intended to be negative, it is simple being honest and realistic. I don’t think it even matters if we launch V5, complete ‘Step’ 3, change the Company/Product name or change our comp plan or the MLM commission platform. There has simply been too much damage done for too long. Read the rest here if you wish at Tracy’s Ufirst Financial: This is what a collapsing pyramid looks like.
Amazing that this program is still being sold. It’s nearly two years that I’ve been writing about this scam, and despite my inclination to just call it quits, it’s tough to ignore a scam like this as it offends my senses. The sellers of this scam are taking advantage of people’s ignorance. The letter excepted above is at least an indication the end is near. Let’s hope so.
Joe
