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.

• 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

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

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

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

photo credit: Rev Dan Catt

You find a 5% mortgage, and the payment is $1342. Wow, nearly $350 per month savings, right? A $3500 closing cost doesn’t look too bad, a 10 month breakeven. Ok, time to think about this. What’s missing? Well, when you told me the payment is currently $1791, I calculated you have 20 years left, on a mortgage that started at nearly $300K. So to understand the savings, you should look at the new rate, but use the remaining time from the old mortgage, got that? In other words, even though it’s a new 30 year mortgage, calculate the payment with the new rate, but a 20 year term. That will give you $1650. This is you actual savings, $140/mo. The $350/mo we first calculated comes at the expense of ten more years of the mortgage. The savings produce a breakeven of 25 months. This may still be worth going after, but it’s far less than you thought, and if you have any idea of moving before then it may not be worth the refinance. Any questions on this approach, post a comment, let me know.

Joe

Joe

** Eventually, it did come down. Some of the messages I left were removed, but others chimed in, and with no comment back to us, it was simply removed.

photo credit: woodleywonderworks

Crazy, right? Each refinance was with no costs. Zero. On a $200,000 mortgage (for example) normally the closing fees would be $2500 or more, so a 1/4% savings would make little sense, breaking even in 8 years when you plan to pay it off in 7. With no fee at all, a $25/mo savings is worth it to me. $2100 over 7 years for 15 minutes of my time on the phone, and maybe a half hour to sign the paperwork at the bank. This product, and my prior refinanced were all called Home Equity Loans, fixed rates, not to be confused with Home Equity Lines of Credit (HELOC) which are variable. There’s little difference in this and a standard mortgage, except no fees, and the rate is a bit higher than what you might find if you were willing to pay points and closing costs.

It can’t hurt to see what your local lenders are offering. $25 may not seem like much to you, but I’m sure you’ll find a way to spend it. If that’s a problem, just add it to your retirement savings.

On a final note – the targeted payoff date isn’t random, I’d like to have the mortgage paid in full by the time our daughter starts college in 2017. We’ve saved specifically for this, but should we be in for post graduate college bills, it will be nice to have no mortgage and know we can do this for our daughter.

Joe

Is it in your best interest to take your extra money or use it to pay the mortgage off early? This isn’t such a clear cut issue, let explore what might impact your decision.

First, and most important, are you taking advantage of any matched 401(k) your employer may offer? A dollar for dollar match should be grabbed regardless of the rest of your situation. Even ahead of paying off any other debt. Companies usually limit the match to 5-10% of the employees’ gross income, so if you make $50,000, the first $2500-$3000 is matched, and that’s it. Don’t miss this.

Do you have any revolving debt? Credit cards? Store cards? Common sense tells you it’s silly to pay 12-18% interest on this debt, yet make extra payment on a 6% mortgage.

Do you have a proper emergency fund? The real concern at the bottom of this question is can you survive the loss of your job and still keep your home until you find new work? Remember, when you send extra money to your mortgage, it’s a one-way street, you can’t easily borrow it back. Of course you can arrange for a HELOC (home equity line of credit) but not after you are out of work. I view the HELOC as a bit of a slippery slope. It can be responsibly used as a secondary emergency account, but should not be your only source of funds to cover unexpected expenses. Your hot water heater fails, you should be able to pay for it.

In the final analysis, it comes down to one question – Do you feel lucky, punk? I ask this in all sincerity, as in most situations it will requite luck to choose the best outcome. We can look at all the data we wish, time periods when stocks returned over 19% on average (the ’90s) or a decade of less than 1% growth per year (the recent ’00s). You can play with the numbers all you wish, but unless Treasuries are yielding more than your mortgage (adjusted for tax implications) then Dirty Harry’s question will come back to haunt us.

Consider, in the big picture there is little difference between a dollar used to pay down a 5% mortgage or one sitting in a 5% CD. Of course, the big difference is liquidity, but I am talking instead about the return on your money. So, as you get older and look at your portfolio, when you look at your stocks and cash allocation, it may make sense to accelerate those mortgage payments and enjoy the savings of 5-6% vs the 1% you might currently get in CDs. For our situation, we decided that it was wise to refinance in 2004 to a 15 yr, aligning our mortgage payoff more closely to when our daughter would start college.

In the end, you might read some very insightful analysis showing that 5% after taxes is really 3.75% if you are in the 25% bracket, and if cap gain rates stay at 15% (they might) that a fund yielding 4.4% will break even. DVY (The Dow Dividend stock ETF) yields 3.6%, the underlying stock need to grow just 8% over the next decade to let you break even. This is total growth, not each year. But the question remains, are you willing to bet on the markets return over the next ten years? Do you feel lucky?

This was a Money Maven Network wide posting, my fellow mavens discussed this topic as well:
Green Panda Treehouse – Pay Off Your Mortgage or Invest Your Money?
Wealth Pilgrim – Pay Off Your Mortgage or Invest
Money Help for Christians’ Pay Off Mortgage Sooner, Invest, Or Save? The Math Analysis
Len Penzo – 12 Good Reasons Why You Should and Should not Pay Off Your Mortgage Early
Enemy of Debt – Should You Grow Your Nest Egg Or Pay Off Your Mortgage?

Joe