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  • Greg July 23, 2008, 10:56 am

    I have seen examples of claims that using a HELOC alone without any extra discretionary income can shave time off the term of the loan. This video makes this case at the end: http://www.thewpi.org/Flash.presentations/HEAP.Client/Presentation_Files/index.html. And I think this is true based on analysis I have done using my software.

    But that is a far cry from claiming the ability to match the results of pre-payment against using a HELOC with no extra discretionary income. Maybe it can be shown to be true if you construct the scenario the “right” way with the “right” numbers.

    I have seen the claim that the MMA can save you lots of money without you having to change your current lifestyle. This I believe to be one of their better and more truthful marketing statements. If you implement a HELOC based system, this can be the case. But, if you can’t control your spending and maintain your current life style when you started, then you can get yourself into even more debt. And if you spent $3500 to setup the system, that money is wasted on a larger level then all the naysayers already point out.

    I don’t know if it is fair to take comments by one MMA representative who is trying to make a sale and apply it across the board to all of the MMA and UFF. But you are certainly right to point out and question the truthfulness of the claim.

  • JOE July 23, 2008, 12:04 pm

    Greg – why don’t you run the numbers on your system and let us know? The above scenario, $250K, 6.5% mortgage, etc. You can share your assumptions, but keep in mind, the mortgage is usually due on the 1st. You can assume most other bills are due at month end. I’ll even let you pick the HELOC interest rate. $3800/mo, no extra principal payments. I’d be curious to see your results, especially in light of the fact that UFF offers their own examples that no no gains at all from HELOC use.

  • Greg July 23, 2008, 4:16 pm

    Ok. I did some numbers. I used a HELOC @ 10% with a $15,000 credit limit. The mortgage payment came to $1580.18 a month. So with $3800 a month in income, the remaining expenses were set to $2219.82.

    I tried various “configurations:” (Non-mortgage payment) expenses once a month, twice a month, and four times a month. I tried income once a month and twice a month. I tried income received and expenses paid on different days.

    Generally what I found was that it was hit or miss on paying the mortgage off in the term. Sometimes the HELOC system would be cheaper by 10s or 100s of dollars. Sometime the HELOC system would be more expensive by 10s or 100s of dollars. Or, if lined all financial events just perfectly, the HELOC limit would be reached because the income never was able to offset the interest being accumulated on the HELOC and the HELOC balance did nothing but go up.

    This is my take on these results. 1) Timing in the case of $0 discretionary income is vital. 2) I have no idea what set of circumstances these claims about being more effective are using to come up with their numbers. I spent only a few hours trying it out but was not able to come up with comparable results with the tight constraints given.

    (So just for kicks I asked what if I had $1 of discretionary income? The results instantly changed to saving over $800 with the HELOC but still making payments the full 30 year term. The discretionary income value is obviously very important for the HELOC system to work effectively and trim the interest costs.)

  • JOE July 23, 2008, 7:49 pm

    I appreciate your reply and candor. I was prepared to concede that with perfect timing, there would be as much as $140/year to be gained, or nearly $10/mo. This would knock as much as 8 months off a 30 yr mortgage. Nothing to sneeze at, but nowhere near the claim of the innumerate blogger/agent I quoted above.
    Thanks again, Greg.


  • Dave Shafer July 31, 2008, 6:38 pm

    What’s the interest cost on the $3800 cost of the software? Seems to me it would be more than the savings!

  • JOE August 1, 2008, 12:48 pm

    Well, if you took the classic example of $200K, 6%, and applied the $3500 (I believe the std price is ‘only’ $3500) as a principal payment with the first mortgage payment, my sheet (any amortization table will do this) shows an interest savings of $16,657. It also cut the mortgage by just under 18 months. MMA agents will continue to sell their product. There are approximately 400,000* potential clients that enter that market each year, so the potential is huge.

    (*I refer of course to the quote “there’s a sucker born every minute. I allow for some mortality of the 525,000 suckers born each year.)


  • Tom August 16, 2008, 8:00 pm

    I’ve been trying to read up a bit on these mortgage accelerator programs because of a comment made on my site’s blog. I just don’t get it. Taking out more debt to reduce debt int his way just doesn’t make much sense. Even if they can time the payments on the HELOC to limit the interest, you’re still paying interest. That will cancel some of their “interest cancellation”. The worst part is your putting all of your extra money into your house and that doesn’t seem to be a wise investment in today’s market. You’re not building any savings and you’re basically just living off credit. You’re in big trouble if you hit a rainy day.

    On top of the price of the software, you’ll also need to pay fees to set up the HELOC and some have additional annual fees. Some lenders are now even canceling home equity lines.

    In one of the examples they gave, they had a couple with a $5k income and $4k monthly expenses. Basically, the $1k was going to pay down the HELOC that was paying down the mortgage. If you were comfortable living with $1k less a month you’re better off just putting the $3500 down initially then $1k extra towards your mortgage without a HELOC. You’d pay off your mortgage in 9.92 years and save over $184k with a 200k 30yr at 6.5%.

    You could also just pay double what the normal premium part would be and you’d pay it off in 18. If you want to go faster, you can pay two months premiums at a time and pay it off in 15 years. You’re going to need to have extra money each month to do this but you’re also going to need that extra money to make these mortgage accelerator accounts work too.

    I decided to try something different. Instead of a HELOC I added a savings account and put the discretionary funds into that along with the $3,500 software costs. Combine that with paying an extra 2x the principle part every month, which comes out of the savings account, you wind up saving $143k in interest and pay off your mortgage in about 14 years. With a 3.0% savings account you also wind up with almost $94k in the bank.

    I put a spreadsheet with alternatives to paying down your mortgage faster on my blog. I’m not charging anyone for it, there’s no fee to access my blog and it is in OpenOffice.org format so you don’t even need to pay for an expensive office suite to look at it.

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