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- Financial Discussion Blog -
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Q: "I was looking at your Excel spreadsheet have a question for you. Why would I want to send all my discretionary income into my 1st mortgage? What if an emergency arose? At least if I had a HELOC set up I could draw my discretionary income or spending money from that. Are you saying Helocs are bad?"
Frank March 07
A: First, we do not actually recommend that anyone spend 100% of their discretionary income... as you alluded, and as we have tried to point out, that's a recipe for future problems or even disaster. Perhaps we should make that more clear in our presentation.
Also, Helocs are not bad, they can be very useful. If someone is in a financial situation that allows, then they may wisely want to have a Heloc 'reserve' for many reasons... like unexpected debts, avoiding mortgage insurance, or for any other future borrowing. This is largely because a secured Heloc or mortgage loan is usually of a lower interest rate, and on more beneficial terms, than other available un-secured borrowing (like credit cards, etc...) However, a variable rate heloc is at a higher interest rate than a first mortgage.
However, if someone is really motivated and interested in paying down/off their mortgage faster than required by their promissory note, then the fastest way to do that is to use every penny that they make (100% of their discretionary income). We think that a 100% approach is a bit extreme for most people, and that it would definitely be more prudent to take a moderate approach. However, the 100% approach is basically what many of these equity acceleration system are peddling, without really explaining that fact to folks.
Explaining this to our customers 'over-and-over' is one of the reasons why we created and have provided the excel spreadsheet... as an informative tool to show (without deception) what is really going on behind the scenes of the various equity acceleration systems. We want folks to at least think about it from the proper perspective, and to understand they can do it themselves and save $3,500. IF someone still chooses to do it or to buy any system after being informed... then that's their choice, and while we many think it's not the best financial decision, at least they had proper information to see what, why, and how for themselves, before they chose to do it.
Though, experience has shown me, after consumers understand the facts, the costs & risks involved, and the free alternatives already available, that most (if not all) change their minds about buying into a system someone is trying to sell them...though most do still correctly see the value and savings achieved by paying off their debts faster in a more reasonable way, on their own!
Simply, we believe that anyone interested in paying off their mortgage or any debt in advance would be best served by following a reasonable and measured approach. I believe the vast majority of people will do just that if they are first properly educated about it, and understand all the facts.
Ron Hobbs
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I just found your web site and was hoping to find something like this. Someone is trying to recruit me to this system. Since I am an engineering type and have an MBA in Finance with real estate mortgage experience, I wanted to dig in deeply to understand what is going on here with the MMA account.
First, this reminded me of the overemphasis that Primerica puts on what they call ‘simple interest vs. scheduled interest’. They credit payments received against their real estate loans on day of receipt instead of at end of month. They make it seems like this is really the big savings, whereas the payment acceleration that they set up, with bi-weekly payments, is the much greater cause of savings. In fact, their compliance department annually puts out a warning to their field agents warning them not to overemphasize scheduled vs. simple interest, and directing them to focus instead on the benefits of pre-payment acceleration. Of course, most consumers are dazzled, and then go ahead and pay Primerica’s exorbitant pricing, typically 3 ½ % up front, and at least 1% higher note rate, often more. They of course focus on interest savings, and ignore the fact that one can already accelerate repayment on any conventional loan [For FREE ].
I am digging deeper into this MMA setup. … the HELOC carries a higher note rate than a mortgage. Of course you also have to take into account the other costs that come with helocs used as a checking account, like check charges, annual payment, minimum check size, and so forth.
And of course, one has to decide if they really want to accelerate a mortgage and build ‘dead equity’ in their house. If one has an after tax opportunity with greater return, then it makes sense to pay off the house as slowly as possible. This has to be weighed against the risk of the alternative investments, and the consumer personal comfort level for owning their own home, and if they want to stay permanently in the house. And of course there can be risk with real estate values decreasing, which I am sure you see in Florida.
FYI, I found out that of the $3500 price, $1000 goes to the company, and $2500 goes to the multi-level sales commission structure (MLM). I asked a mortgage broker friend about this, and he said that he uses a $59.95 software package that allows one to set up a payoff acceleration, or do debt stacking (focusing all available debt payoff money on the highest rate loan-or if a psychological boost is desired, on the debts that can be paid off more quickly). Once a debt has been paid, that payment amount is freed up to be applied to another debt. Ultimately, one can tackle the lowest rate mortgage [last].
…It all depends ultimately on the self-discipline and motivation of the consumer to save….
My overall impression is that this is another variation on the simple vs. scheduled interest word play…. Sometimes consumers need a structure [or help]… to finally get their act together to get real results. But this seems very pricey to me.
Hope this helps. I would like to see other info as you find out about it posted on your web site. You are free to share my opinions, and they are only opinions.
Mr. J
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Reply to: Mr. J,
Your entire e-mail is filled with many of the same things we have been pointing out to our clients for years. For example the bi-weekly payment saving plan that has been marketed by many mortgage lenders or companies set up solely to make [money from charging bi-weekly payment FEES]. I have seen companies charge any where from $295. to $1495 upfront plus transaction fees 26 times a year at a cost of $3.95 to $16.00. In most cases the payments were still only being credited monthly, but the total sales presentation revolved around the bi-weekly payments as what saved you the money, when it was really simply the extra payment per year [13 months instead of 12 months] that saved 98% of the money. We educate our clients about how to pay down the mortgage on their own without the added [unnecessary] costs. It is true, many people need help budgeting but there are so many places to acquire low cost or [FREE] software to do the same thing. It make no sense to pay $3500 or more.
If these products were marketed as a way to assist budgeting, or financial discipline, etc… and IF [consumers were truthfully] told that that’s what they were buying for $3500, it would not be as bad. We would not have any problem with someone making the decision to do so, [as long as they were properly informed, understood all the facts and details, and only then made an informed decision themselves].
If you have seen any of the presentations you might have noticed financial 'mistakes' in the presentation that just overwhelm the average person. In addition facts are left out about the HELOC interest, also comparing 1 month interest cost on the HELOC to the total term of the loan interest savings, which is totally misleading. If you could actually reduce the amount of interest to few days it would be nice but the reality is that the cost of the HELOC interest on an average daily balance would be much more than a few days [closer to 15-25 ]. Besides, if it were only a few days of interest, that would mean the customer already had most of the money in the bank and could have instead sent a check and applied it on their own without a HELOC or even with a HELOC without the cost of a $3500 program.
We have been approached by several people in our business to sell the MMA. We could have made a lot of money selling MMA”s as I am sure many people have done. It is just that we would not have been able to sleep at night presenting the information the way it was presented to us. I believe a lot of the [salesmen] do not understand finance and financial numbers well enough to realize what they are selling. Beyond that, we don't think it's worth $350, let alone $3,500.
FYI, we received a call from a financial crimes detective in a major Western U.S. city with concerns about shutting down the MMA program in his city and possibly his total state. I suspect that selling the MMA software is not illegal, but [deceptive and misleading sales tactics are definitely unethical].
Samuel H. Hobbs (President) Integra Mortgage and Investment
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Reply: Thank youl:
I was once in Primerica, but once I saw them twisting the numbers, and comparing accelerated mortgage payoff on their loan at a higher rate with an unaccelerated conventional loan… I had to get out. It was how they tried to sell the bogus concept that interest rate does not matter. (Which they have to do, since their rate is typically 1-2% higher than market.) I found out that their insurance cost twice as much as a typical similar AIG policy, and that their Smith Barney funds were the worst performing of all the major warehouses, and even trailed the 1, 3, and 5 year S&P returns. I am not sure the sales people know enough or care enough…. It is like a religion with them, accepted totally on faith. Of course the top sales leaders want to protect those $1-2 million/year overrides they get.
I don’t know if this group is as bad, probably not, … Adding $2500 commissions to a $1000 product definitely seems excessive, though.... The multi-level [sales structure] drives up the price incredibly.
I am very leery of buying it or getting involved. Fortunately, I understand finance, and have self-discipline, so this strikes me as a waste of money.
Thanks for your good work trying to help people avoid wasting money.
Mr. J
p.s.: I just finished viewing a sales video, and was frankly under-whelmed. (And a little pissed off, ... ).
This is indeed just pure repayment acceleration, and yes, I notice they did NOT compare the additional interest over the life of the heloc, with the interest saved over the life of the first. $5000 average balance at 9% (unless it went higher) would be $450 x 30=$13500, and at $10,000 it would be $27000. No small amount.
I think that people could just as easily keep a good spreadsheet budget, including irregular items, keep a interest bearing side reserve for emergencies, maybe laddered CD’s, and not wait for the software to tell them to pay extra, but pay their extra leftover every month. That way they would pay down principle sooner [and save more money]. The principle is the same ... Pay your bills and whatever else you buy, and pay anything extra against your first. Although, I would rather put it into anything that generates a higher after tax return than my mortgages costs after tax.
Thanks for the info. I am going to pass on .... I don’t need software to minimize my interest and payoff term. I can do better than the software, I have no doubt. To the uninformed who are unconscious and uneducated about their finances, this probably seems to offer a ‘magical’ way out. [But there is no magic... the savings come from what they do themselves]
It amazes me how someone can sell something that actually costs more, and charge top dollar for it.
Mr. J
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Q: "I already have a [Second Mortgage Home Equity Line of Credit] HELOC from my local bank, so can't I just pay it down to reduce the interest I am paying monthly on my second mortgage... without paying [$3,500] for software? Isn't it really just the same thing I already have? "
Chris Jan.07
A: The answer is Yes, BUT… only so long as you already have an existing home equity line/loan Debt today. Many Homeowners already have HELOC'S, literally millions of them have been written over the past 20+ years! They are a very popular and financially prudent way to avoid paying mortgage insurance and to affect increased tax deductibility. 'Combo Loans' are a kind of exchange; they are a way to personally take over a bit of the Bank's variable interest rate risk, in exchange for a lower interest rates on your first mortgage. There are also other advantages. So, If you already have an existing Higher Rate 2nd lien mortgage debt, you most likely would be better off reducing that debt first, BUT only after you have taken care of credit cards and other even higher rate debts. To lower your overall interest costs, pay down your highest rate debts first.
Don't be fooled, after your revolving high rate debt is gone and your HELOC or 2nd mortgage is paid to zero, it still doesn't make financial sense to borrow at a higher variable rate just to pay down the lower fixed rate first mortgage.
Ron Hobbs
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Here’s a comment regarding a particular 'merge account' scheme from the respected finance and investing site, the Motley Fool http://www.fool.com that folks may find interesting:
“I got this advertisement in the mail and went to check on it at the website. …There’s a lot of unanswered questions and it’s scary because I can’t find what the scheme, which makes me wonder that if it is in fact a fraud (and I’m sure it is), and how many people are thus getting sucked into yet another mortgage scheme?
The lack of sufficient details is central to the fraudulent scheme.
They are not really selling a plan with details, etc. They are selling a dream. The dream that the hard-pressed overstretched homeowner can, simply by rearranging the insufficient amount of money they currently have, somehow pay off their home mortgage quicker, with no extra risk, and without somehow having to take money from somewhere else to do so. It’s a magic algorithm or something like that.
There are only three ways that one can pay off a home loan quicker than the scheduled amortization: (1) make additional payments towards the principle amount, either on a regular or irregular basis; (2) pay off the entire amount due in one giant lump sum; (3) refinance, which basically means getting a new loan and paying off the old loan with the proceeds of the new loan. Of course then you are left with the new loan to pay off, which may or may not be a better deal than the old one.
Now from what we can tell about this “plan,” one is not paying off the loan in one lump sum, nor is one supposedly making accelerated principle payments, nor is one refinancing. Ergo it is impossible. We don’t need to know anything more. Mathematical impossibility is mathematical impossibility.
… Lots of promises, no details.
Now in terms of how they make money on the fraud, … Who knows? You won’t find out exactly how you’re being screwed until your money is all gone anyway.
Con artists and fraudsters operate by getting you to trust them. People want things to be easy and con artists play into that. People in financial distress are prone to these kinds of schemes because they are under a great deal of emotional stress making it hard to think clearly. They’re looking for a life preserver and the con artist pretends to have one, only actually it turns out to be a lead weight that takes you to the bottom of the ocean. ”
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