Payoff Your Mortgage...

In Record Time!

That's the way the story goes...

I had a call from a client who was asking about this new way to own your home faster the other day. "It's a radically simple idea. I don't know why I didn't do this before!", she said ever so enthusiastically.

To tell the truth, I had no idea what it was she was referring to.
Then it hit me.
There is an office in our building that hires new loan officers.
They put them through a sales pitch training and then unleash them to the world.
I happened to be riding down the elevator one day when one of their wide eyed Stepford zombies spotted my Patagonia embroidered oxford.
She said, "Hey! You do mortgages!"
"I work for Blah, Blah Lending and we have the most exciting new loan that allows you to payoff your mortgage in almost half the time! I'm so excited about this I'm going to enroll my Mother, My Brother, and my best friend!""

I started asking her questions until it became clear she had no idea what she was talking about.
It wasn't just clear, it was crystal clear!
The only thing she could spout back was what they had just told her in her sales training seminar.
When I started asking her specific details, things any decent loan officer should know, it was also clear she knew nothing about mortgages in general.
So I blew her off much like I would have for someone who had just cornered me into an Amway presentation.

So when my client asked, I did some research, I made some calls, and I found some answers.

Here's the details:

They want to do a refi for you, that part may be pretty evident.
They want to refi you into a Home Equity Line of Credit.
But it doesn't stop there.

To do this, they want you to deposit all your money into their bank account!
Let me just stop right there and say "This is never a good idea!"

Oh, they'll give you free bill pay, free checks and a debit card but they want you to have automatic deposit of all your income.

They'll hold your money till you need it.
This will lower your average daily balance.
As long as you don't spend more than you make, the difference over the life of the loan this reduces your interest accrued.

Notice I said, "As long as you don't spend more than you make..."
Go the other way and you'll end up worse than if you did a Payment Option ARM.
But really, how many people spend more than they make?

Simple, eh?

But it's not.
The HELOC is not going to be at 6.0% like your fixed rate might be.
It'll probably be at something like 7+%.
It's also an ARM - that means adjustable.

According to the article attached:

Problem is, the marketing literature is often misleading, comparing apples and oranges and enticing the homeowner to refinance by taking on a home-equity line of credit that provides for the unlimited checking, bill-paying, and ATM access. By sleight-of-hand, this line of credit, with a higher interest rate than the mortgage, is made out to be a savings move.

For example, one of these programs boasts that a homeowner paying 6.5 percent interest on a 30-year, $300,000 mortgage could have the mortgage paid off in 15 1/2 years by using a cash-flow management account tied to a variable-rate home equity line of credit charging 7.72 percent to start. To realize the same interest savings made possible by the early payoff, the homeowner would have to find a 30-year mortgage charging a mere 3.83 percent, the marketing claims.

In reality, what makes the early mortgage payoff possible is not the line of credit but the assumption that this homeowner would save $800 a month into the cash flow management account. So, why not simply keep the existing mortgage at 6.5 percent and send an extra $800 into the principal each month?

Then, "the result would be paying off the mortgage in 14 years and three months," or 15 months earlier, said David B. Jacobs, a fee-only certified financial planner in Kailua, Hawaii. And the homeowner would save an additional $45,000 in interest over the life of the loan, compared to the line of credit, Jacobs said.

Besides the line-of-credit costs, a one-time fee for setting up and managing these cash-flow accounts can run as high as 1 percent of the loan balance. If you were to apply to the mortgage principal the fees saved by not using one of these services you could reduce your mortgage payoff time by another year, Jacobs said.

And yet, "people whom I would normally consider fairly financially savvy are falling under the spell of this marketing blitz," he said. "These schemes take the simple idea of making extra payments toward your principal and make it look more complicated so they can charge for what you could simply accomplish on your own."

Be careful out there.