A friend of mine, Tom I’ll call him, was very excited about this new business opportunity that involved helping people pay down their mortgages, and significantly reduce their interest expense paying off their mortgages in as little as 8 years without changing their lifestyle. Tom asked me to come by and watch a video, and we did a little paper and pencil work too. I did, and told Tom that if I could satisfy myself that this product worked the way the video claimed, that I knew a lot of people that would also benefit. As a real estate agent, I speak to a lot of people everyday, many of whom are current and past clients. If the claims were true, they’d have to be fools not to jump right on it. Not only would this allow me to help a lot of people, I’d make a tidy commission from direct sales, and from recruiting other sales people.
I was thinking, “I was a math major for three years at Virginia Tech, and a full time management consultant for two, if this product was really great, all I’d have to do was to see how the numbers worked, and I’d be home free.” My struggle of starting my own business would be over. Tom showed me some spread sheets, but the numbers were not all there that I needed to make it work. I tried to cut and paste them into a spreadsheet, but the program wouldn’t let me do it. I asked Tom to get the spread sheets for me from the marketing department and well, that was a couple of months ago. http://www.u1stfinancial.com/ is the website, and there is a video you can watch there. If someone could show me how this works, I’d love it. I could really help a lot of my friends, and I’d really like this struggle to be over, you have no idea. Maybe I’m outsmarting myself, I’ve done that before. I do think that the “Calculus of Several Variables” and “Moderan Algebra” classes I took before switching my major to Political Science fried a few brain cells.
Let me explain how I’m puzzled. The “interest cancellation effect” is part of the smoke and mirrors in my opinion because there is some truth to it. We actually just set our equity line account up like this having heard this presentation. If you have a second mortgage, like from an 80/20, if you depost your pay checks every month against your balance, and then pay your bills from your line of credit account, you can save a few bucks each month in interest, because it will lower your average daily balance. This is true. It just won’t save enough money to pay off your mortgage so many years earlier. If you can lower your average daily balance by $5000, then at 10%, you can save $500/year in interest expense. That is not going to pay down your mortgage that early.
Here’s another half-truth that makes the presentation convincing. What can make a significant affect, which is where much of the savings comes from that are claimed in the spreadsheets, is that if you don’t replace your car until after your mortgage is paid off.
What is convincing is the anecdotal evidence in the video and the appearance of mathematical proof. If, everytime you consider making a purchase, you calculate the effect if you took that same money to pay down your mortgage, you are more likely to put it down on your mortage. Let’s say you’re looking at a $2000 treadmill. If you calculate the effect of taking that same $2000 and putting it toward your mortgage, you’ll be much more likely to buy the treadmill, and much more likely to pay down your mortgage. The compounding effect of is pretty significant. So, I’m sure there are cases of people that purchased the $3500 program, and paid off their mortgages much earlier. The question then becomes, did they need a $3500 program to do that? Or could they have done the same thing with a spreadsheet calculator that could be made in ten minutes or that is available online.
Also, you probably would be more inclined to not only drive a Toyota Camry or Prius, the four banger version, you’d probably try to hang onto it for ten years.
Please, please, please, someone prove me wrong. We’ll buy the program tomorrow, if someone can show me the spread sheet how it works in a real case, year by year. I’ll be on the phone every day, calling everyone I know to help them with this great tool. My lame brain just can’t figure out how you can use 9% money to pay down 6% money and come out ahead without smoke and mirrors.
To clear the confusion, I’ll simply state that the term of the loan is essentially irrelevant to early mortgage pay off strategies, other than it determines the pre-programmed amount of principle paid down by your standard mortgage payment. Interest is calculated by mulitplying the rate by the amount owed. So, if you owe $10,000 at 9%, your interest expense is $900. If it’s at 6%, then it’s $600. By paying down a lower interest loan with a higher interest line of credit, you’re only increasing your interest expense, making it take longer to pay off your loan.
The purpose of United First’s MMA software is to tell you precisely when, and how much you’re going to write a check from your Line of Credit, to your primary mortgage to pay down the principal. In fact, it’s a much more effective strategy to completely or nearly pay down the line of credit first, and then start paying down large chunks of principal on the primary mortgage. But then, there would be no need for an expensive software program.
Here is the sneakiest part of the whole thing. If you buy their program and follow their recommendations, it actually will work the way it’s reported in the testimonials. It’s really quite brilliant and convincing. You can definately pay down your mortgage in 12 years, even less using their program. You’ll have to drive the same car that entire time, which might be worth it. What they don’t tell you is that you can come up with your own common sense plan that gets an even better result, and without buying a $3500 computer program.