Don’t Buy it. You don’t need an expensive program to pay down your mortgage more quickly.

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. 

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4 responses to “Don’t Buy it. You don’t need an expensive program to pay down your mortgage more quickly.

  1. The entire paycheck goes against the outstanding equity line. Therefore, any money not spent on paying for bills, groceries, etc, is effectively put against the loan. Most people put money into their checking account, pay bills (including mortgages) and then put some into savings (hopefully). The “magic” behind this program is that there is no longer a need for a savings account, as the equity line is used as both the checking and savings account – therefore all extra monies goes into paying off the mortgage. This does two things, reducing the interest AND the principal. This is of course assuming you are living within your means and don’t need credit cards to buy things when the money runs out before the next pay check.

    A far easier way of doing this is to always pay extra every month on the mortgage. If you put EVERY possible extra penny against the home equity line at the end of each month, the net results are the same as this program. Do you need a $3600 program to do this for you? I don’t. But some people may find that the program helps to force them save and be more frugal as every purchase can be viewed as making the loan pay off take longer. Suddenly the $10 pizza doesn’t look so hot, when it’s shown to have an “economic” cost of over $50!

    There is no magic here – it’s just an ultra aggressive payoff schedule. Remember, during the first few years of a mortgage, almost the entire payment is interest, not principle. Getting the principle knocked off early leads to massive savings in interest down the road. On a conventional 30yr @ 6%, putting just $1 extra on your first mortgage payment saves you over $4 in interest charges. Pay early, and pay often if you want to be out of debt – there is not any other way.

  2. In case anybody is interested, the following web site offers a great calculator showing the effects of adding a one time, yearly, or month extra payments to a mortgage.

    http://www.bankrate.com/brm/popcalc2.asp

  3. Thank you very much, Rob. That’s a very useful tool, which by the way I added to my blogroll. Adding $100/mo to our mortgage would pay our mortgage off 6 years earlier.

  4. By the way, I do believe in using calculation tools to help home owners see the effects of making extra payments on their home loans. I also know that if you set up your second mortgage so that you can deposit your paychecks against the balance, and then pay your bills out of this account, you can save about $50-$100/month in interest; how much obviously depends on your unique situation. If you were on the upper end, the “interest cancellation” effect could result in your paying off your mortgage earlier, several years earlier depending on your specific numbers. Use the calculator to do your own “what-if” scenarios.

    I don’t recommend rolling your car payments unless the rate for your car note is higher than your equity line. However, if you hang onto your car until after you pay it off, and then apply your car payment(s) to your mortgage, you will see a huge effect, very similar to the claims by United First. In my case, my mortgage would be paid off in 12 years, if I put $500 extra every month toward our mortgage. My car payment is $560, and Cara’s is $425, so if we put both of our payments toward our mortgage, starting in a couple of years when we paid them off, our mortgage would be paid off very quickly, like 7 years. Cara doesn’t drive so much, so that’s realistic for her. I, on the other hand, drive about 30,000 miles/year, so in 7 years, my car will have about 250,000 miles on it and will smell like a rat’s butt. You know the smell I’m talking about, when the upholstery starts breaking down, Yuck. I don’t think my clients will appreciate that. So, I’ll be trading my car in, probably before it’s paid off. Which I’m sure many of you are planning on doing, one way or the other. You may not, now that you know about how much money you can save on interest.

    http://www.bankrate.com/brm/rate/calc_home.asp

    Use this calculator to complete what-if scenarios, and see if you don’t change the way you make decisions. You can pay off your mortgage in 8 years, you just can’t do it that fast without changing the decisions you’re making.

    My problem with the MMA presentation, is that it makes it makes it sound like some magical calculations and timing, along with the “interest cancellation effect” are going to get the job done to satisfy their claims to pay off your mortgage in about ten years. It also recommends making a couple of bad decisions in order to make their numbers work.

    I challenge anyone to explain to me how rolling a 6% car note into a 9% line of credit is going to save you money.

    The program also suggests paying down the lower rate primary mortgage out of the much higher rate line of credit, which doesn’t make sense to me. Wouldn’t it make more sense to allow the savings to pay down the line of credit, which is at a higher interest rate? Then, once the second is paid off, start paying down the primary? Come on, you accountants out there, help me out here. I want to be wrong so bad. Please help.

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