I was a bit skeptical when I read this article about high speed mortgage payoffs. What would they recommend to pay off your mortgage, I wondered?
Apparently, it's some ADB reduction plan on a daily compounded HELOC. A huge red flag went off when it said:
get a variable-rate, home equity line of credit (HELOC) instead of a fixed-rate loan for their first mortgageWoah, wait a minute. I should get a variable rate revolving loan instead of a traditional mortgage? How is that better?
So I read on, and the process sounds pretty simple, if it weren't ridiculously complex. You put all your paychecks into this loan, basically as a payment. Then you pay your bills with the loan. Well, that makes sense if you stick to a budget and make sure that you put more in than you take out. This part got me thinking:
When the account holder deposits a check, the debt immediately falls for a lower balance used to calculate interest. If the paycheck arrives on the first of the month, and the mortgage isn't due until the 28th, the balance falls by the size of the paycheck for all the days between.Well, that would work if my paychecks came in 2 times a week and all my bills are due at the end of the month. They aren't. They come throughout the month, so my paychecks mostly vanish as soon as they are cashed. My "average daily balance" in the loan, therefore (which is what they are talking about) really doesn't change all that much. As soon as the money goes in, it comes out for a bill. However I do see on large ticket items, like a mortgage that I need to set aside a little bit each week for, that this concept would work.
Then, I remember that this is a variable rate revolving loan. That alone kills the deal for me.
Here's the best part:
The loan is suitable only for borrowers who generally have more money coming in than going out, according to Kern Lewis, a marketing director for CMG Mortgage. Borrowers with negative cash flow would just keep adding to their debt.But why would I go out and sign up for this complex plan? Couldn't I just save my own money and pay extra towards my low fixed rate mortgage principle? Sounds a heck of a lot easier, and safer than messing with an enormous variable rate revolving loan.
Well, complex programs aside, they give an example of how this thing can help you, so I decided to compare it with just paying down your regular loan.
According to a CMG calculator, a borrower with a $200,000 mortgage, who takes home $2,000 every two weeks and saves 20 percent of net pay could be mortgage-free in 12 years using the accelerator compared with a conventional 30-year fixed rate loan. The interest would also drop by $125,000.Not enough info here, but okay. Basically you've got a $200k mortgage and you are putting 20% of a $4k monthly income to pay down the principle early.
On an ordinary 30 fixed at 6.5% you'd be looking at paying $225,000 in interest. So according to this article we can save $125k of that interest by paying it early with the rapid-accelerator plan. But if I took that 20%, which is $800 of that particular monthly income, and just apply it to the principle of my fixed every month, I end up only paying $84k in interest, so I'm saving $170k in interest.
We don't have a lot of numbers to work with, but $170k ballpark looks a lot better than $125k. And it doesn't involve taking out more loans or playing games with paychecks and bill payments. What this boils down to is saving 20% of your income and throwing it at your mortgage principle, which you don't need a fancy program to accomplish. So really, I have to ask, what's the point?
Both CMG and Macquarie said their businesses are increasing rapidly. But Gumbinger doubts they'll win a wide clientele. "Other mortgage products have come and died on these shores," he said. "Americans like the old, fixed-rate loans. Oh, we'll take an ARM if we have to but that's not what we prefer. High-end, sophisticated borrowers who are intent on quick amortization will probably support these mortgage accelerator products."Or maybe Americans can do math? Then again, if they make $4k a month and bought a $200k house, maybe they can't do math!