Speeding through your mortgage

By Julie Rains on 7 June 2007 (Updated 27 December 2008) 112 comments

Now that many of you have crunched the numbers for accelerating your mortgage payoff, I think you are ready for a quick lesson on speeding through your mortgage. Now, I am not saying you should speed through your mortgage but there is a program available that helps you pay off your mortgage very quickly (approximately 10 years) so let’s see how it works.

I thought it would be fun to review the MMA (Money Merge Account) program from United First Financial (UFirst). The company has a website with content that includes the MMA Intro 101 video (note: this video has been removed from the UFirst website) and an FAQ section (note: the FAQ section has been updated from an earlier version).

Very briefly, the UFirst program involves obtaining an ALOC (advanced line of credit aka HELOC or home equity line of credit) and running all your financial transactions (checking, savings) through the ALOC. That is, you write checks from the ALOC account and designate that account for the direct deposit of your paycheck. You record all of your transactions in the MMA software and then the MMA does its calculations and tells you what actions to take in regard to the timing of payments.

So, let’s consider the following question and answer on UFirst’s FAQ:

Q. Why can’t I make extra principal payments to my primary mortgage and achieve the same results? A. Simply put, the mathematics behind MMA present a sophisticated process that has a substantial financial benefit over increasing your monthly payments…

Here are the assumptions for the Jones (the couple in the video illustration), who have developed a budget with their UFirst agent and discovered that they have $1,000 per month in discretionary income (typically defined as money left over after essentials such as housing, food, and transportation):

  • Primary mortgage of $200,000
  • 30-year fixed rate mortgage
  • 6% interest rate
  • Monthly mortgage payment of $1,199.10
  • Extra monthly payment on principal of $1,000
  • Program cost of $3,500.00

According the video (approximately 20 minutes in), the Jones’s can pay off their mortgage loan in 10.417 years.

However, if you speed through your mortgage Julie’s way (apply the MMA program fees to the principal payment in the first month and then apply the $1,000 to the principal every month), you can pay off the loan balance in 9.917 years.

Check out the attached amortization schedule (enhanced based on recommendations from reader Jim).

Edited December 27, 2008 to reflect changes in UFirst website.

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Guest's picture

Hello. You take on more debt (ELOC) but I did not see the extra interest rate/fees that you would pay, or the net result.

Thank you.

Julie Rains's picture

In my scenario (Julie's way), I don't take out a HELOC/ALOC -- all the money goes directly to the mortgage payoff. In the Other Way (MMA), the ALOC interest charges are discussed for a couple of months but are dismissed as insignificant and part of the Interest Cancellation account. I would be very curious to see what the line of credit balance is at the end of the mortgage payoff because yes, you can take out Loan B (ALOC) to pay off another Loan A (primary mortgage) but and you are creating additional interest charges.

As I mentioned in the post, I am not advocating the speedy payoff just comparing the two methods.

Guest's picture

Do not prepay on your mortgage. Every available cent should be pushed into your brokerage account - INVEST! The earlier you start, the WAAAAAY better off you are.

Julie Rains's picture

I'm not saying you should prepay just wanted to show how the "program" being proposed by UFirst works.

Guest's picture

I mailed in a request a few weeks back for Wise Bread to do a post on mortgage accelerators, and if this is in response to that I greatly appreciate it.

It seems to me however that your analysis isn't 100% right. Let's look at a situation where you make no additional principal payments and you spend every cent you make. If your bank account and mortgage are merged, the time between when you receive your paycheck and you spend your paycheck can be used to temporarily lower your principal. This results in a reduction of interest paid.

Now the $3500 fee could very well negate all the interest savings, but what if you opened a HELOC yourself? Say you normally keep $5k in your checking account. You open a HELOC and immediately transfer $5k to your mortgage along with the $5k in your checking account. Now although your interest rate on your HELOC is higher than your mortgage, you direct deposit your paychecks into your HELOC and pay your bills out of it. The HELOC then acts as your "money merge account" without you having to refinance your original mortgage. Your optimal gain is when you keep your HELOC at as close to 0 as possible.

I'm not sure what the costs are in setting up a HELOC, but you also have the benefit of an emergency fund. Rather than keep cash sitting around in case of an emergency, you use it to pay down your mortgage. Should an emergency arise, you already have the HELOC set up to cover you.

My math is a little fuzzy right now but I think it could certainly help, although not to the degree MMA claims since you're not paying off $1k extra in principal each month.

Julie Rains's picture

Yes, you are the one!! I've reviewed the video numerous times -- all the details of the HELOC payments (in and out) are not fully explored; that is, you don't really see the precise cost of the interest charges for comparison purposes.

I think they are playing games with the time value of money, presenting the LOC monthly interest as miniscule compared to the gigantic interest associated with the mortgage but if you compounded everything out (using PV and FV functions, etc.), you would see a different picture. Again, the entire 10 years or so are not shown, making it harder to dissect the program. The video viewer is disencouraged from taking pencil (or pen) to paper; or presumably, keyboard to spreadsheet.

I guess the idea is that you are incurring a small interest charge that is calculated on a smaller balance to pay off a larger loan that is set for a 30 year time period. Once the first of the month passes, you (via your mortgage) will have to pay the entire month's interest whereas with the LOC you are just paying on the days you have a balance. But if you prepay the mortgage, you are "cancelling" the interest not because of timing but because you are lowering the loan balance.

I think you should consider the interest rate for the mortgage, the interest rate for the HELOC, and the time that you would hold the outstanding balance on the HELOC. Crunch the numbers and see what happens (or send them to me). If you are borrowing at a higher rate to pay off a lower rate, though, then it's unlikely to be beneficial.

Now, having a HELOC or LOC is not a bad idea to have in case of emergency or possibly, if you want to borrow at a lower rate to pay off a higher rate balance. (Some folks may call it robbing Peter to pay Paul or they may call it cash management).

Guest's picture
Guest

The HELOC is only calculated from the time at which you borrow from it, but the mortgage is at a constant rate and time. The optimal position for savings will occur if you do not let your "idle" funds sit in your checking account, but use them to pay down your HELOC account until you need them. It is more about timing to optimize all of your income.

Guest's picture
Guest

The HELOC is only calculated from the time at which you borrow from it, but the mortgage is at a constant rate and time. The optimal position for savings will occur if you do not let your "idle" funds sit in your checking account, but use them to pay down your HELOC account until you need them. It is more about timing to optimize all of your income.

Guest's picture
denise m. smith

As a loan officer for a new hampshire based mortgage firm I can assure you that you could not get your own heloc for anywhere close to zero, as their rates are closely tied to the prime, and also that the $3500 fee for the MMA account is actually less than the closing costs on many helocs.
I would be happy to be contacted via the e-mail address I have provided to Wise Bread for further information.
Sincerely,
Denise M> Smith

Julie Rains's picture

The HELOC rate that I was using for the sake of illustration was 7%. There was a mention of zero in one of the posts but I think that was in reference to the loan balance. I do try to mention (in this and other posts) that the costs incurred (fees, balance calculations, etc.) may actually be higher than what I have illustrated.

Guest's picture
Jennywenny

When I lived in the UK I had a 'virgin one' mortgage through the royal bank of scotland. It was a credit card, savings and checking account all in one. I dont remember any fees. Mortgages work a little differently over there, but I basically could borrow up to my full mortgage if I needed to so it offered me a great deal of flexibility as well as saving a ton of cash.

Julie Rains's picture

Some of these program-sellers keep mentioning how things are done in the UK and Australia. Thanks for giving the specifics http://www.oneaccount.com/onev3/toa/toa-landing.html. With this product, you have 1 loan at 1 interest rate all bundled into an account with checking, savings, etc. In this way, you can manage your cash flow -- pay off balances early if you'd like or borrow if you'd like. Fortunately, it does come with a warning that failure to keep up with payments can lead to foreclosure.

Guest's picture
FlatGreg

Julie,

Thanks for all your work on this post - I find it really interesting. I'm unable to view the U first video on their site (currently at work), but I did find this:

http://youtube.com/watch?v=D_URQoEblKE

Also there seems to be a problem with the comparison done in your spreadsheet. You model the $3500 cost of "The Other Way" correctly, however you don't model the resulting benefit.

The calculation isn't simple, which is why I've been having so much trouble with it. It sounds like the U first system provides software that tells you when to transfer money from your HELOC to your mortgage such that you maintain the smallest possible revolving balance.

I don't think the software is worth $3500, however I can't figure out how to calculate exactly how much you'd be saving. The claims of paying off a mortgage in 8-10 years always comes from also making additional payments; I'm curious how much time is shaved off by making no additional payments and just by making your payments differently via the HELOC.

Guest's picture
Guest

I am not sure what you mean by the "resulting benefit." There is not a benefit to using the HELOC -- if you don't pay extra, you don't pay off the principal early, period. What I have tried to explain is that the program works by making additional payments and lowering your outstanding loan balance. And, interestingly, my "the other way" works out precisely to number of months the video says it will. Now, if you took out a 6% HELOC to pay off a 7% mortgage loan, perhaps you could find some benefit but not the other way around.

Guest's picture
FlatGreg

I disagree - I think there IS a benefit without making additional principal payments. I'm having trouble calculating the exact benefit, so let me try through an example.

Let's say you have a $200k mortgage, and make $5k a month. Let's also say you have a $1500 mortgage payment, and spend the remaining $3500. This leaves you with no extra money to apply to principal.

1) With a "normal" mortgage, you'll pay your $1500 every month, and your principal goes down a small amount.

2) Now say you take out a HELOC for the same amount as your monthly income, $5k, and apply this directly to your mortgage. Your paychecks get direct deposited into this HELOC and your bills get paid out of it, and depending on the exact timing of when you get paid and when your bills are due, you could say that the average daily balance is $2500.

So how are these two different? In #1 you pay interest on $200k. In #2 you pay interest on $197.5k. What I can't figure out is how significant that is, but it is definitely different and you have not contributed anything extra to principal. You're benefiting from the difference in how interest is calculated on a mortgage (monthly) and a HELOC (daily). Also the benefit should increase over time. The price you pay is the difference in interest rates as well as any fees associated with it.

I'm not saying U First is selling a good product, but that there is some sense to what they're saying.

I originally submitted this question after hearing a news interview with the author of this book:
http://www.amazon.com/How-Your-Home-Years-Sooner/dp/0974267600
I haven't read the book, although there are some interesting comments from people who have. He recommends using a HELOC as a way to reduce interest payments.

Thanks for discussing this, and for dealing with a stubborn Wise Bread reader :)

Julie Rains's picture

Okay, I think this is what you are looking for...

If you paid $2500 on the first or primary mortgage in the first month (30-year 6% fixed rate), then you would save $11,891.21 in interest (original total payments of $431,678.38 less the actual total payment of $419,787.17) and would pay the mortgage off in 348 months.

First -- and this is not the scenario you were thinking of but rather the one I was thinking of -- if you just borrowed the $2500 from a HELOC with a fixed 7%, you would have an average daily balance of $2500 plus $15 in interest for that first month. Since you are not paying any extra, your HELOC balance is going to increase over time. If you did a very simple calculation using the Future Value stream of payments, then the FV of $15 per month at 7% interest for 348 months is $16,892.51. If you then realized that this monthly interest is added to the balance every month and grows exponentially, then your balance on the HELOC is going to be $18,813.53. So you have spent $19K to save $12K.

If you could manage to have 15 days rather than 30 days of an outstanding balance, then it seems that you would pay just $7.29 per month of interest and the FV of this stream of payments is $8209.76 (7% for 348 months). However, you will be paying interest on top of interest (assuming that you do not have any extra cash and so never pay off this interest) in addition to the loan balance. So your loan balance is really more than $8209.76, it's $9406.77. Now that you've paid off the $200,000 mortgage 12 months early, you can pay off the line of credit balance. You should be able to do that fairly quickly in 8 months with a total interest cost of $243.13. So the total interest you've saved is $2241.31 ($11,891.21-9406.77-243.12).

Perhaps this is a no-cost way of saving $2241.31. You have spent 29 years making sure that your balance never went more than 15 days. But besides having to be ever vigilant over this time frame, my concerns are: 1) while it makes sense that if you only have the balance out there for 15 of the 30 days each month ($2500 loan balance for 15/30 days = $1250), the bank may have a slightly different way of calculating average daily balance (does this mean I am cynical?) and 2) it may be difficult to have less than 15 days of a balance as there may be settlement periods of 3-5 days for your direct deposit and then you may need to write checks out of your account early enough (5-10 days) to reach your creditors and avoid any late charges. But the fewer days of a balance then the less interest you would have to pay.

Guest's picture
FlatGreg

Thanks Julie, you really did a lot of work on this one. It looks like without making additional principal payments, the benefit is so small it's hardly worth the hassle and risk. Thanks for doing the research and number crunching.

Guest's picture
Scott

Hi Julie,

I am curious as to what you really know about the mortgage industry or even this money merge account? What makes you an expert to talk about this? I see your profile and I'm amused.

I see you using the term, 'I guess'; I find that to be a funny term in an industry that is not based upon upon 'guesses', but it is based upon factual evidence.

We believe that the money merge program/concept is is good one, just like every debt reduction program (that works) out there, but we do have a problem....

I am referencing the "Julie’s way" program. The money merge account is about ZERO EXTRA Payments to your budget every month AND yours is NOT. Your program is misrepresenting the facts and in the mortgage business that is called fraud.

I am a 10+ year mortgage professional and a writer for one of the largest and most respected mortgage industry publications and this is article is exactly what I am tired of. People that don't know what they are talking about.

3 things:
1) Go back and listen in on the money merge presentation and get the facts correct
2) last I statistic I heard from the federal reserve is that only 12% of the loans taken out in our country are paid ahead - People need a system
3) know your facts before you publish them

Guest's picture
Guest

I'm very interested in this thread because the posters are asking the same question I am. I realize that an amortization spreadsheet and a Future Value of money spreadsheet are probably more simplistic than the MMA software...but some basic financial principles must be driving the effectiveness of the MMA software.
It concerns me that the basic principles are not clearly stated by UFirst--rather they point to "complicated algorithms". I realize that optimizing the last few percentage points are probably "complicated", but surely the majority of the software's decisions are made based on principles that can be understood by reasonably savvy people.
Scott, you appear to understand the functionality of this software. What basic financial principles are the MMA algorithms based on? I would feel better about spending $3500 on what appears to be quite useful software if I understood that. (I would also like to see that spreadsheet that Julie asked you for.)
Thanks for your help

Julie Rains's picture

Thanks for participating in a friendly, thoughtful discussion about MMAs and methods of paying off mortgage loans early. My article was based on the UFirst video presentation. I think readers would like to hear about your system and how they can pay off their mortgages early without making extra payments; please link to a spreadsheet or step-by-step guide showing us how it works.

I am not advocating paying a low-interest loan off early but rather exploring methods of early payoffs.

 

Guest's picture
hoganzzz

I agree with needing to see it in a spreadsheet to get a feel for the flow of it. The presentations are way too confusing and do not give enough detail, only generalizations, which has most people skeptical about the process. What are they hiding? Are they afraid that the calculation is really quite simple and people will not spend money to buy their software once they know the "secret"?

It appears that once you spend $3500 on the software and get the first lump payment on the mortgage, you have to pay the HELOC down to some given point before they recommend that you submit another large lump sum payment (borrowed against the HELOC) to make an impact. If you are on a tight budget already with say $100 or so in extra income each month, it would be years before another lump payment went through. In the meantime you are incurring additional debt on your HELOC at a prime+ interest rate that is generally higher than your fixed rate mortgage.

It would seem that bi-weekly payments are the way to go since you truly are not paying out anything additional each month, only changing when you send in the payment.

Also, this program seems to force you to use anything additional regarding your income to pay on your mortgage. That is not realistic given vacations, emergencies, etc. I have not seen anything during the on-line presentation or the face-to-face presentation I was given by a rep that discusses any of these issues.

I really like the concept but need more clarity that no one can seem to give.

Guest's picture
Buck

So, should I do this program or what?

Guest's picture
Jeremy

Why dont you take this information and try doing some of your own research along with it. If you just sit and take any old person's financial advice without fully understanding it and knowing it then you will get what you deserve. So take a little time and do some independent research on this. Take notes of what you find and why not report back here with your findings?

Guest's picture
Tri

Who are you addressing your comments to Jeremy?

Guest's picture
BA RE Finance & 28 years in RE & Lending

MS Excel has a bi-weekly calculator; if you add in the maximum discretionary income that you can give up to the bi-weekly payments you are no doubt getting the biggest bang for your buck. Open a Heloc (if you can) with the bank you have your checking or mortgage with directly (it should cost just a few hundred if any $$ to open). If you need emergency funds or discretionary funds draw against the Heloc and then pay it down to 0 as soon as you can (because it has higher interest rates now). The people defending MMA's program are the people charging $3,500 and where their commission is between $1-2K. Their program would have only a marginal difference over an under $100 personal finance program such as MS Money or Quicken. Plan to automatically deduct your bi-weekly and additional set priciple payments from your pay check and then sticking with it is the key; the rest is a shell game and salesmanship. I know people that bought into this program and I hope they stick with it. They could have saved $3,400 ($3500-$100 for a personal finance program). It’s a tough time in the market place and everyone is looking for a better way and a fast buck. Selling your friends on a program that does little more that fill the linings of the up-lines pockets is a sure way to end up with nobody at your funeral.
Credentials: 28 years in RE sales and RE lending (owning my own investment company & mortgage branch); I have a BA Real Estate Finance, Arizona State University, Tempe AZ and have transacted well over $1 Billion in my career. As I said have a plan and sticking to it (with periodic review and adjustment); hard as it is these days, is the best advice anyone can give. If it does cost you $3,500 for a plan, I hope you stick with it! Brad G.

Julie Rains's picture

Buck, the short answer to should I do this or not is "no." My recommendation and Brad G.'s as well as others is that if you want to pay off quickly, it is easiest to do it yourself without paying for a program.

Guest's picture
Guest

I just found this thread and I think many people are on the right track. The fact is that there are people that believe mortgage acceleration is good while others believe that investing is better. Basically, everyone invest early to benefit from compounding interest as a way to leverage wealth. But you must remember that, this is exaclty why the banks lend you money, they benefit from compounding interest utilizing your mortgage as their investment tool. Either way you look at it the average consumer pays almost three times the cost of their home just to own it. The key principle is that you should accelerate the payoff of your mortgage. Just do something, pay extra utilize any means of accomplishing the same goal. As explained above there are many ways to accomplish that, and some are better than others due to comparable savings. Remember interest saved is like interest earned. My example is that I would rather have my house paid off let's say in 10 years then reinvest that money for the next 20 years. The basic premise of these software programs is that they provide a strategy road map to achieving the highest interest savings. The software's benefit is to keep you on target with your goals. I personally have to fight procrastination and have discipline to employ such a strategy. For me the software provides a snapshot of the exact savings and strategy being accomplished. I have looked at all the programs available and cost is a factor. I have found a new program that is less expensive and provides the same benefits at www.equityexpress.com , there is also a discounted promotional price available call them and ask for the promo code#orla .

Guest's picture
Guest

The above post referenced the incorrect website. Sorry.

Correct Website www.Maxequityexpress.com

Julie Rains's picture

Well the price in #24 is more competitive ($1997) compared to the other MMA products ($3500) and cost is really one of my biggest concerns about these programs. The HELOC arrangement is a bit of a bother to me, but I may just be old-fashioned about borrowing against my home.

The BankRate article is interesting and I like its info (the site is on my blogroll) but there is one, critical difference between the UK/Australia program and the US process in regard to the HELOC account. In the UK for example, the account being used is a combo savings/checking/mortgage/home equity account (see comment #11) and not a HELOC account and separate mortgage account. So the UK account owner doesn't incur additional, unnecessary finance charges that may be generated using the HELOC but rather money earns interest (via the savings/checking account).

It can be a dilemma to decide pay off early vs. invest; I have a mutual fund account that I was thinking of using to finish paying off my mortgage. I'm glad I didn't this year because 2007 spread (to date) of investment return - interest rate is over 20%. Of course, now I am wondering if I should take my gains and pay off the mortgage in case the fund doesn't do well next year. If you have a low-interest loan (6% or less), it may be wise to invest rather than pay off early.

Still, I understand that if the program works for you and it helps establish discipline, that's great -- seeing results is motivating. If anyone wants to download my spreadsheet, that may work well for many also.

Guest's picture
Guest

My understanding is that with the MMA you must have and adjustable morgage rate, "in order for the program to work". What happens to the figures should the inflation rate increase (dramatically). How do the numbers look then?

Guest's picture
Eddie

Julie,

(I posted #23 and #24)

I agree that there is a big dilemma regarding taking discretionary income to prepay or invest. Clearly, that decision is based on ROI(return on investment) if you can make more on your investments then it may be the better choice. You must take in to consideration the capital gains and liquidity on the investment. My personal challenge is how much more comfortable will I feel if I own my home outright? Clearly, it would give me a sense of financial freedom, I then can invest my full mortgage amount and accelerate my investment portfolio. It's clearly about personal comfort levels and choices. There are many opinions and "gurus" that would argue for and against all choices. One just needs to take personal financial responsibility and makes choices to secure one's financial goals. It's just like being healthy; everyone knows about it, there are different types of excercises ie. gym, bicycle riding, eating right etc. But you see many in our society that just don't or can't unless they have a plan. I've found a great analogy between buying and owning your home: Would you like to buy your home for $250,000 or own it for $660,000? Clearly the bank wants you to own it for $660,000. My goal: I'd rather own it for as close to the purchase price as I can, that's the key to mortgage acceleration. We Just must do something!! It's not about how much money one has, it's about how one manages the money they have. It's been great taking part in this discussion.

Guest's picture
Tri

Hello everyone,

I've been researching on using HELOC to accelerate the mortgage pay off and I think I can give a good example of how this technique will work.

Disclaimer: I'm not in the mortgage business nor am I an investment advisor so please don't take my words at face value. In other words, I may be misstating something about how loans work as well.

First off, the UFF site does say (in their FAQ) that this method ONLY works for people who have discretionary income each month. If you don't have any, then it will not work. But if you don't have any to begin with, then surely you cannot implement Julie's method either, as it requires putting in EXTRA monthly payments towards the principal.

To understand why MMA or similar products work, you need to recognize that a fix-rate mortgage is a close-ended, compound-interest type loan and a HELOC is an open-ended, simple-interest type loan.

If you look at your mortgage table that Julie created in her Excel spreadsheet (a big thanks there Julie), you will see that most of your payment goes toward the interest. This is why it is a close-ended loan...because you are paying the money back on a pre-calculated schedule. Whereas with a HELOC, you pay interest only on the outstanding balance for each day, you are not following some pre-established payment schedule.

Now, lets look at an example. Assume a 200K loan, at 6% fixed rate amortize over 30 yrs. Based on Julie's spreadsheet, the total interest paid at the end of 30 yrs is $231,676.56.

For simplicity, assume we also opened up a HELOC at the same time that we established this mortgage. So along with the first payment for the mortgage, we take out $5000 from the HELOC and pay it towards the principal of the mortgage. According to the spreadsheet, we now see that the total interest paid is $206,713.31. An immediate saving of $24,963.25 in interest cost for our $5000.

How much is the interest on that $5000? Well, lets be conservative and simple and make it 10%. $5000 x 0.1 = $500. That $5000 will cost you $500 for the year, or $500/12 = $41.67/month!!!!

Let us assume you have only $500 discretionary income per month. As you can see, in this simplistic case, it will take you about 11 months to pay off the $5000 in your HELOC. $41.67/month x 11 months = $458. So it costs you $458 in interest to use that $5000 from your HELOC to save you $24,963.25 in interest in your mortgage!! WOW!

How we can cut the cost of the interest from the HELOC even more? By using it like a checking account and by using your credit card to make most of your purchases if not all. When you get your paycheck, simply move all that money into the HELOC. What this will do is it will reduce the balance on the HELOC, hence, reducing the interest you have to pay. And by using your credit card to pay for your living expenses, you delay the withdrawal of that money from the HELOC. The longer that money stays in the HELOC, the more you save in interest cost.

So at the end of the month, you transfer some money out of the HELOC to your checking account and write a check to your credit card company to pay off the charges that you have incurred during the month. Keep in mind we assumed to have an extra $500/month discretionary income. Thus, you can now see that at the end of the month, your $5000 HELOC balance will now be reduced to $4500 + the interest for that month.

Lets say you get pay net $3000/month on a bi-monthly basis in the middle and the end of the month. On the 15th, you trasnfer $1500 from you checking to your HELOC account. On the 26th, you transfer $2500 from the HELOC account back to your checking account to pay your credit card company. On the 31st, you get another deposit of $1500 from your employer and you then transfer that into the HELOC.

This is what your HELOC balance will look like:

$5000 (from day 1 to day 14, this balance is used for interest calculation)
$3500 (from day 15 to day 26, this balance is used for interest calculation)
$6000 (from day 27 to day 30, this balance is used for interest calculation)
$4500 (on day 31, this balance is used for interest calculation)

As you can see, the interest is now less than the $41.67/month as your balance did not remain constantly $5000 through out the month. And within 10-11 months, this balance will be paid off and you are ready to begin another $5000 round.

I hope from the discussion above, you can see the effectiveness of using a HELOC to pay down your mortgage faster. But you can also use this approach to pay off any debt you have, not just a mortgage. And as you can see, our HELOC, even though it is pegged at 10% interest, still yielded much less net interest cost than the mortgage interest cost!

Furthermore, you can see that you need extra discretionary income each month to make this work. But the huge benefit is, you can always withdraw the money if you need it (thanks to the HELOC). Whereas if you pay extra towards your mortgage without having a HELOC, you lose access to your equity! Obviously, the more discretionary income you have the quicker you will pay off that $5000 balance and the quicker you can restart the next $5000 round.

Someone had mentioned in a previous post that you need to consider the cost of opening a HELOC. Well, find one that has no cost. Or just roll the cost into the HELOC balance and you can see it still saves you more money. Bank of America offers HELOC at no cost!

Now imagine this scenario: You have been paying an extra $500 per month towards the mortgage without using the HELOC method for 5 years. You are feeling pretty proud of yourself for such discipline. Then you get laid off and can't find a job for a year. Will you be able to cope? Assume your emergency fund runs out before you land another job. Can you still cope now?

You won't be able to draw on your equity because you failed to open up a HELOC. What's worse, you WON'T be able to establish a HELOC now because no bank in their right mind would give you one when you have NO INCOME!!! Now you can see how beneficial the HELOC method is!

Summary:

1. HELOC are open-ended, simple interest loans. Converting money tied in close-ended, compound interest loans to HELOC is the key to dramatic savings in interest cost.

2. Save tens of thousands (if not hundreds of thousands) of dollars in interest cost.

3. Own your home completely in 1/3 to 1/2 the normal 30 yrs span without changes to your normal spending habits.

4. Instant access to your equity at any time.

5. Just because a HELOC interest rate is higher than your mortgage rate doesn't mean you end up paying more interest. You have to analyze your net interest payments for each loan.

One last topic:

Now that you understand how this concept works (I hope you do :-)), should you fork out $3500, or $1999 or even $1250 for a software program to do this for you?

Well, the software will definitely help you "monitor" the progress for your mortgage pay down. It will also do any recalculation necessary in case you are not consistent in getting that discretionary $500/month. But it also maximize the use of the HELOC to help pay down the mortgage in the quickest time (at least that's their claims).

UFF supposedly hired Ph.Ds in mathematics to design their algorithms. And they also invited several math professors to try to beat their software.

I have yet to purchase any software myself as I would like to find out which is the better value.

Guest's picture
Guest

Hi,

I agree, I think the HELOC is the way to go, but I don't think one has to pay $3,000 for something like the UFF software. I am not associated with any company, I've just been doing a bunch of research. feel free to email me and I would be happy to share what I have found.

Guest's picture
Sandy

Would you please share with me what you learned

Guest's picture
Eddie

Tri,

Excellent overview! Thanks for the quick synopsis. I too researched the programs available and felt that you must weigh the pros and cons of the expense. Clearly with the high cost programs I felt that I 'd rather put that money as my first mortgage injection. The cost with some programs are out of reach to some consumers. The companies that offer a good service at a reasonable cost will prevail. The company I mentioned on post #24 has a promotional offer that is a fraction of the cost of other programs. I wish everyone luck on their desire to take personal responsibility for one's finances. And Julie thank you for the open discussion on your blog. Let's educate not bash. Thanks.

Guest's picture
Tri

To Julie:

Thank you for your blog. It's a good place for me and everyone else to participate and learn. I have a comment about your statement:

"The HELOC arrangement is a bit of a bother to me, but I may just be old-fashioned about borrowing against my home."

Well, how is that different from borrowing a primary mortgage? All you are doing is borrowing from the house using one type of loan (HELOC, open-ended, simple interest loan) and paying off another loan (which you are also borrowing from the house) that is a close-ended, COMPOUND interest loan.

"It can be a dilemma to decide pay off early vs. invest."

I agree with Eddie's comment regarding this topic. Many people have expounded their ideas/stance on this topic. It all boils down to personal preference in terms of how much risk can one afford to subject himself/herself to.

To Eddie:

Thanks for the positive feed back Eddie. A question about your coment:

"I have found a new program that is less expensive and provides the same benefits at www.Maxequityexpress.com"

How do you determine that the program provides the "same" benefits? Did you have the two company do an analysis of your situation? I'm asking because I'm trying to get a couple of vendors to give me a free analysis right now. By the way, the product from that website is the same as EquityGeniePro (http://www.equitygenie.com/calcs.html).

To: Brad G.

Questions about your statement:

"The people defending MMA's program are the people charging $3,500 and where their commission is between $1-2K. Their program would have only a marginal difference over an under $100 personal finance program such as MS Money or Quicken."

Prior to my posting of how to accelerate your mortgage with a HELOC, do you know how the MMA program or similar product works? Have you made a comparison analysis between using your method and theirs? I'd be interested to see if you some numbers. It just might convince me that I don't need the software after all :-).

Julie Rains's picture

Points taken about using the HELOC to access cash when needed. I guess I was thinking of using HELOCs for purposes other than paying off the mortgage, such as major vacations, cars, etc. There are tax advantages to the HELOC vs. other types of loans but I would still think carefully about having many liens against my primary residence. If you build up your investments, you can borrow against them as well but without the tax advantage.

The simple, open-ended interest sounds better than close-ended, compound interest but there are pros and cons of each. (See discussion about simple interest by Jack Guttentag, a former professor with the Wharton School of Business, University of Pennsylvania). In my earlier discussion about using the HELOC, I was compounding the interest and the example Tri is using simple interest; you need to look at the term of the loan (or watch it in action) to see how interest is applied. Jack, aka The Mortgage Professor (overlook his visual design, he's got great content), also discusses HELOCs and it looks like interest in his example is calculated daily using an average balance calculation but, again, you would need to analyze the HELOC documents and the bank's interpretation to get an accurate picture of how interest is calculated.

If you apply $5,000 to the principal when you first get the loan, then you will shave off $23,000 from the loan balance over the 30 year period. But it looks like you are paying $5458 to save $23,000 which sounds good but the $5458 is in today's dollars (present value) and the $23,000 is in future dollars (future value). The future value of $5458 at 6% in 30 years is over $32,000.

I do see how managing every dollar and timing every expense with a program could work but the fees involved with the program, HELOC, etc. may cause it not to work as expected.

 

Julie Rains's picture

There was a question about ARMs and how that would affect the MMA program. It would really depend on your mortgage interest rate and the HELOC rate, and with an ARM, the rate would change and the benefits would change also.

Guest's picture
Tri

I created an Excel spreadsheet to implement the approach of using a HELOC to accelerate the mortgage payoff. It's very basic, but it proves that this approach works. It's basic in the sense that it does't take into consideration if you move your paycheck money into the HELOC to reduce the interest cost.

More importantly, it works better than paying Bi-Monthly, Semi-Monthly, Bi-Weekly, Weekly, or paying extra each month. I think it comes very close if not better than better than if you pay Semi-Monthly and add extra money on each first payment of the month. And this is based on using this basic version of the method. UFF's product promises much, much better outcomes than what a basic spreadsheet can do.

But here's the kicker...are you ready...I'm getting pretty much the same savings in interests with my basic spreadsheet method as the $1999 program that is currently selling out there (i.e. EquityGeniePro)!!! Or at least it matches/beats the results from the SAMPLE payoff calculator that they use on their website.

So what are you paying $1999 for? You’re paying for a software that tracks your progress and maybe some other features that may or may not be useful to you. Oh, you're also paying for someone to develop an easy to use program so you don't have to worry about how all this works or how to keep track of everything in case you deviate from the plan. I’m not sure if you can implement something like this in Quicken or not…but I would venture between Quicken and Excel, you can get pretty close. Is it worth $1999? That's up to you to decide.

The UFF product is clearly the superior product so far (IMHO). But I've only been playing around with the spreadsheet for a day. Why do I say the UFF product is superior? Because as of now, their claim of savings is so much more than what I'm getting in the spreadsheet that I may just plunk down the $3500 and go for it. Furthermore, I believe UFF guarantees your results in writing, provided you can consistently come up with the positive cash flow that you claim to have in the initial analysis of your mortgage. But please don't quote me on that...simply inquire them about it.

Here's my analysis (and I cannot guarantee any of these values as I'm not a financial expert):

Approach A:

Pay mortgage down via HELOC in $1977.73 blocks, and using $1000 each month to pay off the HELOC:

Loan Amount $200,000.00
Annual Interest Rate 6.00%
Term of Loan in Years 30
First Payment Date 11/1/2007
Frequency of Payment Monthly
Payment (per period) $1,199.10

Rate (per period) 0.500%
Total Payments $267,504.98
Total Interest $67,504.98
Interest Savings $162,812.49
# of Payments Saved 237
# of Years to Payoff 10.25
Built-up Cash Reserve $120,015.30

Approach B (Brad G.’s method… it appears to give you the best out come, although I’m no expert):

Pay mortgage down via semi-monthly and adding $1000 extra with each 1st payment of the month:

Loan Amount $200,000.00
Annual Interest Rate 6.00%
Term of Loan in Years 30
First Payment Date 11/1/2007
Frequency of Payment Semi-Monthly
Payment (per period) $599.28

Rate (per period) 0.250%
Total Payments $266,891.61
Total Interest $66,891.61
Interest Savings $164,592.65
# of Payments Saved 476
# of Years to Payoff 10.17
Built-up Cash Reserve $120,664.63

From the above data, you can see that the Approach A costs ($67504.98 - $66891.61) = $613.37 more in interest and takes one month longer to pay off the loan than Approach B. However, keep in mind that the $613.37 in interest cost will most likely be eliminated if you move your paycheck into your HELOC account each month.

Plus being on a semi-monthly plan could restrict your cash flow quite a bit as it is a contract between you and the bank. You can’t choose to pay one month semi-monthly, and pay monthly on another month (at least this is my understanding of how it works…please correct me if I’m wrong).

Guest's picture
Tri

I realized I forgot to mention that I use a fix rate of 9% for the HELOC. Keep in mind that the HELOC will be a variable interest rate. So perhaps in this basic version of doing this method, you will come out slightly better by paying Semi-monthly and adding extra per month.

However, keep in mind that UFF claims much, much better results. And I'm guessing their model uses variable interest rate for the HELOC.

But as you can see from the discussion above, it sure doesn't hurt to get a free analysis from UFF if you are interested.

Guest's picture
Guest

Tri,
Results are results. It's math, you can't acheive different results using different software if the math is correct. All of them use projections since things will change along the way. So, it's your financial position that counts. If you bought 5 programs, the results for you should be the same at the end for all of them.

Perhaps the projected results will vary from one to another. Should you be leary of the one showing you the highest savings that also happens to have the highest price tag? My advice, if you buy one, get the one with the promo code talked about above, since it sounds less expensive.

Do it yourself if you like. Put all your discretionary income into your mortgage each month. Everyone already knows this will rapidly reduce your interest, but how many people do it? Not many. Remember though if you do, you won't have anywhere to go in the event of an emergency. The program and the software are tools. We can all write our checks in the register and write out our own tax returns, but I'd gladly pay (but not too much) for a piece of software to help me. Is $3500 too much for you when there are comparable programs out there for less?

Guest's picture
Tri

If any one reading this owes mortgages for more than one property, you owe it to yourself to call UFF for a free analysis. You'd be amazed at what they can do for your situation.

Julie Rains's picture

If you use my spreadsheet, you can track your results and speed things along without paying fees, which can be put applied toward the principal or placed in an emergency fund. If you want to pay variable amounts each month, then you can adjust the principal amount paid. Or, if you are promoting a program, you can keep posting that you need to pay for a tool rather than download one for free.

Guest's picture
Guest

If I use your spreadsheet and save fees to put into a reserve for emergencies, it's a start. There can be many unexpected changes to income and expenses. You could go thru that reserve in no time.

If I add to my reserve by putting some of my discretionary income into it, I'm defeating the purpose of reducing my mortgage. I can't have the best of both worlds.

I can have the best of both worlds when I use the software. It does the work for me. It tracks my income and expenses and my HELOC balance. I have a built in reserve. It tells me what to do next. I can easily see the effect if I have a one time expense or income. It forces me to look more closely at my budget. I didn't do that before.

It's like taking a sophisticated spreadsheet and combining it with other spreadsheets and putting it all in one. It motivates me to do it and it saves me a lot of time. Is it worth the price? Sounds like a personal choice. Most people I know have anxiety about doing it on their own using spreadsheets, so they do nothing.

Guest's picture
Tri

First, I want to humbly apologize to all the readers of this topic. My intention is not to hawk any product or vendor. After re-reading my posts, I guess one can surmise that I was trying to push the UFF product. I am merely researching on this topic and wanted to really understand the mechanics of what makes the HELOC method work so well.

I could not find anything on the web that clearly shows how this method works without having to pay some one for information. The information in this blog did not seem very accurate in terms of how the HELOC method works...so that's why I decided to contribute my findings.

I was able to produce similar results to UFF's interest savings claims on a spreadsheet last night. Upon reaching that, I conclude my research.

Some final remarks for those who are interested:

1. HELOC method is the best approach to use to pay down your mortgage FAST! Hands down, it beats all other approaches. I'm talking you are saving a huge amount of money in interest cost as well as time!

Go have any of the product vendors do an analysis of your loan. You will be amazed at the savings and at how soon you can own your home free & clear!!

And the beauty of this approach is it doesn't affect your normal spending habits and it will give you access to your equity when you need it. That's why I strongly believe in this approach so much.

But it's NOT for everyone...only those who are good at managing their money!

2. This approach CAN be implemented with a simple spreadsheet. Software will NOT help you pay down your mortgage faster. You need to have positive cash flow to make it work.

Some software may make more aggressive recommendations than others in deciding how to best use the HELOC to accelerate the mortgage payoff.

Post #38 appears to be from someone who's very familiar with one of the software packages and I concur with his/her remarks. It will make implementing the HELOC method much simpler and more carefree. That may be worth the price for some people.

3. Are there more risks in the approach than others? Maybe. Refer to Julie's Post #31. It contains a link to a website that discusses about the risks of simple-interest loans.

But IMHO, the way the HELOC is used to pay down the mortgage limits that risk because of the size of the balance (we're talking $1000-$5000 balance here...see my example in Post #38).

Thanks again Julie, for creating this blog. I'm sure many people will find it useful in their research to understand the HELOC method.

Julie Rains's picture

I am still skeptical because I am wondering if the calculations include all of the cash flow for both the mortgage and the HELOC -- you can pay the mortgage off faster than its term but will it be faster using the HELOC at a higher interest rate compared to my way?Well, you can pay off the mortgage balance faster but you'll be building a HELOC balance not only with the extra principal payments and the interest that will keep getting added to the balance. See #12 for my thoughts on this process (though you may have read through that already). Still, Tri, let us know how this works out for you, perhaps in 6 months or so.

Guest's picture
Guest

Julie,

I do know that it does calculate everything for both the 1st and the HELOC.

Guest's picture
Guest

If you want to track your mortgage payments, pay down debts, or need to do some calculations in Excel, check out this site:

http://www.vertex42.com/

They have a ton of templates in Excel. Very easy to use.

Guest's picture
Tri

I just found this site here that sells the program for only $99!!!

http://www.maxmyequity.com

This the most reasonable one (in terms of pricing) I've found so far.

Julie Rains's picture

Thanks for the links Guest and Tri. I have been focusing on the mortgage acceleration only using the spreadsheet rather than money management tools, though many readers have emphasized the value of such tools. I can see how those tools could be extremely useful though my approach is different, most likely due to the way my brain is wired. I tend to determine how much I can spend in various categories (meals, clothing) after subtracting fixed, nondiscretionary expenses such as housing and baseline costs for utilities for example; still if your expenses vary over time (and they do, depending on life circumstances) it is good to review them and then see where you can reduce and then apply savings toward financial goals such as investing or prepaying. 

Guest's picture
Guest

I think you'll be extremely disappointed with that calculator, errr ahh, I mean program.

After you buy it, why don't you let Julie know. Maybe you can convince her to delete your post. Meantime I'm going out to a nice $99 dinner.

Guest's picture
Tri

Does this mean you've seen that program or use it and that the results are not very good? Please elaborate so we all can gain some insights.

Thanks.

Guest's picture
Tri

I meant Post #45 above.

Guest's picture
Guest

I've seen it. I recall a guy who bought it who was willing to sell his for $50. I bet you could offer him $10 and he would take it. If you look around, you can find him.

If you get it for $10, I guess I'll only be able to eat fast food instead of a nice dinner.

Guest's picture
Guest

Hello everyone,

I have been reviewing all the comments regarding the mortgage acceleration software available. And I agree that there are pros and cons regarding the need for such a product. My question is: At what price if any does one think it is beneficial? Clearly return on investment is important and there is always a distinction between price and value. I am just wondering if the biggest issue is the current price that the product is selling for that makes it such a hot topic? I personally agree that as I look at the products my personal challenge is the PRICE. Do I see value in a tool that guides you through the process, personally yes. We've already addressed many opinions on the product so I just would like everyone's opinion on price point? Thanks.

Guest's picture
Tri

The high price was a major turn off for me as well. I went and got quotes from a couple of vendors and based on MMA's projected savings for my current situation, I realized that in the long run, I save more money in interest cost with MMA than other competing products. That's what I based my decision upon in terms of pricing. I even factored in the fact that if I took the difference in the initial software cost to pay down my 1st mortgage's principal, MMA's still yielded better savings for me. And this is with just one property.

As I pay down my 1st mortgage and then use the software for the next property that I purchase, I predict even more savings down the road. Thus, it is worth the investment for me. I may a couple of thousands now, but long term, I'll be saving tens of thousands if not hundreds of thousands!!!

Each person's situation would probably result in different projected savings. I strongly recommend people to call the companies and ask for a free analysis and look at the long term benefits.

Guest's picture
Tri

In case anyone is interested, I re-examine the information from the MMA projections and the projected savings didn't look very achievable to me. So I'm holding off on this purchase until I can get them to prove the math for me. If not, then I'll most likely go for the Equity Genie product instead.

Guest's picture
Cindy Trevino

Does anyone have a comparison or experience with either UFF or this MAP program? The MAP is at http://www.mortgage-acceleration.com/

I have seen other mentions of MMA, but not sure if anyone has used this program. Seems to be more educational than "calculator". That is my understanding as it sits anyway.

Julie Rains's picture

I'll put in another plug for my amortization schedule: DIY Acceleration, which is a free download right here at Wise Bread. It's in Excel and allows you to create an original schedule (how your mortgage was designed to be paid off), a $100/month acceleration schedule, and what I called a real-life schedule based on random extra payments made over the life of the loan. If anyone needs any help in using the spreadsheet, let me know.

Guest's picture
JimmyDaGeek

I have been following Tri's interesting posts. Like her, I have been investigating mortgage acceleration programs for the last few months, as I am interested in getting rid of my mortgage.

I have been creating my own spreadsheets, trying to understand what the magic is in using a HELOC, as opposed to simply sending in spare cash.

So, to use Tri's example of $200,000 borrowed at 6% for 30 year, you pay $231,676.38 interest. My numbers will differ by a few dollars as I didn't round. If you pay an extra $500 a month, you pay off the mortgage in 179 months and pay $102,534.54 in interest. If you pay $5000 every 10 months, you do a little bit better. You pay off the mortgage in 175 months and pay $99,376.71 in interest.

I learned there is an inherent fallacy in every HELOC example I have seen.

If you borrow the $5000 from the HELOC and and you only have $500 a month to pay it back, that $500 has to equal the sum of the principal and the HELOC interest at the end of the month. In other words, the interest on the HELOC becomes another bill that you pay and you have a closed-end loan. So, instead of paying off the HELOC in 10 months, it's actually 10 and a fraction that represents the HELOC interest you have paid.

I tried to reproduce what Tri had done to approximate the savings in a HELOC shuffle. I assumed the effective interest rate would be 4% and that I would borrow the $5000 in the same month that the HELOC would be paid off. Using this adjustment, the mortgage is paid in 176 months paying 100,090.31 interest. But the HELOC took an extra 2 months to be paid off, even with the extra mortgage payment, and the total interest was about $1600. Adding it all together, the interest cost is about $101,690.

Sooooo, you savings is $102,534.54 - $101,690, about $845. WOW!! All that work... for what? I have no idea what these mortgage acceleration programs do, so perhaps the HELOC costs are excessive. BUT, they keep claiming $1,000's of savings over do-it-yourselfers.

As I have stated in posts elsewhere, the only advantage these software packages and services give you is a way to focus on your end goal of mortgage payoff and see how every dollar spent affects that goal. If you feel that is valuable to you and that you can't do it on your own, then paying for it would be worthwhile in the end.

As another poster noted, you can also use this method to put money aside for investments. However, paying off your mortgage is the same as getting a compounded bond return at the same interest rate.

Guest's picture
Tri

Ok, I finally got to the bottom of the UFF projection and now I know why they had such spectacular projected savings as opposed to what I was getting on my spreadsheet.

Essentially, I told the UFF agent that I get paid bi-weekly and my wife gets paid semi-monthly. So in his analysis, he punched in those values but the net monthly income was erroneously calculated. My bi-weekly payments were mistakenly calculated as if they were semi-monthly. Once I corrected this, the math matches.

For example, say I earn 1000 bi-weekly, and my wife earns 1000 semi-monthly. The MMA net monthly income was calculated as:
(1000x24 + 1000x24)/12 = 4000/month.

But it should have been calculated as:
(1000x26 + 1000x24)/12 = 4167/month (rounded for simplicity).

As you can see, that's 167/month extra income. I was assuming their net monthly income calculation was correct and using 4000 in my spreadsheet. However, their actual calculation used 4167 (although they reported 4000).

In closing, all the products out there do the same thing, IMHO, so pick the one that is easiest to use or cheapest or has best feature, etc.

Guest's picture
Tri

First, to clarify, I'm a guy, not a gal.

As for your example, it's really similar to my example in Post 33. And as you can see there, the saving is also minimal. But the advantages are

(1) you have access to your money at any time;

(2) your spending habit is not affected (because you are not obligated to make any extra payments, instead, you are merely parking your extra cash in the HELOC to pay it down).

> BUT, they keep claiming $1,000's of savings over do-it-yourselfers.

I'm not sure if that's their exact claim. I believe their claim is a homeowner will save $1,000's over the standard 30-yr mortgage approach and that this method speeds up the mortgage payment dramatically while not forcing a change in the homeowner's spending habits.

> As I have stated in posts elsewhere, the only advantage these
> software packages and services give you is a way to focus on your
> end goal of mortgage payoff and see how every dollar spent affects
> that goal. If you feel that is valuable to you and that you can't
> do it on your own, then paying for it would be worthwhile in the end.

I concur. But as Scott in Post 16 says at the end in item #2:

"last statistic I heard from the federal reserve is that only 12% of the loans taken out in our country are paid ahead - People need a system"

Whether he got his fact correct or not I do not know. But I'm sure a lot of people can use this approach since it really doesn't affect their spending habits.

Guest's picture
Tri

The software makes recommendations as to the best amount to use from your HELOC to pay towards your mortgage's principal such that it will minimize your mortgage payoff time as well as maximize your interest savings.

This is not as trivial as it sounds. Especially if your financial situation changes (and who's situation doesn't change over time)!

Guest's picture
Tri

Another approach one could take is simply pay extra towards the principal monthly but open up a HELOC anyway. The HELOC would allow access to your equity in times of need. This will yield the same result and cost you nothing extra!

Julie Rains's picture

From Tri, "Another approach one could take is simply pay extra towards the principal monthly but open up a HELOC anyway. The HELOC would allow access to your equity in times of need. This will yield the same result and cost you nothing extra!"

This is where I've landed -- it is nice to have the line of credit (whether it is tied to the home or not) for emergency funds though it pays to be cautious when taking a lien on your home.

Also, commenter Scott is likely a sales rep for the UFF product. Loans don't have to be paid ahead and if you can earn a return in the market that is greater than your interest rate, it may not be the best thing to pay off early.

Guest's picture
Tri

Here's a link to a calculator that will help you determine if HELOC method and the software will help you save more money IN YOUR SCENARIO:

http://www.maxequityexpress.com/payoffcalc.swf

Use the mortgage calculator at bankrate.com or Julie's mortgage spreadsheet or the one from http://www.vertex42.com/ to set up a mortgage schedule that reflects your current scenario.

Then enter in how much extra income you will put in each month for the early mortgage pay off. The spreadsheet will show you how much interest you pay and save.

I will use the example in Post 54 to make it easy.

Loan Amount $200,000.00
Annual Interest Rate 6.000%
Term of Loan in Years 30

With this loan, if I pay $500 per month extra towards principal the total interests paid is $102,534.54. I call this plan the extra-payment plan.

Assuming a HELOC interest of 9% (current HELOC rates are at 7.75% or so...I'm using 9% just to play safe as rates will vary over time), the maxequityexpress.com calculator reports total interests saved as $128,936.81. That mean we would have paid:

$231,676.38 (total interests paid with normal 30yr fixed loan)
- $128,445.52
--------------
= $103,230.86 in interests.

I'll call this plan the HELOC plan.

Notice the interests paid under the HELOC plan is $696.32 higher than the interests we paid under the extra-payment plan.

Now you may think, "Aha! The HELOC method doesn't work and the software won't do anything for me".

Well, first off, the HELOC method DOES work because it saved you a ton of interests charges over your normal 30yr fixed loan. It's just that for this scenario, it is saving you less than if you simply pay $500 extra/month on your own.

Lets us see what happens when we have $1000 extra per month!

Extra-payment plan: $67,408.31 total interests paid.
HELOC plan: $65,868.52 total interests paid.

That's a saving difference of $1539.79 in favor of the HELOC plan.

Now assume you have $1500 extra per month: the savings difference is now $3075.34 in favor of the HELOC plan!

And for $2000 extra per month: the savings difference becomes $3942.53
in favor of the HELOC plan!

So as you can see, the HELOC plan may make a difference, depending on your particular scenario.

But of course, once we factor in the cost of the software, we see that the savings is really not that much unless you go with the lower priced package.

Since I've already verified that all software on the market does pretty much the same type of calculations, you should now have plenty of data to help you make your decision.

Julie Rains's picture

When I go to the calculator (sponsored by the company who is selling this program), here's what I do: put in the following

  • loan amount of $200,000
  • interest rate of 6%,
  • term of 30 years
  • monthly income (net) of $4,000
  • monthly expenses (excluding mortgage payment) of $2,000.

That means that I have an available budget of $800.90. Now here's one thing that gets tricky: if I apply that entire pot of money to making extra payments, then I can pay off the loan in 11 years and 7 months, ahead of the system's payoff in 11 years, 11 months.

So, why does the "extra payments" method (given these assumptions) have a payoff of 19 years, 2 months? Because, if you look at the asterisks**, using the extra payment method of calculation involves "making additional payments every month that total one third of available monthly budget"; in other words, paying $266.67 (rather than $800.90).

Just to make sure that we are comparing apples to apples, what amount did you put in the Monthly Income and Monthly Expenses blanks?

 

 

Guest's picture
Tri

> So, why does the "extra payments" method (given these assumptions)
> have a payoff of 19 years, 2 months? Because, if you look at the
> asterisks**, using the extra payment method of calculation involves
> "making additional payments every month that total one third of
> available monthly budget"; in other words, paying $266.67 (rather
> than $800.90).

Yes, that's the way they calculated it. But I don't bother looking at that, because that's not the same comparison. I simply use bankrate.com's mortgage calculator and apply the full $800.90 per month to get an apple-2-apple comparison.

Another thing to consider if you are concerned about the cost of the software. Take a long term look (that's how I'm looking at it). When you are done paying off your mortgage, you will most likely be getting a lot of extra cash each month. If you then invest in real estate, then IMHO, the software is definitely worth it. Because the more properties you use the software on, the more money it will save in the long run.

By the way, I went ahead and bought the software package from that site.

Julie Rains's picture

When I used the calculator at bankrate.com and plug in the same numbers ($200,000 loan, 6% interest rate, 30 years for a loan payment of 1199.10 and then add 800.90 to the monthly payment), the loan is paid off in 11 years, 7 months. The maxequity system gives me an 11-year, 11-month payoff, which is not as attractive as the 11-year, 7-month scenario.

Guest's picture
Tri

But look at how much you save in interest with the HELOC method. Although it took 4-months longer with the HELOC method, you save more money. Like I said, it depends on your situation (i.e. loan amount, rate, remaining years, etc.) and how much discretionary income (call it DI) you have.

Also, if you look at it long term and that you intend to buy real estate to rent out in the future (after you payoff your house), the software will be beneficial!

You already see that the HELOC will provide better result if you have a lot of DI. So when you buy a rental property, you will have extra cash (since you're no longer carry a mortgage on your house) as well as the rent paid by the tenant for use to quickly pay down that rental property.

Guest's picture
Tri

Ok, so now that I bought the program. I thought I'd enter in a whole year of estimated income expenses based on my income frequency to see what the savings would be like.

I can't get the loan monthly payments to match up exactly but they are close enough such that the effect is minimal.

I'm paid biweekly and my wife is paid semi-monthly. On my spreadsheet, I simply average both of our earnings to be monthly so I come up with a monthly income and monthly expense for simplicity. From that, I get an extra monthly income of $621.80. I then apply that full $621.80 each month to the principal of the mortgage for 12 months.

For my situation, this approach yielded a savings of $27,239 in the first year alone of extra monthly payments.

I then went onto Equity Genie and enter a whole year of income/expenses but according to our pay schedule. I even pay some expenses twice by accident (an extra expenses $8100 by mistake). The program comes back and tells me I saved $55K in interest in my first year!!!

Makes a believer out of me for sure. I'll run another case where I use an average monthly income/expense for a more apple-to-apple comparison.

Guest's picture
JimmyDaGeek

Hey Tri,

Sorry about the mix-up.

I hope you didn't pay more than a few hundred dollars for your software. I would like to send a spreadsheet to you that shows that using a HELOC only saves a few thousand dollars over the life of a mortgage. It would be nice if you could post your projections.

Guest's picture
Tri

I beg to differ!

For my scenario, I'm saving much, much more than a mere couple of thousands. I did many test run with the software since I've bought it and I'm seeing savings of over $45K in the first year alone as compared to simply taking the extra money and paying it towards principal each month!!!

But please send me your spreadsheet anyway. I'd like to know if your spreadsheet was set up similar to mine (I also did the HELOC method on the spreadsheet - and it showed me more than a couple of thousands in savings).

Guest's picture
Tri

To answer the question of whether paying off the mortgage with extra money or using it to invest in the stock market, I've made the following comparison.

Assume a mortgage of $300,000 @ 6% fixed for 30 yrs. By the end of the 30 yr term, you would pay $347,515 (rounded) in interest.

If you have $500 extra income per month and you applied it towards the principal each month, you would pay only $187,220 (rounded) in interest for the duration of 12 yrs and 4 months.

That gives you a savings of $347,515 - $187,220 = $160,295.

That means your monthly contribution of $500 for 12 yrs and 4 months would yield a $160,295 tax-free gain.

Using bankrate.com's savings calculator:

http://www.bankrate.com/brm/cgi-bin/savings.asp,

I get the following pre-tax gains based on $500/month contribution:

Your monthly deposit of $500 for 13 years with an interest rate of 8% compounded monthly with an initial starting balance of $ 0:

Year Balance

1 6440
2 13395.2
3 20906.82
4 29019.36
5 37780.91
6 47243.38
7 57462.85
8 68499.88
9 80419.87
10 93293.46
11 107196.94
12 122212.69
13 138429.71

Final Savings Balance: $138,429.71. Keep in mind this is PRE-TAX gains!!!

As you can see, paying off your mortgage is a much better investment!

Guest's picture
Tri

To answer the question of whether paying off the mortgage with extra money or using it to invest in the stock market, I've made the following comparison.

Assume a mortgage of $300,000 @ 6% fixed for 30 yrs. By the end of the 30 yr term, you would pay $347,515 (rounded) in interest.

If you have $500 extra income per month and you applied it towards the principal each month, you would pay only $187,220 (rounded) in interest for the duration of 12 yrs and 4 months.

That gives you a savings of $347,515 - $187,220 = $160,295.

That means your monthly contribution of $500 for 12 yrs and 4 months would yield a $160,295 tax-free gain.

Using bankrate.com's savings calculator:

http://www.bankrate.com/brm/cgi-bin/savings.asp,

I get the following pre-tax gains based on $500/month contribution:

Your monthly deposit of $500 for 13 years with an interest rate of 8% compounded monthly with an initial starting balance of $ 0:

Year Balance

1 6440
2 13395.2
3 20906.82
4 29019.36
5 37780.91
6 47243.38
7 57462.85
8 68499.88
9 80419.87
10 93293.46
11 107196.94
12 122212.69
13 138429.71

Final Savings Balance: $138,429.71. Keep in mind this is PRE-TAX gains!!!

As you can see, paying off your mortgage is a much better investment!

Guest's picture
Tri

To answer the question of whether paying off the mortgage with extra money or using it to invest in the stock market, I've made the following comparison.

Assume a mortgage of $300,000 @ 6% fixed for 30 yrs. By the end of the 30 yr term, you would pay $347,515 (rounded) in interest.

If you have $500 extra income per month and you applied it towards the principal each month, you would pay only $187,220 (rounded) in interest for the duration of 12 yrs and 4 months.

That gives you a savings of $347,515 - $187,220 = $160,295.

That means your monthly contribution of $500 for 12 yrs and 4 months would yield a $160,295 tax-free gain.

Using bankrate.com's savings calculator:

http://www.bankrate.com/brm/cgi-bin/savings.asp,

I get the following pre-tax gains based on $500/month contribution:

Your monthly deposit of $500 for 13 years with an interest rate of 8% compounded monthly with an initial starting balance of $ 0:

Year Balance

1 6440
2 13395.2
3 20906.82
4 29019.36
5 37780.91
6 47243.38
7 57462.85
8 68499.88
9 80419.87
10 93293.46
11 107196.94
12 122212.69
13 138429.71

Final Savings Balance: $138,429.71. Keep in mind this is PRE-TAX gains!!!

As you can see, paying off your mortgage is a much better investment!

Guest's picture
JimmyDaGeek

Hey Tri,

I think you need to rerun your numbers.

Borrowing $300,000 @ 6% for 30 years and paying $500/month extra does cost $187,220 rounded, in interest, but it takes 17 years and 8 months to pay off the mortgage. The mortgage is payed off 12 years and 4 months earlier, not the other way around.

Regarding my spreadsheet, how do I get it to you?

Guest's picture
Tri

Yes, thanks. You are correct. I'll rework the numbers. You can email the spreadsheet to my email: agentinvestor@gmail.com.

Thanks.

Julie Rains's picture

Spreadsheet -- hey I'd like to see it too! I found HELOC calculations tedious even though I usually like making spreadsheets. If you want to send a spreadsheet to Wise Bread, you can use the contact form.

My findings were that you need to consider the compounded cost of the loan over time and not just the initial cost (which the illustrations tend to emphasize); and also consider whether when the bank credits your account for deposits/loan payments, which banks tend to delay for as long as legally possible. This delay can wreak havoc in the value of the HELOC system.

As far as investing vs. payoff, the smaller the spread (8% in investments vs. 6% in loan rate), the more attractive the payoff; the higher the growth rate, the less attractive the payoff.

Guest's picture
Tri

I made an error in the earlier post. Here it is again:

Assume you have a $300,000 mortgage @ 6% for 30-yr fix. That means you are paying $1798.65/month. By the end of the 30 yr term, you would pay $347,515 (rounded) in interest.

If you have $500 extra income per month and you applied it towards the principal each month, you would pay only $187,220 (rounded) in interest for the duration of 18 yrs and 4 months.

That gives you an interest savings of $160,295 ($347,515 - $187,220).

If you choose to carry your mortgage for 30yr and invest your $500 extra per month ($6000/yr) at an 8% annualized rate of return, you will get $734,075 at the end of the 30 yr period.

If you choose to pay the $500 extra towards your mortgage for 18 yrs and 4 months, and then investing $2298.65 ($500 + $1798.65 [since you no longer have a mortgage payment to make]) each month (or $27,583.8/yr) for the next 11 yrs and 8 months at an 8% annualized rate of return, you will get $702,118 ($541,823 + $160,295 [interest savings]).

So you have $734,075 (pre-tax) vs. $541,823 (pre-tax) + $160,295 (tax-free).

Now lets consider taxation drawbacks/benefits. I'm not a financial person so someone please help out and correct any misinformation / misunderstanding on my part. Assume for every dollar of interest you pay, you get back 30 cents.

For a 30yr plan, we would pay an extra $160,295 in interest. That means we get back $48,089 in tax savings. With our investment gain of $734,075, our tax would be $110,111 @ 15% capital gains tax rate. Therefore, our net gain after 30 yrs is: $672,052.

For the pre-pay plan, we get an interest savings of $160,295. With our investment gain of $541,823, our tax would be $81,273 @ 15%. Therefore, our net gain after 30 yrs is: $620,845.

So it appears the 30yr plan wins over the pre-pay plan by $51,208.

I used the calculator below to calculate the capital gains:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Guest's picture
Tri

Looks like in Post 76 I made another error...the time it took to pay off the mortgage by extra payment method is incorrect. Lets hope I get it right this time around.

Mortgage: $300,000
Rate: 6%
Term: 30 yrs
P&I: $1798.65
Interest: $347,515

Extra-pay $500 monthly:
Interest: $187,220
Term: 17 yrs and 8 mos

That gives you an interest savings of $160,295 ($347,515 - $187,220).

If you choose to carry your mortgage for 30 yrs and invest your $500 extra per month ($6000/yr) at an 8% annualized rate of return, you will get $734,075 at the end of the 30 yr period.

If you choose to pay the $500 extra towards your mortgage for 17 yrs and 8 months, and then investing $2298.65 ($500 + $1798.65 [since you no longer have a mortgage payment to make]) each month (or $27,583.8/yr) for the next 12 yrs and 4 months at an 8% annualized rate of return, you will get $749,754 ($589,459 + $160,295 [interest savings]).

So it appears the extra-pay plan is more advantageous at this point, so no need to look at tax issues.

But of course, each scenario is different, so it's best you run an analysis for your individual case.

I used the calculator below to calculate the capital gains:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Guest's picture
Tri

To continue with the above example, but this time, looking at the HELOC method (based on my HELOC spreadsheet implementation):

HELOC method with $500 monthly:
Interest: $132,683 <- how much interest you pay by time loan is paid.
Term: 13 yrs <- time it takes to pay off loan.

That gives you an interest savings of $214,832 ($347,515 - $132,683).

If you choose to pay the $500 extra towards your mortgage for 13 yrs and then investing $2298.65 ($500 + $1798.65 [since you no longer have a mortgage payment to make]) each month (or $27,583.8/yr) for the next 17 yrs at an 8% annualized rate of return, you will get $1,220,268 ($1,005,436 + $214,832 [interest savings]).

Guest's picture
Tri

Please disregard post 76.

Guest's picture
Tri

I mean please disregard post 78.

Guest's picture
Tri

HELOC method with $500 monthly:
Interest: $174,847 <- how much interest you pay by time loan is paid.
Term: 16 yrs 6 mos <- time it takes to pay off loan.

That gives you an interest savings of $172,668 ($347,515 - $174,847).

If you choose to pay the $500 extra towards your mortgage for 13 yrs 6 mos and then investing $2298.65 ($500 + $1798.65 [since you no longer have a mortgage payment to make]) each month (or $27,583.8/yr) for the next 17 yrs at an 8% annualized rate of return, you will get $839,074 ($666,406 + $172,668 [interest savings]).

Guest's picture
Eddie

I think that there are so many variables that one should consider. My personal thought is that the HELOC method works because of the ability to create an interest cancellation account since you are applying your income to offset the average daily balance on your HELOC. Remember that if you had only $500 in discretionary income and applied it monthly there is a net benefit and it's easy to calculate that effect on an amortization calculator. But the benefit of the HELOC method is that it allows you to accellerate your interest savings by giving you the ability to inject let's say $2000 which is 4 months of your Discretionary Income immediately. This helps reverse the compounding interest on the First Mtg aggressively. As you keep your income against the HELOC you are canceling a good portion of that interest for the $2000 float, then your discretionary income pays off the HELOC and you start over again. I know that many of you are very good at calculating these numbers but this kind of makes sense to me but I haven't put it on a spread sheet. Thanks.

Guest's picture
Tri

I was thinking some more about the debate between investing and paying down your mortgage.

Go back to either Post 81 or Post 77. I thought about it some more and at first, if you look at the numbers, yes it appears paying off the mortgage is more beneficial. But upon more careful analysis, I realize, my math is totally wrong here!!!

Lets look at it more carefully. At the end of 30 yrs, in both cases, you would own the house outright. However, in the investment scenario you would end up with $734,075 in your investment account, whereas if you prepay, you only end up with $589,459 or $666,406 in your investment account. Yes you saved a lot of interest if you prepay. But in the end, you still have less cash in the investment account than if you had invested the extra payments. So in the final analysis, you end up being more wealthy if you had invested.

But I think it really boils down to one's risk tolerance. The security of having being debt free is priceless to some people. For others, it's a non-issue.

Guest's picture
Guest

I attended an investor meeting last night with a guest speaker from United First Financial peddling the MMA software. As some of you have concluded, the product is pure snake oil. The notion that it is some powerful collection of complex algorithms able to save users money through interest cancellation techniques is simply false.

Rather than struggle with spreadsheet analysis to reach this conclusion, one need only look at the ground rules offered by the salesmen. It only works if you pay more money into the ALOC/HELOC then you take out. That difference, or positive cash flow, isn't accumulating anywhere as savings, instead its being used to pay down the money you borrowed from the ALOC/HELOC to make principle payments on your primary mortgage.

The initial results seem impressive because rather than making small additional principle payments on your own, which would eventually have the same affect, the program has you borrow larger sums from the ALOC/HELOC for those principle payments then uses your own positive cash flow to pay them off.

The software does little more then tell you when your ALOC/HELOC balance is approaching zero so you can borrow another chunk for a principle payment to your primary mortgage. Really, since you have to input all the data yourself, it doesn't tell you anything you couldn't already have deduced, very easily, on your own.

Finally, for those considering the United First Financial product or others, keep in mind that banks aren’t going to let you cheat them. They’re perfectly happy with you borrowing money to pay down other borrowed money. And they don’t care if you pay off your mortgage early because they will use that extra principle payment money you’re giving them to get a higher return somewhere else – something you could and should do yourself rather than invest in snake oil.

Guest's picture
Sam

Tri,

When you said you bought the software package, were you referring to the MMA product or another brand?

Guest's picture
Roy

Before you spend 3500.00 or get involved in a heloc. Go to and Check out www.SuperchargeYouMortgage.com ..Turn your speakers on first. I own my home free and clear and am now working on my investment properties. You can also find "Supercharge Your Mortgage" at Amozon books as well.

Guest's picture

I've been reading a few blogs regarding MMA and HELOC use, and this is my observation.
There are two drivers to any acceleration system, the extra principal payments, which the spreadsheets can easily calculate.

The HELOC portion is a bit tougher to get a grip on. Assume you are paid $5000 on the first of the month, and it's not due to pay any bills until the 31st. Well, you basically have $5000 just sitting there (at 0%, the MMA folk would want to claim). By getting a return equal to your mortgage rate, you gain $5000*.06 or $300/yr (wahoo!!). If that $5000 is applied to one's mortgage as principal, it turns into quite the sum, over $25,000 in the 30th year. Where the HELOC comes in is when the bills are due earlier, say the 24th. Now, you owe $5,000*(say 8%)*1/4 = $100/yr since it's only borrowed for 1 week per month. And it's certainly stretching the point, but that $100/ yr has still gained you $25,000 by year 30. You realize if you are getting a high rate on your checking, this explanation is rendered moot. The MMA people focus on putting all your money against principal. Yea, I want to destroy any liquidity I have by paying down my mortgage. Just my observation.
JOE

Guest's picture
Guest

Has anyone tried equitygenie? I looked at the UFF software, and the program appears to be great, but I can't see paying the $3500.00 cost if the other less expensive programs work the same way? Any list of other comparable software and reviews?

Guest's picture
zane_gogo

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Guest's picture
Guest

I am considering using a heloc to pay off the mortgage on my house. I have a substantail amount of equity and my current Mortgage rate is 5.625%. I can get a heloc today with for 4% with no closing costs and no early payment penalty. I figure I will continue to make the same mortgage payment I make now (or more) with the exta money going towards paying down the heloc balance. By the time the fed raises inteest rates back up to 5.625% I should have the whole thing paid off.

Can anyone see a reason why this wouldn't be a good idea?

Guest's picture
Guest

To post 93-
If you can borrow at 4% to pay off a debt at 5.625%, and you don't have to pay anything for the privilege of borrowing at 4% (other then the obvious interest) then you will save some money. However, helocs often have adjustable rates so be careful of that.

Additionally, to optimize your savings you'd probably want to use the 4% (hopefully fixed interest rate) heloc to borrow the entire amount of money you owe on the mortgage and pay your primary mortgage off. Then pay the heloc back at its 4% [this is an example of the principle of paying off the highest interest rate debt first to maximize interest savings].

You may also want to look at refinancing. You may be able to get a lower rate then the 4% from the heloc on a refi. Yes, you might have to pay some closing costs, but if the savings going this route might pay for the closing costs.

Julie Rains's picture

Thanks guest #94 for discussing the HELOC/lower rate advantage but also the possibility of a reset in rates.

The only other thing I'll mention is about the nuance of the fixed mortgage is that while if you pay earlier in the month, there is no advantage (unlike other loan types, presumably also the HELOC); there is also no penalty for paying later in the month (say on the 7th if the absolute deadline is the 10th). However paying later in the month on a HELOC will incur additional interest charges.

 For more discussion on HELOCs and mortgages, see the Mortgage Professor's website (this guy has been a real professor btw):

HELOC

Simple Interest Mortgages (see info on grace periods).

Hope this is useful.  

 

Guest's picture
Mike Pack

I was recently involved with a person selling the MMA software. I crunched the numbers, using their example, versus investing their software cost and only the same amount of money they did. That was approximately 2785 every 3 months. Using a best case, and unrealistic scenario of putting all of my cash into the Heloc on the 1st day of the month, and pulling out of the Heloc on the last day, thus achieving the absolute lowest average daily balance, no matter how you look at it - doing it yourself always works out better. What they don't say in the video, is that there is a balance in the Heloc of around 11,000, and you still pay more interest because of that generated using the Heloc. Also, when is it EVER a good idea to take money from a lower interest loan and put it into a one with higher interest. The only advantage is the Heloc, where in case of an emergency, you still haad funds available.

Guest's picture
steve

This program is a scam. Only the mathematically unsure of themselves could be tricked by it. There is no "sophisticated" program that can give you a better return than paying as much as you can, as early as you can, on your mortgage. Taking out a HELOC to "prepay" your mortgage just means you are getting additional interest charges, and the borrowed cash would need to be paid back as well. Plus you are paying this company to run their "program" for you.

This is a scam to mislead the misleadable.

Guest's picture
steve

I think maybe my last post was too strongly worded. I apologize to anyone I may have offended by it.

I do believe that the program is a scam, pure snake oil. And I am concerned that someone will fall for it and have it cost them wasted money. Actually, I am pretty sure that many people HAVE fallen for it but I don't mean to disparage anyone.

Guest's picture
jim

I think the concept behind the HELOC is good, but anyone who is sophisticated enough to understand it is sophisticated enough to do it themselves with a spreadsheet. You don;t need to pay someone $3800 to do it.