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H.E.A.P. Home Equity Acceleration Plan

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date :24-July-2007

In the July 10th newsletter, I outlined some of the traditional methods people use to pay off their home mortgage early. Those methods are: 1) Rounding Up; 2) Applying the Bonus; and 3) Bi-Weekly payments.

Each plan, if used correctly, can help pay off a 30-year home mortgage 1-6 years early. To read the July 10th newsletter, please click here.

As many of you know, I’ve been having fun and getting satisfaction telling anyone who will listen what’s wrong with the books Missed Fortune 101, Stop Sitting on Your Assets, and Last Chance Millionaire. While I think the books are full of fuzzy math and ignore the realities of the tax code (264(a)3), what I’ve found is that the topic of mortgages and building wealth through Equity Harvesting seems very interesting to much of the American public.

The problem with the sales books listed above is that not everyone is a candidate for Equity Harvesting (borrowing money from a home and repositioning it into cash value life insurance). Once the general public learns about Equity Harvesting, many will want to use the concept to grow maximum wealth, and many will not qualify or simply will not want to use the concept. Knowing that is the case, I decided in order to be helpful to all clients, I needed to educate on the flip side of Equity Harvesting, which is paying off your home early.

There are two types of people in this world

Is it a fair statement to say that there are two types of people in this world? Those that want to use the equity in their homes to build a tax-favorable retirement nest egg, and those that want to pay off the debt on their home as soon as possible.

I think that’s a true statement. How many people, if they were asked that question, would instead of saying “yes” or “no” would say that they would rather just slowly pay off their 30-year home loan in 30 years? Not many.

The Home Equity Acceleration Plan (“H.E.A.P.”)

This newsletter is going to explain H.E.A.P. and how it can work to help you pay off your home mortgage years early and years earlier then the three traditional methods discussed in last week’s newsletter.

H.E.A.P. is very simple and is based on the theory of always using all of your money to pay down maximum debt at all possible times. In an effort to keep this newsletter brief, I want to make a few statements you can think about as you go through it.

- Interest on a home mortgage is charged daily.
- A home mortgage payment pays for last month’s interest expense.

If you can find a way to pay down interest earlier and more often, you would save X amount of money in interest charged every month/year.

- You earn nothing or very little when carrying a balance in a personal checking account (and if there is income from a checking account it is taxable each year).

- A Home Equity Line of Credit (“HELOC”) is a credit line obtained using the home’s equity as security. If the line is not accessed no interest is charged.

H.E.A.P. works in conjunction with a HELOC.

An example is the best way to explain how H.E.A.P. works. Assume a borrower (Mr. Smith) sets up a $25,000 HELOC utilizing the equity in his home.

Here is the other basic information you’ll need for this example.

-Monthly income (after taxes) = $5,000
-First Mortgage Balance = - $200,000
-First Payment = Feb 1, 2007
-Payment at 6.25% = $1,231.45
-All other payments (bills (credit card), utilities) = $789
-Misc. Monthly expenditures (dinners, movies, fuel.) = $800
-Total Monthly Outlay = $2,820.45

To implement H.E.A.P. the client will draw from the HELOC $10,000 and pay it directly towards the first mortgage.

By paying $10,000 down on the 1st mortgage, the client obviously reduced the principal of the 1st mortgage (and the interest paid on the loan over the long term) and shortened the length of their primary mortgage (assume it is a 30-year fixed).

The “total” debt on the home is still the same as the day the HELOC is accessed ($190,000 from the primary mortgage and $10,000 from the HELOC that was applied to pay down the 1st mortgage).

Using the HELOC as a checking account

With H.E.A.P., the client will use a HELOC as his checking account. It sounds strange, but that’s just what makes the plan work.

Remember, having a balance in a checking account is basically worthless (earns no or little interest). With H.E.A.P. the client will have his paycheck from work direct deposited into the HELOC.

Therefore, the client will pay all bills out of the HELOC as he would a normal checking account and make all deposits into the HELOC as he would a normal checking account.

THE GOAL IS TO ALWAYS BE PAYING DOWN MAXIMUM DEBT WITH MAXIMUM DOLLARS

One reason H.E.A.P. works is due to the fact that money that is normally not productive in a checking account is put to work by always paying down the balance on the HELOC (every day of the year).

Most clients who are not candidates for bankruptcy have a surplus balance in their checking account that is usually wasted each year buying misc. items (or potentially the client could be investing saved money at the end of the year).

With H.E.A.P. the goal is to pay off the home, and if a client has surplus, that surplus will be used to pay down the HELOC to zero (once or multiple times a year). For our example Mr. Smith, when the HELOC reaches zero, would access it again for another $10,000 and apply that to pay down the primary mortgage. When you see how the numbers work, it will truly amaze you.

Date	Activity	Amount	HELOC Balance	Available Credit
2/1/2007	First Mortgage Reduction	-$10,000.00	$10,000.00	$15,000.00
2/15/2007	Payroll Deposit	$2,500.00	$7,533.90	$17,466.10
2/28/2007	Payroll Deposit	$2,500.00	$5,059.44	$19,940.56
3/1/2007	Bills	-$2,820.45	$7,879.89	$17,120.11
3/15/2007	Payroll Deposit	$2,500.00	$5,406.61	$19,593.39
3/30/2007	Payroll Deposit	$2,500.00	$2,924.94	$22,075.06
4/1/2007	Bills	-$2,820.45	$5,745.39	$19,254.61
4/15/2007	Payroll Deposit	$2,500.00	$3,264.87	$21,735.13
4/30/2007	Payroll Deposit	$2,500.00	$775.94	$24,224.06
5/1/2007	Bills	-$2,820.45	$3,596.39	$21,403.61
5/15/2007	Payroll Deposit	$2,500.00	$1,108.58	$23,891.42
5/30/2007	Payroll Deposit	$2,500.00	-$1,387.66	$26,387.66

In four months, without changing any spending habits, and without using extra money, the client just paid off the $10,000 balance on their line of credit.

THE NUMBERS

Understand that the exact numbers are not that important due to the fact that everyone’s situation will be different. It’s the concept that either does or does not work.

This concept will work for readers who have the discipline to use it and who carry some kind of balance monthly in their checking accounts.

Sure, those that use H.E.A.P. are going to have unexpected expenses or expected expenses that will change the numbers in any given period of time. The key is that a borrower is always using his/her money in its best use, and having money sitting in a checking account earning very little or no interest (which is taxable each year) is NOT in any borrower’s best interest.

Mr. Smith could budget for three mortgage reductions a year of $10,000. Assuming he’ll want to spend some of that money on items not listed in an annual expense ledger, I will assume he will pay down the HELOC two times a year. After applying $20,000 per year to the primary mortgage, the new calculated payoff date of the first mortgage is 2/1/2014. That’s twenty-three years early.

In the marketplace

This concept is getting out more and more and there are a few firms starting to nationally market their own private label version of H.E.A.P. While the concept is very strong and can and is being used as a terrific marketing concept to get a client’s attention, I do not recommend you get hooked up with a firm that suggests you pay $3,500 for the plan and access to their software. While the firm I’m referring to seems to be getting it from clients, I think it’s an outrage.

As I did when I got outraged at Missed Fortune 101 for using fuzzy math and ignoring the tax code, because of my outrage at advisors charging clients $3,500 for this solution and software, I have my own software clients can use that is nearly complete. The calculations to show you how H.E.A.P. works are not difficult to use.

The software will be available in the next few weeks. It will cost $500 to purchase the software. If you would like to learn more about the software, please contact Trustmakers at info@trustmakers.com. The software will pay for itself in the first year for most clients.

The bottom line with this concept is that if you are not candidates for Equity Harvesting, then you are a candidate for H.E.A.P. Don’t do what most people do which is to “do nothing” and continue to pay off your 30-year home loan in 30 years. If you want to pay off your home early, I strongly urge you to learn more about H.E.A.P.

FYI, I have a 50-page chapter on H.E.A.P. in my new book The Home Equity Management Guidebook (the remainder of the book explains how to build “Maximum Wealth with Maximum Security” through the use of Equity Harvesting).

Order The Home Equity Management Guidebook

If you are interested in learning about how to build wealth using the equity of your home or in detail about the Home Equity Acceleration Plan, you can order my new book The Home Equity Management Guidebook.

Roccy M. DeFrancesco, JD, CWPP™, CAPP™

 

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