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Home Mortgage Acceleration Plans: The Good, The Bad And The Ugly.

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

Date: 16-Oct-2007

Dear Subscriber:

I created a newsletter some time ago on the Home Mortgage Acceleration Plan (H.E.A.P.) and had no idea that there would be as much interest in the topic as has been generated. What’s also interesting is that over half of the e-mails and calls I’m receiving about home equity acceleration are about “other” programs in the market place. Clients are getting inundated with solicitations on one plan in particular that I personally find far too advisor friendly and NOT very client friendly.

Because of the interest in this topic, I thought I would issue another newsletter explaining in more detail the plans that I believe are NOT client friendly.

Let’s start out with “the Good.”

The “Good” is the mortgage acceleration plan that’s been around for nearly 20 years in one form or another and is now making its way to the U.S.

How does “the Good” acceleration plan work?

It’s surprisingly simple, and I’ll explain it below in a short summary. To read a more detailed summary of this program and the numbers that support it, please click here and read the past newsletter on H.E.A.P. The Home Mortgage Acceleration Plan (H.E.A.P.). Other similar programs you’ll find in the marketplace work off of a few basic facts about mortgages.

1.) Home mortgage interest is charged daily.

2.) Mortgage interest is paid in arrears. Every time we pay our mortgage we are paying for last month’s daily interest charge.

3) When we carry balances in our checking account we typically make no annual rate of return on that money (or if we do its 1-2% annually which is taxable and is like earning zero).

H.E.A.P. and other similar plans work on the theory that a client should use EVERY available dollar EVERY DAY to pay down home mortgage debt.

H.E.A.P. is supposed to be a plan that can be implemented WITHOUT changing a person’s spending habits or style of living.

How H.E.A.P. and other similar plans work:

1.) A client sets up a home equity line of credit (HELOC).

2.) The HELOC is accessed and the borrowed funds are used to pay down the balance on the primary mortgage.

3.) The HELOC then acts as the client’s checking account (the client has his/her paychecks deposited into the HELOC and also writes checks from the HELOC).

4.) When the client’s monthly surplus (extra money in a checking account at the end of a month) pays down the HELOC to zero, it is accessed again and the borrowed funds are again applied towards the primary mortgage.

Let’s look at an example and how it works. Assume our Mr. Smith has a home with a fair market value of $250,000 and debt of $200,000. Assume he earns $5,000 a month after tax and has the following expenses: mortgage payment = $1,231.45, monthly bills = $789.00, misc. monthly expenses (spending $) = $ 800.00 for a total monthly outlay of $2,820.00.

Mr. Smith will obtain a $25,000 Home Equity Line of Credit (HELOC) and will access it in the amount of $10,000. That $10,000 will then be used to pay down the $200,000 primary mortgage down to $190,000.

Then over the next several months Mr. Smith will slowly pay down the $10,000 HELOC to zero with his checking account surplus. When the HELOC reaches zero, Mr. Smith will access the HELOC again for $10,000 and will use it to pay down the primary mortgage again.

With H.E.A.P. Mr. Smith will pay off his mortgage not in 30 years but instead in SEVEN years and will save $189,670.50 in interest over the life of the loan.

If you look at the numbers closely, Mr. Smith could have paid down the HELOC three times a year and this example only has him doing it twice a year (because in the real world stuff happens, and I wanted the example to take that into account).

Getting back to “the Good.”

The good about H.E.A.P. vs. the other highly advertised plans in the marketplace is that advisors are forbidden from charging more then $1,000 for the advice they give to clients to setup the plan. You can read about H.E.A.P. and it is also covered in a 50 page chapter in The Home Equity Management Guidebook which can be purchased through Trustmakers by clicking here.

The “Bad.”

The bad in my opinion is a H.E.A.P. type acceleration plan that requires advisors to charge clients $3,500 to implement.

The $3,500 plan (which shall remain nameless (if you want the name, please e-mail us at info@trustmakers.com) justifies the fee by having “dynamic” software that can tell a client every day how much they are saving with the plan. If that’s important to a client, then I’d recommend they pay $3,500 for it. It’s not that the $3,500 program doesn’t work or is not as good as H.E.A.P. financially, the plans work the same for a client except the fee for it is much, much higher.

These types of acceleration plans have been around for 20+ years and only recently has software become available for sale. I believe the reason is because you can’t charge $3,500 to explain and help a client setup such a plan unless you give them fancy software that they think they need (they think they need it because the sales person told the client so).

Think about H.E.A.P. It’s simple and self-fulfilling/self-perpetuating. Once it is setup, clients simply pay their bills from the HELOC, deposit their paychecks into the HELOC and then try to spend as little each month as possible. The less a client spends, the quicker the HELOC will be paid off and then re-accessed to pay down the primary mortgage.

The client will see how the plan is working when receiving their primary mortgage and HELOC statements each month. Software cannot magically help a client spend less or accelerate the payment of the mortgage. It’s simply fluff and an excuse to charge $3,500.

It is also interesting to note that the company that charges clients $3,500 is a hybrid Multi-Level Marketing (MLM) plan. I personally am not into MLM plans as they feed the people at the top of the pyramid at the expense of the client.

The “UGLY.”

The ugly is a mortgage acceleration plan that requires the client to refinance their entire mortgage into a 1st position HELOC. Why is that bad?

Imagine telling Mr. Smith who has a 30 year fixed mortgage rate of less then 6.5% that he MUST refinance all $200,000 of his debt into a HELOC that floats monthly at Prime or higher.

Why would clients be forced into a 1st position HELOC? The reason they are forced into a refinance is so advisors can make very good money refinancing the loan.

This is an outrage to me as the client can accomplish accelerating their mortgage by using a simple $5,000-$10,000 HELOC that is paid down every 3-6-9 months. Using a small HELOC functions the same way and the client does NOT have to increase the interest rate on their primary mortgage and does NOT have to take the risk that interest rates will climb with a monthly floating rate.

Summary/Conclusion

The time is right to discuss mortgage acceleration plans. With the mortgage industry in turmoil and with rates unsettled, many clients are very receptive to finding ways to pay off their debt early (especially if you can show them how to do it without changing their lifestyle).

If you would like to pay off the mortgage on your home 5-10-15 years early, I suggest that you review the “GOOD,” “BAD,” OR “UGLY” acceleration plan in the marketplace and determine which one is best for you.

For those of you who would like to build more wealth in a tax favorable manner by Equity Harvesting (instead of using H.E.A.P . to pay off your home's debt), I suggest reading the first nine chapter of The Home Equity Management Guidebook . If you don't know if it is better for you to use H.E.A.P . to pay off your home's debt or Equity Harvesting to build more wealth and would like to discuss your situation, please feel free to e-mail us .

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

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ABOUT THIS EDITOR:

Roccy DeFrancesco, JD, CWPP, CAPP, MMB - Author and lecturer, Roccy specializes in advanced estate and asset protection planning. Roccy's passion is to teach advisors how to implement lawful strategies that will hold up for the test of time.

Full Bio - Email Roccy