Those "pay it off fast" schemes??

Question

A few years ago I was approached by a 'friend' who was doing a great biz of charging homeowners a pretty hefty fee in exchange for the info and program to pay off the principle of a home loan and save HUGE bucks of interest.

I discounted it as a smoke and mirrors type arrangement and cant see HOW you can pay off faster without paying additional sums of principle sooner!!!  They say-"You pay no extra payments,you pay  by virtue of a 'magic' algorithm they provide,,,not bi weekly as some have tried"

They somehow create a HELOC to provide these funds and make payments from there,,,sort of wishy washy money in different accounts.

THEY say its all in the 'timing' of these payments directed by them.

My contention was the ONLY way to pay off a loan early(thereby saving LOTS of interest) is to disguise extra principle payments in disposable income as discretionary spending etc.

I was told, no thats not how its done,altho its been so long ago I dont even remember half the pitch.  I couldnt see where I could in good conscience take a few thousand from homeowners doing this.  Has anyone ever heard of this type deal??Are they as big of scams as it 'sounds'???

I dont even remeber what this company name is,,,have to LOOK alot to see if I can find any of its info.  they sent a dvd and all it was ,,,was a cheerleaders view of hip hip hoorah!!,,,greatest thing since sliced bread.

Real or fiction???

Michael Culler · Answer

As a mortgage broker I was fortunate that the first person who presented this to me was wacky and I knew not to trust them immediately.

So I looked into it, and they use whats called an ALOC, or Advanced Line of Credit.  Basically they use a long boring presentation to lull you into a daze.  Somehow you come out with sick numbers like you can pay off your 30 year note in under 10 years!

Unfortunately you will find that in order to do that, you have to provide the money to ultimately fund this ALOC that is paying your mortgage down quickly.

So basically you put ALL of your money through the ALOC, then basically change your lifestyle to house poor.  Once you do that, you only have to live house poor for the amount of time that you need in order to get to your goal of free and clear.

Stick with Bi-weekly instead.  In fact, check out BWMA (Bi-Weekly Mortgage Association)  if your lender will not accept bi-weekly payments.  You can get a real straight answer from those guys.

There is no mumbo jumbo, you pay the house off quicker, and you can even sell their services too if you are looking for a business idea.

We sell it to our long term mortgage clients when they are going with a lender who doesn't offer bi weekly service for free.

Richard Warren · Answer

You are talking about the Money Merge Account.  There has been a lot of discussion here about their so-called magic software.  Of course, the one's who tout it are also the ones who are selling it.  I would rather put the $3500 into the mortgage.  The whole trick is they compare future dollars (the saved interest) to present dollars (what you pay now) it's not the same no matter how much they insist it is.
            
            Check out the thread:
             Money Merge Account?
            
             :cool:

Account Closed · Answer

If your lender won't accept bi-weekly payments FOR FREE without a "setup charge" or any other garbage fee just...

Take the principle and interest portion of your payment and divide it by 12. Then add that to your payment each month.

If you pay bi-weekly you end up making 13 payments instead of 12 each year. What I described above does the same thing for free.

The ALOC/HELOC payoff strategy is GREAT for the companies selling you the "magic software" and such but is a bad idea financially.

Work on paying off your mortgage after you get all other consumer debts paid off. With no credit card debt, student loans or car payments you will be amazed at how fast you can payoff the mortgage from your normal salary.

Finance isn't rocket science but unfortunately we don't teach the basics to our kids.

Dave Toelkes · Answer

Yes, for the first payment you have daily interest for one half of a month.  But, the unpaid balance of the HELOC is carried over to the next month, and you now have a full month of daily interest accruals.

Let's say you take $12K from the HELOC and apply it to principal reduction on your primary mortgage.  If you have $1K in discretionary income each month, then it will take one year to pay off the HELOC.  When the HELOC balance is zero or near zero, you borrow another $12K from the HELOC, apply the proceeds to principal reduction on your primary residence mortgage, then pay off the HELOC balance over the course of the next year.  Keep repeating until your primary residence mortgage is paid off.

Instead of using the HELOC, let's just apply the $1K in discretionary income directly to the primary residence mortgage as additional principal each month.

In both scenarios you are still making your normal monthly loan payment.   In the first scenario you are making a lump sum additional principal payment at the beginning of each year.  In the second scenario, you are making $1K additional principal payments each month.

I ran the amortization tables for both scenarios and the lump sum scenario pays off the loan about four months faster than the monthly plan.

I agree that there is no need to pay for a program or system to do what you can do yourself for free.

Will Barnard · Answer

It is a lot harder to get a HELOC these days and you will need a large amount of equity in the home to get one, but that said, if you do, it does make financial sense IF you stick to it.

Will Barnard · Answer

Example:
You owe $100k on your home and you have a fixed 30 year mortgage.
The home is worth $200k so you take out a $50k HELOC.
A HELOC is an open ended loan in which you can borrow from and payback through as many intervals as you like so long as you at least pay the minimum amount due once each month.

Your first mortgage is due on the 1st of each month but not past due until after the 16th. Lets say you make your first mortgage payment with your HELOC on the 15th of each month, then every paycheck, you apply back towards your HELOC. In addition, you borrow $5k from your HELOC and pay towards the principle reduction on your first mortgage. 
In essence, you only borrowed from the HELOC for days and not a full month, on teh monthly payment and on the $5k extra, you pay that back with your discretionary income (extra cash after all monthly expenses have been paid). This process allows you to pay down the principle on your home or investment home faster using borrowed funds, timely planning and basic math (although the computer software systems have elaborate mathematical equations built into them)

Will Barnard · Answer

Anthony, I don't know the answer to your specific question however, would like to comment.
Do you realize that a bi-weekly payment schedule is essentially paying 13 months of payments in 12 months? In other words, by dividing your monthly payment by 4 then paying that amount every week, you would end up paying 4 extra weeks (52 weeks in a year, in contracts to 4 weeks = 1 month in a standard payment), thus giving you an extra 4 weeks.

All you have to do is take one month's payment, divide that by 52 and save that amount each week and apply it to an extra payment.

The better way is to incorporate an open ended credit line such as a HELOC or credit card to help cancel interest and apply the savings along with the discretionary income towards your payments.

Scott Hubbard · Answer

Todd-

Assuming you have no credit card balances or personal loans outstanding (these should be paid for first) you should not need to make extreme changes but it does require you have discretionary capital.

If you make $4K a month income and your monthly nut is $3K, then you have $1K in discretionary.

There are several companies that tout these programs so do your research.  You can accomplish a lot of this on your own using credit cards and an HELOC.

I recommend this type of program for anyone looking to pay off their mortgage or RE portfolio more quickly.

Alternatively, you can also take your discretionary and reinvest it back into real estate.

Good Luck!

Scott Hubbard · Answer

Will is right.  There is a very complex mathmatical formula that takes advantage of these lines of credit paying principal down, but also using credit cards with the grace periods for cash purchases like groceries and gas.  The program uses these grace periods to reduce interest compounds on your mortgage.  I was very skepticle at first and had to see it work in real time before I agrred to buy it.
                                    
                                    I actually use it on my primary and it calculates my bills and budgets my discretionary spending.  
                                    
                                    The other day I bought a box of cigars which was not in my budget and when I adjusted the expense out of my discretionary spending, it shows me how much those cigars actually cost me in terms of interest I could have saved. They were the most expensive cigars I have ever smoked.  LOL
                                    
                                    I really like the program and it really makes me want to stop eating out so I can see how much I saved.  It is really a cool tool, but the only way your going to succeed in paying off your mortgage in ten years is if it becomes an obsession with you.

Will Barnard · Answer

Calculators are great Jeff, but these on bloomberg or any others do not calculate the interst savings on the format I explained above.
You pretty much have to do it by hand to see your savings (obviously must be somewhat mathematically inclined)

Those "pay it off fast" schemes??

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