This one is new to me…

[PerryChase]

I see now. At first I was thinking why do I need a Heloc? I guess the Heloc is to allow you to “re-access” your money if you need it? The plan seems complicated.

But why do you need THEIR plan? Can’t you just make the additional principal payments yourself? With electronic payments you can make principal payment whenever you feel like it. Combine that with a Heloc and you achieve the same thing.

[no_such_reality]

It’s careful marketing spin. And IMHO, slight of hand and I see spin similar to that of an payment option ARM.

It appears that they’re taking your whole loan and rolling it into an HELOC set to LIBOR.

Your spending stays the same. repeat that. repeat that. repeat that.

Spending stays the same. (Note savings isn’t spending)

$400,000 HELOC, $10,000 monthly pay direct deposit, $9000 monthly spending.

I crunched a spreadsheet and almost thought they had something then realized I wasn’t “spending” my savings into my savings (brokerage). Adding savings as a expense and wallah, balance goes up up up… if the HELOC rate is mere 1% more than your fixed. Even at 6.5% Heloc vrs 6% fixed, it pushes your paid off date to 33 years. If and Helox rate is fixed at the same rate, the floating might save you two years in my scenario. ( I don’t that’s too likely though)

IMHO, these look worse than an option payment ARM. I wonder if people really realize they are paying more interest to prepay their loan as an HELOC.

As you said, you could more easily open a HELOC, not use it and pre-pay a $100 or so a month more and easily beat this program with lower risk.

[Next in Line]

My feel is that – as with all things – discipline is the key. The main idea is the company wants to sell its proprietary software at inflated prices and capitalize on a down market. That being a given…

Example:
If I have a 300,000 dollar mortgage and I net 5,000 dollars a month and have fixed expenses of 4,000 dollars per month. My discretionary income is 1,000 per month. I either have or open a HELOC. Month 1: I make a lump sum payment to principal of say 3,000 dollars. Now my HELOC balance is 6,500 dollars (Lump sum payment + cost of software 3,500! – outrageous I know). I then deposit my total income (5,000) as a payment to the HELOC – now the HELOC balance is 1,000 – this is the amount I owe and additional payment towards – but everything else is paid. Month 2 (this schedule is for example purposes only) I don’t make additional payments to principal I just draw fixed expenses from the HELOC and deposit my income as payment to the HELOC. Month 3 I make additional payment to principal of 2,000 dollars. So the idea is without any change to my current standard of living I can rapidly pay down my mortgage – and the overpriced software holds-my-hand through the whole process.

Upon hearing this concept which on the face seemed to the skeptic in me said too good to be true…why wouldn’t this be more widely used? The company says banks don’t what you to know – but that’s what I expect them to say –us against the banks.

[sdcellar]

You are paying interest on the balance in the HELOC (whose interest rate is higher than the 1st mortgage interest rate). Why in the world would you want to do that? Paying money to save money? They’re getting you coming and going (cost of the software and HELOC interest). Why wouldn’t you put your money in money market account, earn interest on that and pay your mortgage down?

I just don’t get it. I’d say banks are dying for you to know. Perhaps someone can explain this to simple old me.

[sdcellar]

Okay, so I finally got off my butt and checked out the link that svferris provided. I see now that you first convert your conventional mortgage to a HELOC.

I ran the simulator and the thing that stuck out to me (beyond the dubious claim of projected savings) was the full 1-percent increase in the interest rate that will be applied to my effective mortgage. Brilliant! Let’s pay more interest. That should help me pay off my house sooner! STU-PID.

…and svferris, I’m not knocking you for providing the link. I know you where just trying to be helpful.

[kaycee]

I think you are all missing the savings from compounding interest. For example; Let’s say that you take out a 100,000 mortgage at 6%. Your payment is $599.95. Here are your first 5 payments:

# Prin Int
1 99.55 500
2 100.05 499.50
3 100.55 499.00
4 101.05 498.50
5 101.56 497.99

If you add just a $100.05 sent principal payment to your 1st payment, you will save 499.50 in interest. Because that $100.05 collects interst for THIRTY YEARS.
If you add just $101.05 to your third payment, you will save another $498.50. Any amount that you can pay off at the beginning of a mortgage, even a small amount, saves you 3 – 4 times that in interest over a 30 year period. So that is how, even having unused money sitting in the account, even for a few days, could save you hundreds when multiplied out over 360 payments.

I have an account where I transfer money every month for my kids’ tuition payments. It is my way of turning a 9 month pymt plan into a 12 month. But the money just sits there a lot of the time, earning a tiny bit of interest that I have to pay tax on. I would rather have it sit in a HELOC and save years of intersest for the few months that the money sat there.

The benefit becomes less though the closer you get to the end of the term.

[Anonymous]

how is sending all your excess to the lender any different than depositing your whole paycheck, and taking back from them what you need each month?

The difference is, your money saves you interest while waiting to be spent. Say, you deposit $1000 to your regular checking account at the beginning of the month, and you spend it all at the end of the month. You earn 2%/12=0.16% or $1.60 in the process.
If the same money is deposited in that 6% HELOC account at the beginning of the month, you will earn 6%/12=0.5% or $5 a month.

Multiply that by the amount that enters your checking account each month to get the picture.

Additionally, depending on your tax situation you might be able to save some money in taxes by not paying income tax on interest earned.

The catch is, the interest rate on a HELOC will be significantly higher than that of a regular mortgage. That, and the enormous origination fees effectively turn the whole thing into a bad idea.
It is an interesting model, however; let’s hope that one day the associated costs will become more reasonable and it will become meaningful for some buyers.

[sdcellar]

I can only speak for myself, but I’m not missing the savings based on compound interest. I’m just saying that you won’t realize near the benefit by managing this through a HELOC and some silly software.

Even if you wanted to keep an open zero-balance HELOC in case of emergency (like the purchase of a plasma television), you’d do better to put all your paychecks in a money-market account, establish a low-water mark for that account and pay all your expenses out of there including everything you can against your mortgage until it’s down to the low-water mark. Then rinse and repeat (i.e. re-fill and pay down).

The scheme hawked here is actually taking advantage of people’s lack of understanding regarding loan amortization and compound interest, making it seem like it’s the scheme that saves you money rather than simply choosing to pay down your mortgage (and instead the scheme costs you more).

[sdcellar]

Real Buyer– Another way to think about it is this:

One might infer from your example that it seems like the higher the interest rate of the HELOC, the better your return. I mean why not shoot for a 12% HELOC and get $10 a month!

Of course, as you so rightly mentioned, the higher interest is actually a deal killer. It could possibly work if the margins worked out just right, but I suspect for most consumers, they would simply never pay off this HELOC. How cool is that!

[kaycee]

I agree that most people would never actually pay it off. I think the ability to continually borrow money you’ve already paid down would be too great for a lot of people to resist.

As far as the interest rate though, I may have misunderstood. I thought, like many Heloc’s, it was simply tied to the Libor, and therefore would vary monthly instead of being fixed.

Obviously, right now, there is a lot of upside potential. But historically, the rate would be as likely to tick down some months as it would to tick up others. Am I wrong?

[no_such_reality]

It’s real simple, if you don’t prepay your loan, you merely do debt arbitrage.

If the HELOC rate runs 1/4 of percent higher, you need an excess cash flow above your loan. If you currently have a $400K loan at 6% with a $2400/mnth payment, you would need $9600 excess cash per month in expenses to breakeven on the HELOC if the HELOC rate is 6.25%.

If the HELOC rate is 6.5% you need $21000 excess cash flow above your mortgage payment each month. Yeah, that’s right, you live in a house with a $400K loan and have a take home of than $250K /year.

If the HELOC rate is 7%, you need $42,000 of excess cash flow a month to break even.

The only reason it appears to pay off the loan faster is because you prepay the loan with extra cash you already have each month.

[sdcellar]

kaycee– Sure, it appears to be fairly high margin adjustable rate loan, at least according to what they present in their simulator. It brings the effective interest rate about a percent higher than the conventional loan you would be transferring over.

Given that rates are considered to be at historic lows, the rate is most likely to increase in the future which presents tremendous downside potential.

[Next in Line]

See the attached article I just found. I understandit will work with any HELOC you can shopthebest rates. However the automatic payment is anot a featureof the programIwas told about called “Pay-It-Early” from UFirst Finantial.

http://articles.moneycentral.msn.com/Banking/HomeFinancing/ANewWayToPayOffYourHouse.aspx

[no_such_reality]

Again, 1/16th of a point difference in the rate wipes out any “savings” in their example.

[sdcellar]

Next in Line, Please consider what no_such_reality is trying to tell you.

Also keep in mind who the article was written by: Don Taylor, Bankrate.com. It’s just possible he might have somebody elses interest in mind (ever so slight pun intended).

Find some real borrowers using this program and I’m confident you’ll find that it actually ended up costing them money.

[Author]

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