Mortgage Buster: Scam or Savior?
We were recently approached with an interesting question regarding making interest payments. While there are many different ways of manipulating money, the absolute hardest way is to manipulate it to the advantage of the average consumer or homeowner. The house is stacked against us and we are given the pesky task of paying interest on almost everything. Notice that I did not say impossible, only “hard,” as in very difficult. Of course there are ways of making money work hard for you and being creative and making every dollar have a certain job, its just that it takes a lot of effort.
When you get a home loan, you have to pay interest. That’s the deal from the start and there’s no way around it unless you have a rich uncle who just gives you a large sum of money, or you win the lottery. Either way even that takes a hit; it gets taxed and believe me, statistically you won’t win the lottery. Or even know someone who does. If I am proven wrong on that one, you can send me $1,000 to prove it. 
So here is the question:
There seems to be a new system of making a mortgage payment out there and I am wondering if it is worth looking into. I’ve heard a little about it here and there and have done a little reading about it, but I don’t have enough of a background to make a lot of sense of it or to be able to tell if it’s a legit concept. Basically what I understand is that it uses the money you already have (sitting in a checking account - they call it idle money) to pay down the average daily balance of the principle which I guess then reduces interest. They say it can help you pay off your mortgage in about 7-12 years without increasing your payments at all. Apparently the idea is coming from some math geniuses in Australia. They wrote a software package that does the stuff for you, but I’ve read that it’s possible without the software if you know what you’re doing. Any thoughts?
Here is a link to one of the sites where I have read about it - http://www.amazines.com/article_detail.cfm/318683?articleid=318683
Thanks,
Ted
The system from Australia he is talking about is call Mortgage Interest Buster and I would like to recommend anyone reading this to try and find more information about this and send it in so that we can have a more clear idea about its legitimacy.
I would love to write back to Ted and tell him that it seems like an awesome idea and that he should go for it and he will end up making a killing just flipping houses. But I really can’t. On paper it seems like it could work but there are about a dozen alarm bells and their respective red flags going off left and right for me. I made a list:
- There is almost nothing out there on the internet about this system. The systems website has a fair amount of information, albeit they state the obvious and have very little proven fact.
- Why isn’t it being used absolutely every where? If it were easy, wouldn’t it be called “The Way?” MY friend Danielle says that from time to time.
- Is it standard to use a home equity line of credit to make payments on your mortgage? Or convert it into a mortgage checking account?
- Where is the glowing testimony of this software that simulates the Australian banking system?
- And how much is the system that does all this? $3,500. Seems like a lot of dough for payment software.
- If this is so selective, why is it not an option? And don’t say its because the banks will lose money. There could be someone reputable that would benefit from this and they would push it. But they aren’t. Why?
- You must have a second mortgage. What if thats not an option?
A quick note, I would like to show everyone the website that houses two “instructional” videos for this, straight from their website: a short 12-13 minute video and a longer more in-depth 25 minute video. Please, let me know your thoughts.
So lets say this works. Is this something you should do? My gut reaction is full of skepticism. I don’t like the idea of taking out a HELOC in order to live. There is way too much hocus and pocus here to illicit any kind of positive recommendation. Sure you can pay bi-monthly or even daily I am sure, if you wanted to deal with the paper work. It is possible but not like this. Unless you are making headway against your principal, you are just making more frequent payments on smaller interest payments. Lets look at some truths about home finance:
- There are no good mortgages below 3.5% for 5 years. If there are then they are called ARMs and you will end up paying even more when the ARM resets. This a big factor as to why this country is in such trouble to begin with. It used to be that money was cheap to get a hold of from one bank to the next and they could make those offers. Policy will and has been passed so that requirements are stricter. Check this link out for more information.
- The only way to safely diminish the life of any loan, be it house car or other, is to increase your payment towards your principle.
- There is a way to take advantage of a pre-payment plan for your mortgage in order to pay it off sooner, but there is no way you should have to pay $3,500 for it. They have you take a second mortgage (the first mortgage is conveniently a prerequisite to joining in the program), and you leverage that to make payments. What they don’t tell you is that the little amount you do end up reducing your interest through this forced increased payment system does not really come from any elaborate system.
In conclusion, I don’t believe there are any short cuts. If there is a way to make this work, and if you did successfully take a second mortgage that had a lower rate than your first, you should not need a $3,500 piece of software to manage it for you by mucking around in your accounts like a rabid kangaroo. (It is from Australia after all.) My recommedation to anyone who wants to decrease the life of a loan is to dedicate an extra 10% of your income to the principal. It is possible but don’t waste a mortgage payment, or two, of $3,500 to do it. Do your homework and incorporate due diligence into your research. Let us know what your experiences are as well!
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Comments
@ Jana: Excellent feedback! Thanks for illuminating us further on this. The whole thing seemed confusing and the sites that pitch this do a pretty good job of painting a rosy picture. Thanks again for your .02, they are definitely worth more!
@ Jana: “Consumers are better off just sending the $3500 to the mortgage company as a principal reduction. Software is not going to tell you anything that your mortgage statement and a calculator cannot.”
I couldn’t agree more, this is exactly what I was thinking the more we dived into these types of products. You also raised a good point about who these types of products are marketed to - those that are always looking for the next big thing. Impressionable people should constantly remind themselves to research further before diving into new products, especially financials where track records are so valuable and common sense almost always takes the upper-hand.
The system here is not magic and you can do it yourself.
1) Get one or more credit cards with as long a grace period as you can manage.
2) Get a mortgage with as large a HELOC as you can manage. It must exceed the balance you would EVER have in your checking account. Ensure you can pay the mortgage and the credit card out of the HELOC.
3) ANY income you get put towards balance in the HELOC and then primary mortgage if HELOC is 0.
4) ANY expense pay with credit card if you can, HELOC if you can’t.
5) Pay credit card on last possible day.
The result is that you are using time shifting to reduce the principal and therefore interest payed. If this system is used perfectly, of the reduction in principal will be the size of one monthly mortgage payment plus the average credit card balance plus your average checking account balance. If you add this up and calculate compound interest over the life of the loan, it will yield you the MAXIMUM total savings vs. “the normal way”. (to math geeks: I know this is over simplified in regards to the math, but it is close)
Personally, I don’t like the idea of not having a real savings. Any savings is imaginary and when spent is really a loan secured by home equity.
@ Joe: I see your point and agree that this is a little simplified, but you make an excellent point. Do you think there is a correct time and place in which this can be used (ie, when the market is better, when loans are cheaper, etc).
Some part of me thinks that this seems risky because if something happens and you are not able to make a payment somewhere, it could mean a sharp downward spiral. Can you think of any everyday instances where this system would crumble?
The idea of that avoiding paying as much interest allows one to pay off a 30 year loan in 7-12 years, while making the same amount and number of monthly payments seems impossible.
i.e. I have a 30 year fixed $340,000 mortgage at 5.875 my P & I payments are roughly $2000 per month. After 30 yrs, 360 payments, i will have paid $720,000 total; $340,000 for principle, and $380,000 for interest.
However, if, under this new payment system, I pay $2000 for 10 years (120 payments) I would only pay back $ 240,000 total. That is way short of paying for the 340,000 principle borrowed, never mind any itnerest! I would have to pay for at least 15 years even if no interest at all is charged just to pay the principle off.
Many mortgage brokers and companies hawking this kind of deal, the first lien home equity line of credit (HELOC). It takes several forms, depending on who it is that is making the pitch.
You’ve raised a lot of good points here, so I won’t belabor the issue by repeating them. Having just exited the mortgage world to raise my daughter, I can say with some certainty that this type of loan is taking the place of the now-maligned “Pick-a-Pay” or “Payoption ARM” loans as the “hot” mortgage product. One of the reasons that the payoption was so popular among brokers was because of its profitability (at the time, now it’s poison). The company I worked for closed hundreds of payoptions, primarily because the brokers found them to be the most profitable. It had nothing to do with the well-being of the borrower, which many are discovering now as their negatively amortizing loans are compounding the pain of a declining market.
Since the first lien HELOC is now their loan of choice to push with borrowers, it’s pretty clear that this is the most profitable type of loan to offer in this difficult market. The client that we catered to was the “savvy investor,” the proactive borrower looking for the next big thing. The reason these clients were targeted were due to their propensity to be taken in by this sort of sales pitch.
There is nothing, I repeat, nothing, in these software packages that will help you pay down a mortgage faster. The only thing that pays down a mortgage ahead of the traditional amortization schedule, is, you guessed it! Sending in extra payments. The software may track things for you, but if you’re really into this kind of loan (and it may be beneficial for some few, just like the payoption was), you can do it with any number of mortgage companies that offer it as part of their regular product lines. Instead of some bogus software, they just charge discount points. Either way, you pay. Consumers are better off just sending the $3500 to the mortgage company as a principal reduction. Software is not going to tell you anything that your mortgage statement and a calculator cannot.
Additionally, since the loan is adjustable, you’re subject to changes in the indices, which of course, show signs of increasing, not decreasing.
My .02, as a former mortgage industry professional.