Re: Early mortgage payoff program, to good? - Posted by John Corey
Posted by John Corey on April 22, 2006 at 19:21:18:
I know TJ as he is local to me and runs a local REIA. He is good at marketing. I have not seen any specific issues with what his promo materials claim. I have not purchased or viewed the specific materials he is offering this time around.
What he is talking about has largely been covered by the other posts to your question.
Mortgage cycling is sometimes talked about in terms of an Australian mortgage. Such programs are common in the Australian market. In the UK Virgin (Virgin group - Virgin Records, Virgin Atlantic Airlines and Virgin Financial) rolled out a similar product for the UK consumers. The bank behind the program was an Australian bank.
The models says that it makes little sense to have savings in a savings account and surplus cash flow each month from a pay check while having debts. Why not put it all together and have a floating amount you owe secured by your home. By reducing the amount outstanding for much of the month you owe less interest so you would pay down more of the mortgage when making the same payments as a more normal mortgage. Each payment would have less interest and more principal is the idea as you would not owe some of the money for the full month.
The comment made by someone saying that it takes discipline is key. You could just as easily spend more than you can really afford up to the limit.
So, TJ is correct. And there is no secret.
As Luke put it, just throw extra cash at your debts and they will go away faster. With a HELOC you can use your whole pay check on the 1st to pay down the mortgage. As you buy gas, food, etc you raise the debt back up. If you raise it by less than your pay check you really win. Even if you spent the full amount of your check the lower debt outstanding for part of the month will help.
One BIG, BIG issue with the product in the UK and other places is the rate on the loan is generally higher than a more traditional mortgage. Hence it will not work and you will be worse off. If the HELOC’s interest rate is lower than the conventional loans you win. If the HELOC’s interest rate is higher you will actually lose out unless you have a lot of surplus cash in a low interest savings account.
A hybrid solution is to have a lower LTV first than you might otherwise have and a HELOC for some larger slice (higher percentage of the LTV). Then aggressively work on paying off the HELOC debt. When that it wiped out more or less you can raise it back up by using the cash to pay down the 1st.
You really need to sit down with a spreadsheet and run some numbers. Maybe TJ has a calculator or something as part of his program so the cost could be worth the trade-off vs. building it yourself.
Then again you might learn more if you do build it.
If someone wanted to build such a spreadsheet I speculate that a few here would check it out and make sure that it is accurate. Assuming it did exist then maybe we could get it added to the site and all would be better off. I am not much of a spreadsheet jockey so would not make a great person to code it. I certainly can explain the math. Anyone interested?