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For this and all of the following examples, we are going to use the scenario presented by UFF (United First Financial) in the presentations they offer to clients. I am glad to see that some of the errors from previous presentations and some of their agents have been corrected, so we can go with what they show now.
Here are the details:
| Primary Mortgage: | $200,000 |
| Interest Rate (30 Yr Fixed) | 6.000% |
| Income | $5,000 |
| Expenses | $4,000 |
| Discretionary Income | $1,000 (Income-Expenses) |
| Investment Rate of Return | 6.000% (Conservative) |
| Borrower’s Tax Rate | 25% (likely more) |
So, let’s look at the homeowner’s first option. Quite simply to do what most Americans do, nothing but pay their monthly mortgage payment and typically squander the rest. End result is that it takes 30 years to become financially free.
Option 2 is a little better. They take all of their discretionary income and place it into their mortgage, paying it down as quickly as possible, or so they think. The end result here is they have their home paid off in 12.83 years. The probably is this leaves them with no money in the bank in the process.
Option 3 is still better. Now they decide not to place their money into their home, but rather build on their investments instead. Amazingly enough, they will be in a position to pay off their mortgage even earlier, at 10.17 years. The big difference in this option is the increased liquidity, safety and rate of return, as well as options, they can take advantage of.
Option 4, they decide to go with a Money Merge Account instead, because they want to focus on paying off their mortgage as fast as possible. The end result (according to the presentation) is that their home is paid off in 10.4 years. Certainly better than simply applying the extra income each month into their mortgage and they get a HELOC to boot. United First Financial says the payoff time is conservative and the real payoff could be sooner, so let’s give them a 15% discount. Now that payoff is at 8.84 years. Pretty good, right?
Option 5 is to use a the CMG Home Ownership Accelerator. For this scenario, we will use it like CMG wants you to, refinancing the entire first loan into the new HELOC. The end result is that the home is paid off in 11.2 years.
Option 6 is a little different thinking. Here is where they elect to use an interest only loan instead, saving an additional $199 in monthly payments. So now they invest that extra money as well. The end result is about the same as Option 3, 10.17 years with similar benefits.
Option 7 starts requires even more of a different mindset. Now the homeowner decides to get the interest only loan and invest the extra $199 plus the tax savings accrued. The end result is the homeowner is in a position to pay off their mortgage in just 8.83 years! The fastest, even when throwing in some time off for the MMA. What is amazing is you could achieve even greater rates of return and shorten the time frame even more.
In the coming posts, I will begin to break down each option. The point of these posts is to educate you on your options and help you decide which one may be of best use to you. Again, don’t take my word for it, seek other fully qualified mortgage professionals who fully understand all strategies.
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{ 8 comments… read them below or add one }
Robert,
Thank you for taking the time to detail the many options for homeowners. I am also a Mortgage Broker and Strategic Mortgage Planner (not certified yet) and have analyzed the Equity into Wealth position using interest only options for additional investment. Mortgage acceleration strategies are among many options for homeowners to improve their financial position. A good Mortgage Planner will offer and explain both strategies and find a solution that fits best for the clients situation. Your article makes many assumptions and I am interested in more detail.
I look forward to your upcoming articles and hope to see your assumptions such as assumed ROI when using investment strategies, market risks for investment strategies, and total cost of options including the cost to refinance if applicable. Perhaps a little more on the Pros and Cons of each option.
You need not post the following as I do not intend to use this post for advertisement – your choice. I am a United First Financial Agent. I became an agent after investigating “One Loan” products, software strategies, equity investment strategies, and DIY strategies. I know this is the best mortgage acceleration strategy available (assuming equity investment strategies are not a good fit for whatever reason). The MMA system by United First Financial is a perfect counterpart to Home Equity Management. It can be used to accelerate equity until our clients are in a position to maximize their potential even further with an Equity into Wealth strategy. They always have a choice.
Norm,
Thank you for taking the time to comment.
I agree with you that a good mortgage planner offers and explains ALL strategies (not just 2) and helps the client find the best solution to meet their needs. In fact, that is exactly what I do and I am using this series as an educational piece to show each solution has value.
Every startegy, including mortgage acceleration makes assumptions. Since we all do not have a “crystal ball”, we have to base things on history and “assumptions” about the future. UFF and others do the same thing and I am not making any assumptions that are not a part of the UFF Money Merge Account presentation.
I will be going into each situation, its assumptions I used and the pros and cons of each strategy in the coming posts. The reason they are coming slowly is that I am doing my best to make them easy to read and understand so everyone can see a “side by side comparison” and learn more about each from one site.
I welcome comments on this site from anyone and I feel that your opinion about UFF’s program should be allowed as input. I don’t agree with you entirely, but as you will see in the post about the MMA in particular, readers should be able to formulate their own opinion.
Also, I will be touching on a combo of Equity Harvesting and Mortgage Acceleration in the series, which I did not elude to in the previous posts. I had posted about it on my ActiveRain blog, but will reiterate its benfits here as well.
Bottom line is that Americans need to know the facts of each strategy and there really aren’t many giving it. That is why I post the way I do. I have seen the UFF presentations, and while they are improving, there is no “comparison” to the “do not pay off your mortgage”.
Thank you again for your input.
I respectfully disagree with all the projections provided by CMG and MMA. A first or second-lien HELOC does not create money out of thin air. The HELOC shuffle, of depositing salary and paying bills, provides very little mortgage term reduction. 99% of the effect comes from paying down the principal. The real difference between just paying it down on your own and using a HELOC is a few thousand dollars and a few months.
My numbers differ on your other options.
With option 2, any mortgage calculator will show the balance is paid in 10.17 years.
With option 3, my calculations shows it takes 11.7 years to accumulate enough cash assuming an after-tax return of 6%.
With option 5, it takes 10.25 years
With option 6, it takes 9.83 years
I am curious to see your future discussions.
Jimmy,
The CMG and MMA numbers are derived from 1) CMGs calculator, publicly available on their website and 2) UFF’s presentation. You are partly correct in your calculations as the vast majority of savings is derived from using discretionary income to pay off the mortgage, versus “software” or even the “interest cancellation” effect.
However, due to teh way interest is calculated on HELOCs versus primary mortgages, there is some benefit and that cannot be overlooked. Again, as you pointed out, comes down to “small potatoes”.
I am not sure how you obtained your numbers, but I run the numbers in two seperate programs before doing posts. I will go back and rerun the numbers and correct them if I find an error.
Another point I would like to add is that the 15% discount is because the “sales” agents of the MMA say the numbers are conservative and I wanted to point out that Option 7 even beats their “bonus”.
Part 3 is a better run down of the numbers in comparison over the long haul. I will also go into the fact that the presentations by UFF and others are more of a best case versus reality, depending on how you operate it.
Thank you for the contribution and I hope you continue to converse as the series goes forward.
Thank you for your response.
I went back to my spreadsheet and simply assumed an after-tax rate of 6%. Then, my calculations agreed with yours on options 3 & 6. This shows that it makes very little difference whether you prepay your mortgage or invest the money at the same interest rate. Really not very instructive.
However, with option 7, I saw only a 2 month improvement. Looking at the original loan, a person will spend more money on taxes each month as money is shifted from deductible interest to non-deductible principal. I used the monthly difference between the interest-only payment and the decreasing interest payment to calculate the taxes not being paid, and added this value to the savings account each month. You can’t use all the tax savings of an interest-only loan for the calculation because then it would represent additional discretionary income, which could then be used on the original mortgage.
I will be glad to send you my spreadsheet.
Jimmy,
I am glad your numbers now come up correctly. I disagree with the fact of not being “instructive” as I am teaching other options available that can prove to be much more beneficial. Again, this is but one post in the series and part 3 shows more of the benefits…increased liquidity, safety, and rates of return, not to mention ability to capture other opportunities, etc. that most will miss if dumping all of their money into their home.
Also, check back to the blog regularly and read other posts as they talk about some issues with “home equity”, like the post I did earlier today.
Option 7, you say saw a 2 month improvement only. Is that a bad thing?
You say that you cannot use the all of the tax savings of an interest-only loan for the calculation because then it would represent additional discretionary income, which could be used on the original mortgage. Why not? First off, those trying to pay off their mortgage will never use that money and when applied toward the original mortgage doesn’t amount to much. Second, once someone is educated on which option to do, most will do what it takes to adjust their W-4s, get the tax savings now (instead of giving Uncle Sam interest) and put it to work for them. That maximizes the effect of why Option 7 is the best strategy listed. There is an even better strategy, but I will not get into it right now.
Please send me the spreadsheet as I would like to see how you are calculating from your side. As I said before, I run the numbers under two different programs before posting.
Thank you for your continued discussion.
I agree with you and others, that putting money into higher yielding investments is more useful than paying down the mortgage, in the long run.
As for option 7, you are changing your original assumptions which say that monthly discretionary income is $1000. In the original assumption, discretionary income must include the tax savings. And because the mortgage interest and subsequent tax saving is decreasing, there must be internal shifts in expenses to maintain this discretionary income. Changing the mortgage from a fixed to an interest-only payment frees the principal amount, but the only possible additional tax savings is assuming the same spending behavior plus the incremental interest being paid. This is what I modeled above. The assumption is also that withholding through the year supports these savings.
As for the 2 months improvement – because I used a spreadsheet to calculate exacting amounts, I don’t see option 7 as being useful unless you have software telling you how much to save.
Jimmy,
Actually I did not change assumptions from the basic ones and I subtle mentioned that. The original assumptions are that the typical family will blow the tax savings. Maybe UFF and CMG include those tax savings as part of their plan, but I did not include it in my comparisons, except for Option 7, as it requires different thinking.
As for Option 7 being useful, you do not need software to determine the savings. All you need to do is take your loan amount times interest rate and divide by 12 then multiply by percentage marginal tax rate. So, if you have a $200,000 mortgage and are in the 25% tax bracket with a 6% mortgage, then your tax savings would be $250.
You can also change your W-4 as it allows and your monthly take home will change accordingly. You can just add the extra income right into the plan that way and then any tax refunds you may still get.
Again, the series is to show how the MMA and other mortgage acceleration programs are more than likely not in the best interests of the homeowner and there are many other options out there. I do have a “combo” strategy which I will show how works later as well. It is potentially the best solution.