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"Reverse Compounding" - Payoff Mortgage In 4 Yrs? |
JohnCl
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Posted: 11:28 on 08-26-2006
Apparently some guru is saying he can teach you how to payoff your mortgage in 4 years without raising your payments. What is this about?
JohnCl
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NewKidInTown3
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Posted: 16:57 on 08-26-2006
In order to pay off your mortgage faster than the scheduled loan term, you will have to pay extra against the principal balance. If you don't have extra discretionary income each month to do this, a mortgage acceleration plan will probably not work for you.
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JohnCl
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Posted: 09:20 on 08-27-2006
The key phrase was "without raising your payments".
JohnCl
[ Edited by JohnCl on Date 08/27/2006 ]
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joel
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Posted: 19:10 on 08-27-2006
Basically it works like this. It turns a monthly payment into a bi-weekly payment. This translates into an extra payment at the end of the year.
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JohnCl
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Posted: 20:52 on 08-27-2006
Joel,
I knew about that. That wouldn't allow you to pay off a 30 year mortgage in 4 years. Most likely this is just some sort of marketing gimmick from "TJ Marrs". It is being offered by Brad and Mary Wozny, whoever they are.
JohnCl
[ Edited by JohnCl on Date 08/27/2006 ]
[ Edited by JohnCl on Date 08/27/2006 ]
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vigasimple
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Posted: 10:42 on 07-16-2007
Do anybody understand exactly what this reverse compounding all about?
If you are not going to raise payments then all I can think of is that you are propably using the majority of the repayment amount to pay off capital as oppossed to paying interest.
TJ Marrs is selling a package for about $2000 but isn't that a lot for a programm which has not been tested by a lot of Real Estate investor guru.
Guys has anybody bought the programm and what are your views, does it deliver what it promise, is it worth it?
Would like to hear from you.
[ Edited by vigasimple on Date 07/16/2007 ]
[ Edited by vigasimple on Date 07/16/2007 ]
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NewKidInTown3
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Posted: 19:56 on 07-18-2007
I think you misunderstood. The programs I have read about promise to help you pay off your mortgage early without "additional monthly expenses" -- not the same as "without raising your payments".
Of course you have to increase the amount you pay to your mortgage lender to put additional money toward debt reduction. The success of these programs depends upon your having additional discretionary income every month. For example if you have $5000 in monthly income and $4000 in monthly expenses, then you have $1000 in discretionary income.
The program channels your discretionary income into your loan so that you reduce your loan balance faster. The more you contribute to debt reduction, the faster you eliminate your mortgage debt. The program works especially well if you have a lot of revolving debt too. By paying off your credit cards, you will have even more discretionary income available to reduce your loan balance.
The programs work even better if you budget your monthly expenses, find ways to reduce your spending and eliminate wasteful spending habits. The result is even more discretionary income to put toward your debt reduction.
The programs generally promise to pay off your 30 year mortgage in nine to eleven years. I have not seen one advertised to work in four years. Although, four years is possible, but more likely to be achievable if you are starting with a low mortgage balance and a lot of discretionary income to apply to debt reduction.
Instead of paying anywhere from $500 to $4500 to enroll in one of these programs, you can probably achieve the same results by just adding extra money to your monthly mortgage payment. For example, I had 27 years left on my mortgage loan. I played with the amortization schedules and discovered that I could retire my mortgage in just ten years by contributing an additional $800 toward the principal balance each month.
I will achieve the same result as the mortgage elimination programs without paying a program setup fee, purchasing software, without refinancing my primary mortgage and without paying interest on a HELOC, and without financing my lifestyle on credit cards. Of course, if I want to pay off my mortgage any faster, I could always apply more discretionary income to my monthly loan payments.
BTW, I figured out how fast I could pay off my mortage under the "Living Free and Clear" approach. I do not own their software, so I built amortization schedules for my mortgage loan using the as much of the technique that I could detect from a demo of their system. According to my calculations, their program paid off my mortgage loan 4 months faster than my approach.
The reverse compounding is the name some program promoters are giving to the way interest on debt is paid under their programs. The basic technique is to borrow 12 to 24 months of your discretionaly income from your HELOC account and apply that money in a lump sum to your mortgage balance. The idea is that this large payment reduces your loan term so that you "save" quite a few monthly payments over the life of the loan. Some months your living expenses will be lower, so your extra discretionary income pays off the HELOC loan even faster, and therefore, lowers your HELOC interest payment even more
If you compute the difference between the total interest you would pay on your shorter loan term with the total interest you pay on the full amortization schedule, then compare that to the total interest you would pay on your HELOC for the time it takes to complete the mortgage elimination program, you should realize a tremendous savings. In effect, you are borrowing from your HELOC to pay your mortgage, incurring a higher interest rate on your HELOC than you are paying on your mortgage loan. Using a higher interest rate loan to pay off a lower interest rate loan ("reverse interest") works because your HELOC is paid off over a shorter term with the effect that the total interest paid on the HELOC is significantly less than the interest saved on your mortage loan. In a nutshell, that is what I conclude it is all about.
If you have the discretionary income available each month, just apply it to your monthly mortgage payment as additional principal. Have your loan servicing company automatically deduct it from your checking account each month along with your regular loan payment. Use your spreadsheet program to play with amortization schedules to determine how much you would need to contribute to your principal balance each month to achieve the mortgage reduction timetable you want. Not quite as "glitzy" as the debt elimination programs, but something you can do yourself.
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JohnCl
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Posted: 09:04 on 07-19-2007
NewKidinTown3,
Thanks for the great response. I believe you've hit the nail on the head. I remember one guru saying something about using equity in your other properties by creating notes and selling them going from there but it looks like it all comes down to having a stream of income to draw from (IE: RE101-someone else paying your mortgage via RENT).
It looks like just a lot of hype and marketing around a simple concept. If anyone disagrees with this statement, please let me know where I am wrong (straight from Michael Medved"
JohnCl
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finniganps
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Posted: 15:32 on 07-19-2007
One thing to consider is whether it makes sense to pay off loans early. For example, I have a 15 year fixed mortgage on my principal residence that carries a 4.75% fixed rate. I got this no cost, nothing added to the loan rate during a low point in mortgage rates. With the mortgage tax deduction, my rate is effectively around 3.4%. I see little point to paying that off early since I can invest my money and earn more elsewhere.
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NewKidInTown3
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Posted: 21:07 on 07-20-2007
finniganps,
You are absolutely correct. A couple of years ago, my financial advisor suggested that I sell (or at least cash out refinance) some of my high equity rental properties and invest the proceeds in the stock market. His argument was that my Return on Equity is a lot lower than my potential Return On Investment in the stock market.
I agreed with the concept, but disagreed with the suggestion because it did not support my "survivor retirement plan". A free and clear primary residence increases the cash flow available to pay the significantly increased living costs my wife will have if I pass away first. Even though the mortgage on my primary residence is only 4.5%, and the cash on cash return in my brokerage account is around 10% right now, I am at the point in my life where it makes sense to own my primary residence free and clear.
We are using half of the income each month from the brokerage account to pay down the mortgage loan on the primary residence. I am also using some excess cash flow from the rental properties to pay down mortgage debt. As each new rental property becomes free and clear, cascading debt reduction just increases the rate that the next property is paid off.
A 10-year level term life insurance policy I bought six years ago will be much too expensive to renew when the policy term expires. With the life insurance premium dropping out of our financial plan in four more years, we needed to develop another source of income.
I figure that a free and clear primary residence and about half of my rental properties free and clear should produce enough cash flow to pay whatever living expenses my wife will incur if I pass away before her.
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d_random
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Posted: 15:58 on 10-02-2007
Thank you 'bacona' advertising bot.
Great post by the way NewKid.
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finniganps
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Posted: 19:07 on 10-02-2007
Paying extra towards principal doesn't cost a thing...just pay extra any month towards your loan. The bi-weekly programs charge hundreds for nothing...Do it yourself and you can stop or add mre whenever you want. The other problem with the paid programs is that if they sell your loan you have to buy a new one through the new seervicer....just say "NO" and do it yourself if paying your mortgage down faster is your goal.
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d_random
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Posted: 22:42 on 10-02-2007
Good advice finniganps.
I pay a couple hundred extra on each property every month.
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ypochris
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Posted: 00:30 on 10-23-2007
The logic here appears simple- if only the HELOC interest rate was the same as your mortgage rate. But with the typical HELOC being several percent higher than an owner occupied home loan, the interest you earn with your escrow money just isn't going to make up the difference.
Along with newkid's suggestions, just say no to the escrow account in the first place and pay your own taxes and insurance.
Chris
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NewKidInTown3
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Posted: 00:17 on 11-08-2007
jeand,
This mortgage concept has been around since the early 90s. Although the program name "Home Ownership Accelerator" has only been recently trademarked, many vendors are offering similar programs.
I agree that this one is a little different in that your home mortgage is refinanced and replaced with a more expensive adjustable rate home equity loan that also behaves like a checking account. This program uses a single home equity loan, whereas other programs use a fixed rate first mortgage and an adjustable rate second mortgage (the HELOC) to refinance your mortgage and to consolidate debt.
However, it still works like all the other mortgage reduction programs. Each time borrowers receive a paycheck, instead of depositing it into their bank accounts, the money is put into the home equity credit account that is tied to the mortgage. As money is added to the account, the balance on the loan falls, allowing the borrower to save money on interest payments over the 30-year life of the loan. At the same time, any other expense paid out of the account increases the loan's balance.
In practice, you only achieve the accelerated mortgage reduction if you have more income coming in than you have going out. The extra income, your discretionary income, reduces the average daily balance on your loan and subsequently reduces the amount of interest charged over what you would have paid for the traditional mortgage loan.
Mortgage loans which have an adjustable rate, are not for everyone. For specific borrowers who are good savers, with positive cash flow in their household, this program may work well. The monthly adjustable rate component of the loan will be unappealing to many homeowners, as the tide has turned against such loans and fixed payments are once again in vogue.
This loan works best for the very disciplined borrowers with lots of reserves and liquid assets to pay off their home and have a credit line. This loan program is not for people who just want to buy a house and need some way to be able to afford that.
For those borrowers, a 40 or 50 year fixed-rate mortgage might work better. These mortgages will offer the lower payments that allow buyers to enter the market with much less risk than the teaser negative amortization ARM loans that helped crash the mortgage market
I still maintain that a disciplined borrower can achieve the same results as the Home Ownership Accelerator by applying all his discretionary income to his mortgage loan each month as additional principal. An Excel spreadsheet to track the loan amortization as extra principal payments are applied is all that is needed. No need to refinance into a more expensive loan, or to convert a fixed rate mortgage to an adjustable rate equity loan.
[ Edited by NewKidInTown3 on Date 11/08/2007 ]
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