The current buzz term in the financial planning circles and also within the mortgage industry today is Equity Management. This is the term given to strategies that involve using your home's equity to fund investments, retirement plans, even the family car. Although the concept has been around for many years, one book in particular has spearheaded a new interest in these ideas. The book, written by Douglas Andrew, is called "Missed Fortune". That book was followed up with "Missed Fortune 101", an abbreviated version for the average consumer/investor and quickly became very popular with Financial Planners and Mortgage Brokers - two groups of professionals that clearly benefit when the strategies espoused by the author become accepted by a wider audience. We have seen Financial Planning firms offering an evening out (with dinner included!) for the opportunity to present these ideas to a groups of people at one time. Even the Chicago Federal Reserve has gotten into the act by releasing the results of a study regarding Mortgage Pre-Payment vs. investing in tax deferred retirement accounts. If you would like to read the study, a link to it has been placed at the end of this article.
In my experience from working with hundreds of homeowners each year, while many homeowners may understand the benefits of applying such strategies, a large majority still prefer the peace of mind knowing that eventually, their home will be paid off. You can show theses folks all the charts and studies... but if the strategies presented are not relatively simple to deploy, most of them will not go through the necessary steps required of them. Making additional principle pre-payments is quite a bit simpler than opening new retirements and choosing investment vehicles that exceed the return gained through principle reduction. After all, we all know the return of principle reduction - it is equivalent to the interest being paid. Locking in a return of equal proportion considerate of the tax benefits may be readily available, but it's certainly not as simple as cutting an additional check each month!
While I also see benefits in deploying the strategies discussed in Mr Andrew's books, I have long been of the conviction that getting out of debt is a positive financial move for most people. When most people think of early principle pre-payments on a mortgage, the Bi-Weekly payment often comes to mind. I think the primary reason for it's popularity is due to two factors. One reason is simply that so many people are paid on a bi-weekly schedule. It's an easy sell to someone that gets paid every two weeks to pay half of their mortgage payment every two weeks.
The second reason it has become popular I already mentioned.... it's an easy sell. A few companies figured out that they could earn a fee for helping people arrange their mortgage payments in this way. Then they figured out a way that they could pay a commission - no license required. So many people just hopped on the bandwagon and began selling this principle pre-payment strategy. They were told that it would cut 9-11 years off a mortgage thereby saving tens of thousands of dollars in the process. Sounds good,right?
Maybe.
It's probably better than doing nothing. But you can easily do this yourself, without paying a fee at all.
When you make bi-weekly payments, you end up making one additional mortgage payment each year. It does work - one extra payment each year will cut approximately 7-10 years off the tail end of your mortgage. There are 52 weeks in the year. Cut that in half and you have 26. 26 bi-weekly payments equals 13 monthly payments, get it? That's all there is to it.
So where's the rip off? The rip off comes when companies and consultants offer to assist you with the process. First, they charge a fee for setting up the account, from a low of $100 to as much as $800. Setting up the account simply means opening an escrow account. Then, they ask that you fund the escrow account with at least one monthly payment depending on when your next payment is due. See it's real simple - they take some money up front, then put you on the plan, paying one half of the payment every two weeks. By the time the first of the month rolls around, there's enough in the escrow account to make the payment. And get this... there's even a small charge for every escrow deposit - anywhere from $2 - $6. Times that by 26 deposits and that'll cost you an additional $52 - $156 per year. For something you can easily do yourself.
The worst part of the story is yet to come. By the time the 12th payment rolls around, there's enough in the account to make one full extra principle payment. They wait until the end of the year before making an additional pre-payment! But mortgage interest is based on "Per Diem" meaning "per day". This simply means, the sooner you make additional principle pre-payments, the less interest is accrued. It would benefit you more to simply divide a full monthly payment by 12 and then add that amount to every mortgage payment!
Then, there's this to think about - the bi-weekly "consultant" controls hundreds, maybe thousands of these escrow accounts. How much interest do you think they are earning by holding all those accounts at a bank? Suffice to say, interest represents a 3rd income stream. No wonder there are so many companies offering bi-weekly payments!
THERE IS A BETTER WAY!
This past summer (2006) I was fortunate enough to be introduced to a gentleman that is recognized throughout Australia. His book - "How To Own Your Own Home Years Sooner! Without Making Extra Payments sold over a half million copies there. Now he has set his sights on North America. His name is Harj Gill and he is known as Consumer Advocate Harj Gill. In America, he is not only teaching his system - he also aims to clean up the entire mortgage system! And it needs it!
More on that later. Right now, I want to introduce you to Consumer Advocate Harj Gill's system. Mr. Gill's system takes advantage of the way mortgage loan interest is calculated. As I mentioned earlier, mortgage interest is calculated "Per Diem" (per day) and is paid in arrears - meaning the interest that accrued for the most recent month is due on the first day of the next month. (September's interest is due on October 1) With Mr. Gill's system, you don't make extra payments - you just make them earlier. At the heart of Mr. Gill's system is a software program he developed that shows borrowers how to restructure their payments to eliminate tens of thousands of dollars in interest while knocking many years off their loan and credit card balances.
The software is simply life-changing. It is available online through his website at SpeedEquity.com.
Recently, Mr. Gill has chosen me to be his liaison to the country's mortgage brokers. This is a prestigious position - one that I take very seriously. Mr. Gill felt it necessary to have a liaison because his "take no prisoners" attitude toward loan officers and brokers that care more about lining their own pockets than the welfare of their clients has caused concern with many of the legitimate and ethical brokers that DO care about their clients. It is my responsibility to help educate the quality brokers out there and to show them that Mr. Gill is not against them - he only wants to rid the industry of the bad seeds. He is right on the money - the industry does need a serious clean up effort. I am only too happy to do everything I can to help Mr. Gill in his quest.
Here is the link to the Chicago Fed Study - http://www.missedfortune.com/downloads/ChicagoFedStudy.pdf
Ron Borg is the CEO of Mortgage123.com - Their Credit Score Protection Plan offers consumers up to 8 lender quotes but only one credit inquiry unlike other mortgage shopping portals: http://www.Mortgage123.com
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