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FIB - Scams 101
Re: $3500 for software to pay extra on your mortgage?
Posted By: JimS In Response To: Re: $3500 for software to pay extra on your mortgage? (Sue Copening)
Date: Thursday, September 20, 2007, at 2:10 a.m.(pst)
>>
Sue,
You don't have to be good at math to solve the problems in this scam. All u have to do is look at the limits and you will see the best case scenario.
In the power point demonstration that I watched, the home owner borrows $200,000 at 6% interest and makes payments of $1,191/mth. Assuming that the home owner were to borrow this money at 0% interest and make payments of $1,191/mth it would take this home owner 168 months or 14 years to pay off this mortgage.If I was loaning you money at 0% interest would you be in any hurry to pay off the loan?
I was told that the advantage to this mortgage plan was that I was substituting 'cheap loan money' for 'expensive loan money'. This is in fact NOT true. The reason that the HELOC at 10% year was 'cheaper' than the home mortgage at 6% year was supposed to be because on the home mortgage money did not have to be posted against principle until either 'the end of the month' or 'when the full monthly payment is made'. Both of these statements were made.
First, with every loan that I have made, I have been able to pay down the mortgage by writing a check and clearly stating that I wanted this additional money 'applied only to principal'.
Second, let's look at the math. In the power point that I saw the home owner in question was spending $4,000/mth on 'bills'. Let's say that I have $4,000 that I can place against principal, but I am saving that money to pay my next months bills. For the sake of argument let us say that the HELOC costs us no interest at all (just as my non-secured credit card does if I pay off the balance at the end of each month). If I place my $4,000 against my mortgage I pay off 20 months of mortgage payments if my principle payment is $200/mth. I can then use the HELOC to pay bills during that month. If, however, at the end of that month I pay off the HELOC with my paychecks, unless I make more than $4,000/mth I will be broke and there will not be anymore 'Advanced Equity' payments.
If I do make more than $4,000/mth I can always write a check for the difference to make an early payment on my mortgage. Now let us consider the argument that my money will not be posted to my principle until the end of the month. If each month I post an extra $1,000 to my bank and that money is not posted until the end of the month, in reality, I have only lost one month's interest. I do not continue to loose one month's interest each month. You can think of the situation like this: Posting the money at the end of the month is no different than if I kept the money in a non-interest earning saving account for one month and then began paying $1000/mth against my mortgage and having that money posted against principle immediately. My loss in this case would be 6% of $1,000 divided by 12 or $5.
On the other hand the average amounts that the UFF program was keeping in the HELOC avg. approx. $2,000/mth or $200/year versus a one-time loss of $5.
The scam part of is this program's story that you are using the banks money to pay down your loan and that this is because of some complex calculations done by some complex software algorithm. When you take the cases of borrowing money at 0% on your home loan, or on your HELOC, you quickly see what the maximal savings can be. You then see that there is no money to be made on the HELOC. In fact, there is money to be lost, since you are using more expensive money to pay off your mortgage; money for which you are paying 10%/mth so that you don't lose $5.
Were you make your money is by paying down your mortgage early, thereby reducing you interest payments. But as you can see from the first example, you would be just as well off taking the $3,500 that you paid for the program and placing that against your mortgage. That would save you 17.5 months of payments right there.
My concern here is with the HELOC's. What do they cost to initiate? Since the software program keeps approximately $2,000 on the HELOC tab at 10% interest, the HELOC is making the bank $200/yr plus any initiation costs. I can see why the banks would want to sell similar 'software' to their customers!
I did not get far enough into the pitch to find out the details about the HELOC, but I was told that there was a cost for this initiation and that these costs would also be rolled into the first draw on the HELOC. My concern is with the story about 'using the bank' when in fact the bank is using you. If the 'friendly lenders' of these 'compassionate' loans use the story that since the software is 'using the bank' you should accept particularly stringent 'repossession' clauses on the HELOC, then you are putting your house at risk for something that you could have done with a non-secured credit card with a credit limit of $4,000. (And in this scenario the interest would be 0% with no initiation fees!)
The argument that the Software makes complex calculations that save you thousands of dollars and hours of time (if you were a rocket scientist) is bogus. The most you can lose by having your $4,000 posted at the end of the month is a onetime loss of $20 (5 x 4). Since all your bills that you are so diligently paying according to some complex schedule by some mysterious software only amount to $4,000/mth the maximum loss to you due to inefficiency is $20, not per month, but $20.
Now, if you are using this tool as a motivational device to save money that is great. But you can go on line for free and see what sort of money you will have in 5, 10, 15 years if you put away $1,000/mth into savings. Better yet, put this money into a 401K and you may get matching dollars from your job, decrease your yearly tax burden and make 10 to 15% return on your money. Not to mention that you get to use your home mortgage interest as a tax deduction. With interest rates as an all time low, I am not surprised that banks would get on the UFF bandwagon and have you spend $3,500 of your money to help them make more money off you.
Oh, I forgot one more piece of math fiction, the NBC news story that a man in Los Vegas, Nevada was using the UFF software to save $300,000 in interest and pay off his loan in 5 years. The fiction here is that the HELOC is being used to miraculously do this for the man. Let us look at the initial numbers: If a 30-yr loan of $200K results in 231K of interest, then in order to save $300k in interest, the man in question must have a loan of at least 260K. If this man had this loan at 0% interest, then to pay back this loan in 5 years he must be paying $52K/year in payments (100% principal, no interest). Since by the numbers given in the opening statement, the usual payment (principal plus interest) for borrowing 260K would be approximately $1560/mth (300K/231K x $1,200/mth), this man must be making additional payments toward equity of $2,770/mth (assuming that the UFF software magically reduced the interest portion of each months payment to $0).
We were told at the beginning of the lecture that the UFF software worked by allowing us to replace expensive 5% interest with inexpensive 10% interest, thereby not making us change our current lifestyle in any way. Even if the UFF software was to eliminate all interest we pay each month we would not be able to pay back the sample loan of 200k in less than 14 years or the NBC loan of 260K in less than 16.6 years without additional payments out of our disposable income. In the UFF sample of 200K the home owner is making $60K/yr and making additional payments of $12K/yr. This represents 20% of net income (assuming all taxes have been withheld). For overextended homeowners who find that they owe the bank more than their home is worth and have no disposable income the UFF software will not be able to work any magic. And as for examples of homeowners paying off an additional $33.2K/year on their mortgage, certainly this will not be the average 45 year old homeowner with an income of $65k/yr without some severe cutbacks in spending!Great idea Dave... smart and lots of people do that.
>> Couple of problems with that though... most people don't HAVE the
>> extra dough to do that... and if they did and needed that money back they
>> don't have access to it.>> This solves that problem.
>> Also.. what you are describing is the same as a bi-weekly plan. Those
>> are great... they will knock 6-7 years off your mortgage.>> Here is a snapshot of one of my real clients...
>> $270,000 mortgage
>> $200 a month in discretionary income.>> Bi-weekly (extra payment ever year) - pay off in 24 years
>> and save $63,425 in interest.>> $200 in monthly discretionary income applied to mortgage EVERY
>> MONTH... they would do better... they would pay off in 22.75 years and
>> save $82,781.>> With the Money Merge Account they would pay off in 16.4 years
>> They would SAVE over $131,000 in interest.>> We BEAT what they can do "on their on" by 6 years and
>> $48,000.>> Now look at the opportunity cost. They are paying off their mortgage
>> 11.7 years early. If they took their mortgage payment and invested it,
>> along with their $200 in discretionary income... at the end of 30 years
>> instead of finally just having their house paid off... they would have
>> over $316,091 ..if they invested at just 4%.>> Of course, this is not just about paying off your mortgage... it is
>> about building equity faster. Taking interest out of the banks pocket
>> means you can do anything you want with it. Buy investment real estate,
>> invest other places, etc.>> Not at hard choice to make when you understand the math.
>> I embrace skeptics... my Dad was an Aerospace Engineer and highly
>> analytical. I am also and have spent over 20 hours comparing this program
>> to every other program I could find out there. It beat them all.>> If you want to make your own comparison... have at it! I found it
>> quite fun to do the research. Just have me do an Analysis for you. We do
>> not need your personal info... or even your real name and address.>> Then you can take that and see if you can come up with your own system
>> to beat or match it. If you can... and it is as easy as this... I will
>> send you a gift certificate at a restaurant near your home for lunch on
>> me.>> Ciao!
>> Sue :)
>> Click the link below to get my site.
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