This past week Anita and I attended a financial planning seminar hosted by a Fort Collins/Loveland financial planner. As part of the presentation we were invited to purchase a "mortgage accelerator computer program" for $1,500 that would get our 30 year mortgage paid off in as little as 6 years. Sounded too good to be true. It was. When I returned home I began studying this product. I learned that this product has been around for some time and is used extensively in Australia.
This is how it works: 1. The homeowner sets up a home-equity line of credit (HELOC) secured by the home. 2. The homeowner purchases the proprietary software costing between $1,500 to $3,500. 3. The homeowner enters all the required data such as all required debt payments and the dates when income will be received. 4. The software then computes the date when payments larger than the monthly payments required by the mortgage are to be made on the mortgage from the HELOC which are paid. 5. All income is paid to the HELOC lender. 6. All debt payments are made from the HELOC on the dates dictated by the software.
I have not studied this program, but I found the following comments on the web:
Dave Ramsey stated:
"The other kind of mortgage accelerator plan out there is a total rip-off. I’m talking about one where some companies will try to sell you a $3,500-piece of software tied in with a home equity line of credit, or HELOC. These things are often called money merge accounts. In this situation, you pay your bills out of the HELOC, and your paychecks are deposited against the HELOC. Then, they’ll apply whatever’s left against your mortgage, and it “magically” pays off your mortgage faster.
The problem is that no matter how many times you move the shell, the pea is still underneath. Whether you use a HELOC or just a yellow pad to make a budget, if you want to make extra principal payments on your first mortgage, you have to live on less than you make. And there’s no way I’m paying some rip-off company $3,500 for the privilege. Talk about stupid! You can do that on your own by making a decision to sit down every month with a pen and a piece of paper and write out your own monthly budget." Read full article at https://www.cbn.com/finance/ramsey060310.aspx
In the other articles I read the commentators conclusions were the same as Dave Ramsey's, though none were as direct or colorful.
Bankrate.com listed 4 ways to pay off your mortgage earlier http://www.bankrate.com/finance/mortgages/4-ways-to-pay-off-your-mortgage-earlier-1.aspx The 4 ways are: 1. Just pay more. 2. Switch to biweekly payments. 3. Refinance to a shorter term mortgage. and 4. Use money merge accounts (the Australian method).
Unfortunately, many lenders charge extra to switch to biweekly payments and once you switch you are locked in to that payment schedule until the mortgage is paid off. A refinance of your mortgage will certainly cost hundreds and likely thousands of dollars to implement and again you are locked in to the new higher payments until the loan is repaid in full. We already saw what Dave Ramsey said about the merge accounts.
To me the best choice is the easiest...just pay more. Just make sure that A. there is no prepayment penalty associated with your current loan. and B. all additional payments are immediately applied to principal (some loan documents state that additional payments are kept until the end of the year and then applied, etc.) By just paying more, you have maximum flexibility. Pay extra each month, or make one additional payment each year or whatever you desire. There are simple loan calculators on line that allow you to determine how much you need to pay to accelerate your loan to whatever payoff day that you desire. If your plans change you can always continue making the current payment amount (the required amount) and discontinue making additional payments.