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Lender Lead Solutions launches new products

National Mortgage Professional
Feb 05, 2008

Equity acceleration and debt restructure: Why they workDave Hershmanaccelerating mortgage payoffs, discretionary income, home equity line of credit There is a tremendous amount of publicity going into the ideas of lower debt levels and accelerating mortgage payoffs, especially at a time when home values are no longer skyrocketing and many homeowners are either upside down in their houses or at least are coming to the realization that they can no longer use their homes as piggybanks. While there is a tremendous amount of publicity, there is also tremendous confusion. Many are selling these programs, but have no idea why they work and how to compare one from another and see whether they are in the best interests of their clients. I am not surprised about the confusion, as we work in an industry that had no idea that adjustable-rate mortgages would not be right for certain clients and helped sell many homes to clients they could not afford. In running an advanced school for this industry over many years, I have found that confusion can run rampant. So why should equity acceleration be any different? Here are the financial concepts behind equity acceleration. First, a large prepayment on a loan early in the term of the loan is worth many times money prepaid later on. For example, if you took $5,000 and prepaid your mortgage in the first month, this would be worth more than prepaying $100 per month for the next 60 months. The earlier you remove principal from a loan, the less time that principal is available to be charged compound interest. By using a home equity line of credit (HELOC) as a secondary instrument, some equity acceleration programs can fuel early and large prepayments. Second, putting your income in a checking account each month means you are obtaining little value or no value from that money. The bank that holds the checking account is using your money for free. By depositing that money in an open line of credit, it will pay down the balance on the line and be working for you. For example, if you borrow $5,000 on a HELOC in order to pay down your first mortgage as in the aforementioned paragraph, but you deposit a $5,000 paycheck in the same account, your balance is now zero. Now, as you pay expenses during the month, the balance will then rise back to $5,000. But if you paid the expenses equally during the month, the average balance would be only $2,500 for the month. In other words, you borrowed $5,000, but only paid interest on half of that. If your home equity line was charging eight percent, your effective interest rate would be four percent in this simplistic example. You will not find checking accounts giving you four percent in interest, and even if you could, the money you "removed" from compounding on your first mortgage would add another benefit to using your money in this way. That benefit makes the worth of the money much more than four percent. Third, your discretionary income can be put to work for you automatically. The average American has a few hundred dollars per month that they can spend the way they would like. That is why we call it discretionary. Usually, we would let it sit in our checking account until we spent it (98 percent of the time) or move it to savings (two percent of the time). We would not use it to pay down our mortgage, because we would not have use of the money, so it sits there and disappears. But if you were using your line of credit as a checking account, that money would further lower the balance on what you owe while it sits there. If it sits there long enough, you can transfer the money to pay off more of your first mortgage. If you need the money in the future, you can still borrow it from the open home equity line. In other words, we reversed tendencies. At the present time, we use any excess money we have monthly to pay down our mortgage only as a last resort. With these programs, utilizing excess money to pay down our mortgage can become the first option. Changing tendencies or the paradigm is what this is all about. Fourth, if the equity acceleration program has a live automated component, it can act like a Global Positioning System (GPS) to direct your efforts. Imagine you leave your house on a long driving trip to a place you have never been before. There are lots of turns. You can run MapQuest, or you can use a GPS. Which will get you there quicker? Well, if you use map-driven static directions, the first time you veer off course because of a poorly marked road, you can get lost. You would need to turn around and get back to where you veered off course. You may have to stop to read the map. If you have a living, breathing GPS when you make a wrong turn, the system automatically adjusts to get you back on course. Imagine your quest to eliminate debt more quickly as a road trip. You will get off course many times over the years. Is the system automatically adjusting? Does the system tell you what the true cost of purchases are so that you can make good, qualified decisions? Right now, we spend, spend, spend without thinking. With help, we can adjust our spending habits to strengthen the probability that we will reach our goals and the speed with which we obtain those goals. You can even adjust how we use the bank's money so that we hold onto our money as long as possible, because it is working for us every day. If the tool chosen is static, you will not receive that help and you will not be as efficient using the aforementioned tools and strategies. What is it worth to you to have your mortgage paid off even two years more quickly than a static plan? Thousands or even tens of thousands of dollars! Finally, there is still a strategy to be employed when paying off debts. Those who have been qualifying clients for mortgages for years have known that it is better to pay off certain debts than others. For one debt, we can save the client $500 per month by paying $5,000, and for another, it may take $40,000 to achieve the same result. Debt elimination plans that employ snowball strategies actually look at the payoff efficiencies. Eliminating one debt, they use the savings to attack the next debt and so on. Further, credit restoration programs may actually go to creditors and negotiate a reduction in debt owed (settlements). But these can negatively affect credit histories. Even credit histories that are bad can get worse. So the next question is, "Which strategies are best for your clients?" Obviously, if they are drowning in debt and don't own a home, the strategy may be different than if they have only one debt (a mortgage) and desire to pay that one debt off more quickly because they are coming to retirement. Complicating the scenario is the fact that many of these programs offer you the ability to set up second income sources (who does not need that in this environment?) while you increase the referrals for your primary business. So you have a decision to makewhere to turn. Hopefully, this work will help you make a better-educated decision, and if you want help making a decision, e-mail me at [email protected] I will send you another article and find out more about your clientele and goals and give you one or more choices. One thing I will say is that a new product line that can help your primary business is the ultimate synergy, but it will not come without effort and tenacity. Dave Hershman is a top speaker and leading author in the mortgage industry with eight booksincluding two best sellers for the Mortgage Bankers Association of America. His mortgage school is the only comprehensive advanced curriculum in the industry. For a schedule of classes, free marketing samples, speaking information and articles by Dave, call (800) 581-5678, e-mail [email protected] or visit www.originationpro.com.
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