Mark,
First of all, congratulations, for living in Colorado. I hope you
experience the
inspirational beauty of the Rockies every day. I long ago vowed that I would
live
in Colorado when I got my life together. I'm not there yet, but perhaps one day
I'll
live NW of Boulder, perhaps in or near Ward, or Allenspark. Where in Colorado
do you
live?
Anyway, back to your inquiry. I'm no money pro, but like so many, I
regard my own
opinion highly, and I'd like to offer my $.02 regarding your inquiry 'home loan
alternative'.
The stated concept, as I understand it, is to simplify the administration of
debt service and
maximize the use of your money. The stategy is accomplished by creation of an
account
to which all streams of income are directed and from which all debt service is
paid. Such
an account would be created at the same time that you create a new mortgage,
specifically
a Home Equity Line of Credit. ( HELOC ).
Practically speaking, you'd take out a HELOC, the proceeds of which
would pay off
the existing mortgage completely. Additionally, you would direct all streams
of income
(direct deposit of paycheck, etc) into the new administrative account.
Likewise, you would
authorize the administrative account to make payments on the HELOC and to
service non-
residential debt on a regular basis. ( school loan debt, car loan debt, credit
card debt, etc.)
The concept is marketed to you as a means of paying principal owed on the
residential
debt in an earlier fashion than you understand is available to you now with
your current
mortgage. The administrative account would accomplish this by frequently
(perhaps
daily?) making additional principal payments on your residential loan from
whatever
excess funds remain in the administrative account after the monthly cycle of
debt service
has been satisfied.
I find the concept laudable, and simple to administer from your side, but I
would have
some discomfort about the frequent transactions and the accuracy of the
additional small
extra principal payments. There are simpler, surer ways to accomplish your
goal of
accelerated principal payments.
What is not clear to me is whether you realize the high degree of
probability that
you can already make additional principal payments to your existing mortgage.
You stated that at the time that you bought the house, you borrowed
$100K for the
$233K purchase. That means that your down payment was $133K, right ? That is
a
significant down payment, and I don't understand how you must wait 10 years
before
being able to make any principal payments against the balance borrowed at the
time of
purchase, unless your mortgage requires only interest-only payments for the
first 10
years. In any event, I don't think you can be penalized for pre-paying
principal.
Back to the concept of the loan you inquired about - What is not
mentioned in the
article is the nature of HELOC loans, but I would strongly suggest you think
clearly before
you make a HELOC loan, particularly if your commendable goals of reducing debt
early are
as stated, as HELOC loans are like crack cocaine to an undisciplined borrower.
Their
primary effect as a profitable financial product is to tempt homeowners to
finance current
living with long-term debt. The line of credit can increase with increases in
the value of
the home, and many people over the past decade have continued to draw from the
HELOC
as housing prices rose, again, funding current expenditures with the HELOC,
which was
increased with increasing equity of a booming housing market. Although
long-term
appreciation is a reality for real estate, I would not be surprised if the
value of real estate
remains flat for a decade or more, and perhaps the recent significant declines
in real
estate value will continue for a good part of the next decade, as well. Houses
are a good
place to rest, but not necessarily a good investment vehicle, particularly if
one buys at the
peak of a market.
I would suggest avoiding the temptation of a HELOC loan by refusing
to be enticed.
Re-read you loan document to determine if there are any prohibitions against
pre-
payment of principal. I doubt it. There are safer ways to pay the principal
early than a
HELOC. Create an amortization schedule for your existing loan - just Google
'home-loan
amortization schedule'. Type in your loan rate, and term, and you'll discover
the principal
payment each month for your existing loan. If you want to decrease the life of
your loan by
half, say, from 30 to 15 years, each month simply make an additional principal
payment
for the amount of principal that will be due on the next month's payment
schedule. Each
month, the amount will increase slightly, but the earlier in the life of the
loan you start, the
greater impact your additional principal payment. By making additional
payments to the
principal balance, you can save tremendous amounts of money over the life of
the loan,
and shorten the length of time it will take you to be mortgage-free.
An article follows, but I wouldn't go near the HELOC plan.
-mainstream
http://www.troubleshooter.com/ConsumerInformation/ColumnDetails.cfm?
ColumnID=733
MY BANK, MY LOAN, MY WAY
by - Matt Klaess
American Guaranty Mortgage
April 11, 2007
A new mortgage comes to the United States, a different type of mortgage that
allows the
borrower the flexibility to manage his assets and liabilities. All of the
borrowers hard
earned money that may be sitting in a checking or savings account earning
little or no
interest, can now be used to reduce the amount of interest paid on their
largest debt –
their mortgage. Without changing any monthly spending habits or making extra
monthly
payments towards principal on your mortgage, this product will allow you to
manage your
cash flow like never before and pay off your mortgage.
The premise of this loan is that borrowers finance the purchase of a home or
refinance an
existing loan with a 1st mortgage HELOC (home equity line of credit). Borrowers
then
begin directly depositing their monthly cash flow (direct deposit paychecks,
income from
other sources, etc.) in their mortgage account or HELOC. Monthly expenses,
other than
mortgage payments, are funded by draws against your available funds, just like
a checking
account, using auto bill paying, ATM withdrawals or a credit card tied to your
account. The
borrower's cash flow is then applied to reduce the principal of your mortgage
on a daily
basis which reduces the amount of interest you pay. The compounding effect of
this
product can easily knock 15 years off your mortgage, compared to the typical
mortgage
where interest is all paid up front in the first 15 years. This product will
allow the borrower
to lower their monthly mortgage payment every single monthÂ…..that's right,
lower their
payment every month.
There are other great advantages to this product and it is something that needs
to be
explained by a mortgage professional that is trained in this product and how it
works.
--- In [email protected], "suziezuzie" <[EMAIL PROTECTED]> wrote:
>
> This is totally off the topic so I expect some really, good off the
> topic responses. I bought a house two years ago here in beautiful
> Colorado and throughout that time, the more I thought about the loan,
> the madder I started getting, specifically, paying all the interest
> up front. I borrowed a little over $100K and came up with the rest.
> The total cost of the house was $233,000.
>
> What these banks do is charge you all the interest up front. This
> means, that for the first ten years on a thirty year fixed loan, you
> pay almost nothing but the interest. So after ten years, you finally
> start paying principle. But let's say on the eleventh year, you want
> to pay the whole loan off. I would then have to pay the entire
> principle which means that the house now costs $330,000! I realize
> that after ten years, I would make back all that interest in the
> appreciation of the house but this really is irrelevant.
>
> My question to all you money pros out there is is there another way
> to finance a house without paying all the interest up front, IOW like
> most loans in which the principle and interest are placed together
> and divided by the number of years of the loan, like a car loan? Has
> anyone heard of this new kind of loan called, My Bank, My Money My
> Way, (something like this). I spoke with a guy about this and it's
> based on an equity loan used to pay off the bank.
>
> Another gimmick the banks use, is lending you money on the equity of
> your house and then charging you interest, to borrow your own money!
> When you buy a house, the down payment which is your money becomes
> theirs-- you pay to borrow it! Does anyone have some good solutions?
>
> My 30 year fixed was taken out at 5.875% with no points and
> reasonable closing costs through Wells Fargo.
>
> Mark
>
