| The current buzz term in the financial planning circles | | | | "consultant" controls hundreds, maybe thousands of |
| and also within the mortgage industry today is Equity | | | | these escrow accounts. How much interest do you |
| Management. This is the term given to strategies that | | | | think they are earning by holding all those accounts at |
| involve using your home's equity to fund investments, | | | | a bank? Suffice to say, interest represents a 3rd |
| retirement plans, even the family car. Although the | | | | income stream. No wonder there are so many |
| concept has been around for many years, one book in | | | | companies offering bi-weekly payments! |
| particular has spearheaded a new interest in these | | | | There is another system that I have been showing my |
| ideas. The book, written by Douglas Andrew, is called | | | | clients for many years now. I get phone calls from |
| "Missed Fortune". | | | | clients that I started on this system years ago and |
| That book was followed up with "Missed Fortune 101", | | | | they are always thrilled with the huge reductions in their |
| an abbreviated version for the average consumer | | | | principle. It is based on the inefficiency of the |
| investor and quickly became very popular with | | | | amortization schedule. See, when you begin making |
| Financial Planners and Mortgage Brokers - two groups | | | | payments on a 30 year mortgage, approximately 90% |
| of professionals that clearly benefit when the | | | | of the payment is interest! Yikes!. Each and every |
| strategies espoused by the author become accepted | | | | month a little more is applied to principle, a little less to |
| by a wider audience. We have seen Financial Planning | | | | interest. But it goes very slowly. Without extra principle |
| firms offering an evening out (with dinner included!) for | | | | payments, it will take 23 years for a borrowers |
| the opportunity to present these ideas to a groups of | | | | payments to be split 50/50 principle vs. interest! Do you |
| people at one time. Even the Chicago Federal | | | | understand what that means? It means it will take you |
| Reserve has gotten into the act by releasing the | | | | 23 years (approx.) to pay off 1/2 of your mortgage! |
| results of a study regarding Mortgage Pre-Payment | | | | The other half gets paid in the last 7 years. |
| vs. investing in tax deferred retirement accounts. | | | | Obviously, amortization was designed to benefit the |
| In my experience from working with hundreds of | | | | lender...NOT the borrower. |
| homeowners each year, while many homeowners | | | | The key to making amortization work for you instead |
| may understand the benefits of applying such | | | | of against you is to pay principle before it is due. When |
| strategies, a large majority still prefer the peace of | | | | you pay principle early, the corresponding interest for |
| mind knowing that eventually, their home will be paid | | | | the amount of principle paid early, is eliminated. Wiped |
| off. You can show theses folks all the charts and | | | | out. Gone for good. |
| studies... but if the strategies presented are not | | | | You need to start the process using your amortization |
| relatively simple to deploy, most of them will not go | | | | schedule. If you do not have one, there are plenty of |
| through the necessary steps required of them. Sending | | | | websites that offer them; just do a search for |
| extra principle payments is quite a bit simpler than | | | | amortization schedule. If you have already made |
| opening new retirements and choosing investment | | | | payments on your mortgage, that is ok, you simply |
| vehicles that exceed the return gained through principle | | | | need to know exactly how many payments you have |
| reduction. After all, we all know the return of principle | | | | already made. If you have already made additional |
| reduction - it is equivalent to the interest being paid. | | | | pre-payments, it will be much more difficult to get a |
| Locking in a return of equal proportion considerate of | | | | correct schedule. |
| the tax benefits may be readily available, but it's | | | | When you look at a complete schedule, you sill see |
| certainly not as simple as cutting an additional check | | | | every monthly payment listed. You will see the total |
| each month! | | | | payment (not including taxes and insurance), the |
| While I also see benefits in deploying the strategies | | | | principle amount of each payment and the interest |
| discussed in Mr Andrew's books, I have long been of | | | | portion of each payment. The key to making early |
| the conviction that getting out of debt is a positive | | | | principle pre-payments is to make them very precisely |
| financial move for most people. When most people | | | | - to the penny. This is the only way to stay on |
| think of early principle pre-payments on a mortgage, | | | | schedule so that you can track your declining balance. |
| the Bi-Weekly payment often comes to mind. I think | | | | It has been often pr oven that lenders do make |
| the primary reason for it's popularity is due to two | | | | mistakes when applying principle payments. That is |
| factors. First, consider how many people are paid on a | | | | why it is so important to keep track of your payments. |
| bi-weekly schedule. It's an easy sell to someone that | | | | The only way to keep task and to stay on schedule is |
| gets paid every two weeks to pay half of their | | | | by making what I call "Precise Principle Pre-Payments". |
| mortgage payment every two weeks. | | | | A Precise Principle Pre-Payment is always equivalent |
| The second reason is that it's a fairly easy sell. A few | | | | to the principle portion of one or more future |
| companies figured out that they could earn a fee for | | | | payments. Here's what I mean: |
| helping people arrange their mortgage payments in this | | | | Say you are making a payment is April. The month |
| way. Then they figured out a way that they could pay | | | | doesn't really matter because once you begin on this |
| a commission - no license required. So many people | | | | system, you will begin to look at what payment you |
| just hopped on the bandwagon and began selling this | | | | are on rather than the month of that payment. There |
| principle pre-payment strategy. They were told that it | | | | are 360 payments in a 30 year mortgage. The trick is |
| would cut 9-11 years off a mortgage thereby saving | | | | to accelerate the schedule so that you make way |
| tens of thousands of dollars in the process. Sounds | | | | less than 360 payments. But using April as a starting |
| good,right? | | | | point, you will be writing a check for April's total |
| Maybe. | | | | payment. Now, you want to pay some additional |
| It's probably better than doing nothing. But you can | | | | principle. The amount needs to be the exact amount |
| easily do this yourself, without paying a fee at all. | | | | of the principle column for future months. Remember, |
| When you make bi-weekly payments, you end up | | | | these will not be very high - roughly 10% of the total |
| making one additional mortgage payment each year. It | | | | payment. |
| does work - one extra payment each year will cut | | | | If you are in April as stated above, you would pre-pay |
| approximately 7-10 years off the tail end of your | | | | May's principle. Again, to the penny. This is important |
| mortgage. There are 52 weeks in the year. Cut that in | | | | because you will actually cross off April AND May on |
| half and you have 26. 26 bi-weekly payments equals | | | | your schedule. Now this is important - YOU WILL |
| 13 monthly payments, get it? That's all there is to it. | | | | STILL NEED TO MAKE A PAYMENT IN MAY. But in |
| So where's the rip off? The rip off comes when | | | | May, you will actually be paying June's payment |
| companies and consultants offer to assist you with the | | | | because you paid May's principle in advance. Get it? |
| process. First, they charge a fee for setting up the | | | | Each month you make a payment, you look at the |
| account, from a low of $100 to as much as $800. | | | | next month (or months), pay the principle tied to that |
| Setting up the account simply means opening an | | | | month's payment and you accelerate on your |
| escrow account. Then, they ask that you fund the | | | | schedule. If you pay the following month's principle |
| escrow account with at least one monthly payment | | | | each and every month, you will be going twice as fast |
| depending on when your next payment is due. See it's | | | | as the amortization schedule calls for. |
| real simple - they take some money up front, then put | | | | One Caveat - Make sure you do not have a pre |
| you on the plan, paying one half of the payment every | | | | payment penalty before beginning this program. If you |
| two weeks. By the time the first of the month rolls | | | | have one, you may need to wait until your penalty |
| around, there's enough in the escrow account to make | | | | expires. On the other hand, many mortgages that |
| the payment. And get this... there's even a small charge | | | | have penalties do allow for early principle pre |
| for every escrow deposit - anywhere from $2 - $6. | | | | -payments up to 20% of the balance each year. If you |
| Times that by 26 deposits and that will cost you an | | | | follow this schedule, you will be paying less than 20% |
| additional $52 - $156 per year. For something you can | | | | of the balance. |
| easily do yourself. | | | | You may also accelerate even faster by looking more |
| The worst part of the story is yet to come. By the | | | | than one month ahead. Taking the same April |
| time the 12th payment rolls around, there's enough in | | | | payment, you can pay May's, June's, July's principle |
| the account to make one full extra principle payment. | | | | early and accelerate by three months instead of just |
| They wait until the end of the year before making an | | | | one. |
| additional pre-payment! But mortgage interest is based | | | | The more you pay early, the greater the interest |
| on "Per Diem" meaning "per day". This simply means, | | | | saved. |
| the sooner you make additional principle pre-payments, | | | | I realize that this may be somewhat confusing but it |
| the less interest is accrued. It would benefit you more | | | | really does work. If you would like some assistance |
| to simply divide a full monthly payment by 12 and then | | | | with this program, you may receive additional |
| add that amount to every mortgage payment! | | | | assistance, simply contact me and I will help you. |
| Then, there's this to think about - the bi-weekly | | | | |