United First Financial (UFF) is marketing an equity accelerator mortgage plan which promises homeowners quicker loan payoff. I’ve been approached by several of their sales people in the past few months on the wonderful virtues of this program. These folks make amazing promises and quite honestly scare me. It’s not that I fear the program, its that I fear this program will be the next mortgage fad that will rob people of their homes.
Here is what UFF promises (from their website):
Qualified homeowners using the Money Merge Account system can now potentially pay off their mortgage within 1/3 to 1/2 the regular time – with little to no change to their day-to-day spending habits and without increasing their minimum required monthly mortgage payments.
The key word on this statement is “qualified”. Being qualified doesn’t only mean having the right income, credit score or liquid assets. Being qualified means fully understanding how the program works and what it means for you. If you don’t believe me about this definition I can put you in touch with the folks who got into Option ARMs thinking they were “qualified”.
To be perfectly clear, I have nothing against this program and I believe an equity accelerator program can help many homeowners. However, like the Option ARM before it, there is potential for abuse. It’s not just a hunch either. It comes from speaking with a few UFF sales people. They seem to act like carpenters walking around with a hammer seeing nothing but nails. I can already see Congress drafting legislation in 2011 to stop “past” abuses in equity acceleration. So, homeowners need to pay attention now!
To compensate for these sales folks who won’t give you anything concrete but only regurgitate what they’ve been told in their PowerPoint training, let me explain how the program works.
You start by either purchasing a home or refinancing your mortgage into a HELOC (Home Equity Line of Credit). This HELOC account also serves as your primary checking account. Meaning you make all your deposits into this account as well as pay all your bills.
As a deposit is made into this account, the amount gets credited immediately to the principle balance. Since interest owed is calculated on a daily basis, this in turn reduces the interest you owe on the balance.
So, instead of paying a fixed principle amount every month (as in a conventional mortgage), you get to apply all your income towards paying down the principle and reducing the interest owed. This simple act of reducing the amount of interest you owe cuts into the time that it takes to pay off the loan.
Since this HELOC account is also a checking account, as you make withdrawals against the account, you increase the principle amount you owe (you’re taking back from what you paid). As long as stay within budget, and leave some money in your checking account you will come out ahead. And over the long term this “left over amount” act as an additional payment to principle, resulting in a quicker loan payoff.
So, in essence, you attack the mortgage by reducing the interest owed and by applying additional money that would normally just sit in your checking account. Sounds good doesn’t it? In theory it is a great plan. It’s your ability to execute the plan that needs careful thought.
How do you know if you’ll be able to execute? I’ll discuss this in part two.