In part one I discussed the characteristics of the mortgage acceleration program and pointed out that while on paper the concept is sound, it’s the execution which needs to be better understood.
So, if you are considering the mortgage acceleration program, I suggest you ask the sales person to generate a comparative scenario involving a fixed rate conventional mortgage where you make extra monthly payments. Make a realistic assumption on how much left over cash you can apply to your mortgage and don’t forget to include the $3500 software charge. Compare the payoff times. This should then serve as your starting point to determine if this program is right for you.
To complete your analysis you need to absolutely understand the following elements of the program and how it may apply to your particular situation.
One: 10% Left Over in Account- According to my research, to pay off the loan in the time frame promised by UFF, you will need to have at least 10% left over after monthly withdrawal. This is the residual amount left over in your account that carries over month to month. Does this 10% rule apply to your spending habits?
Two: Stable and Regular Income- The program works best if you have a stable regular monthly income. For example, be very cautious if a greater portion of your income is in the form of a variable commission. The entire program is based on a consistent flow of deposits coming into the HELOC account.
Three: Your Financial Discipline- It almost goes without saying, but I will say it anyway. Your financial disciple is critical in making this program work. If there is a severe danger of you overdrawing on your account then this is not for you. Overdrafts quickly reverse any equity gains you make. Put it this way, if you regularly overdraw then you’ll essentially be using your home as an ATM and you know how that ends up.
Four: Stomach Daily Variable Interest Rate- The interest rate is usually higher than a fixed rate home loan and it varies daily. I don’t know which index they use, but regardless, you must be able to stomach the possibility that your home loan rate is different every morning.
Five: Initial Setup Cost of $3500- Finally, you have to purchase a $3,500 software from UFF that helps you manage your account and monitor your progress. As a side note, just so you know, from various sales folks I’ve talked to a large portion of this goes to the sales person making the sale.
I think mortgage accelerator programs will be all the rage in 2008 and 2009. Given how many people are eager to be done with their mortgage, UFF stands a fair chance of capturing a good chunk of the market. For those who understand the program, can use it and realize its benefits, all power to you. However, for the vast majority of folks, I caution you to be very vigilant, resourceful and inquisitive. Don’t get caught up in the hype. We’ve been down this road before.