Recent discussion with Journalist John Schoen at MSNBC...
Point. Accelerated Mortgages are better than conventional mortgages for
the right type of borrower.
Counter Point. Accelerated Mortgages are dangerous, onerous and only
profit the lender.
IFS: Fixed rate and payment loans can not recast following month’s
payment demand. Extra money paid toward principal accelerates pay
off term and lessens interest cost but only at the end of the term.
JOHN: ?? But if you pay off early with extra payments to principal,
doesn’t that shorten the term?
IFS: Yes but you can't realize that until term is up. No savings.
Cash flow has to be comprimisedto achieve unrealized savings.
Meaning you either have to get a raise to find that extra money to
put toward principal or you have to give something up to create the
extra money. You have to buy the savings.
It's a 1 to 1 ratio too. Not a good financial investment. For every
dollar put in you only get a dollar back. Then you have to wait for
the savings or return when you either sell or
refinance again. It's silly when you think about it.
JOHN: IN any case, you’re achieving savings
(you pay less interest over the loan life), you’re
just not achieving immediate cash flow.
IFS: Where is the extra money going toward principal coming from?
JOHN: How are those cumulative savings increased by tapping them
immediately?
IFS: No need for tapping them. They sit in reserve amplifying savings
where it does not with a conventional loan. Any money not going toward
interest (pure profit to the bank) is applying toward principal and amplifying
rate of return in savings.
It is unrealized savings. Full term must occur to realize savings.
The contray exists with Accelerated programs. Since payment
demand is recast each month on the lower outstanding principal,
extra savings is immediately realized.
JOHN: ?? How can a lender make competitive return or reliably
predict cash flow if principal is constantly being reset? Aren’t they
going to demand higher rate to offset this risk?
IFS: No. That being the case all credit card companies would raise
rates too.
This can not and will not happen. The term of the note is written in stone.
Rates only go up and down as economics change. When rates go up it's
because the economy is getting better. Look at the historic changes in
prime since 1980. Tell me what you see. 5 points up and down the scale.
One would have to see a 30 point change in most cases to see a one year
change in pay off term using our methods.
This is again a visual requirement. You have to see it.
Cash flow is immediately realized where fixed rate and payment loans
can not offer cash flow since extra payments must be pulled from
income or diminished expenses.
JOHN: ?? Don’t get this one … where does the “cash flow” come from?
Are you saying lenders rebate interest month to month?
Again, how can they make a competitive return by doing this
without raising the initial rate?
IFS: Cash flow comes from savings. If you do not pay the lender
interest on a higher outstanding balance because deposits and
accumulated reserves sit toward principal then you obviously
cash flowmuch more effectively. Lenders HAVE to lower interest
cost on outstanding balance. That's the rules. Check your credit
card statement. Doesn't the minimum payment requirement
lower as you pay down debt? Since offset methods are diminishing
principal through normal deposits usually diverted to checking and
savings there is no need to find disposable income.
The leveraging of income offsets the daily average balance.
JOHN: ?? Don’t understand what you’re getting at here …
IFS: When placing all your income toward a mortgage you trick
your mortgage into thinking you just made a huge payment.
Since the money is liquid and the lender has to give you re access
to it you get dual use of your money. You can not achieve this
with a conventional loan. Once you dump money into the principal,
its gone. Your mortgage does not recognize the money in
checking and savings. It's just sitting there waiting to be used.
With accelerated programs the principal balance is affected by
what's sitting there. The daily average balance is "OFF SET" by
what is in reserve and therefore interest is based on the net
difference. If you allow all income to be paid toward the principal of
a conventional loan, there isn’t any money to pay bills.
JOHN: ?? This is the hardest part: if you apply your paycheck
at the start of each month and then pay bills from HELOC, aren’t
you just advancing payment cycle by one month? You still
have to draw back out to pay the bills, at which point you’re
paying interest on the HELOC.
(Assuming income and expenses balance.) If you have extra money
*every* month, you’re one of a very, very small minority of
American homeowners.
IFS: Your thinking is way off here. Remember interest is
accumulated only on the "Daily" average balance.
You draw out money as you need it. Money normally sits
in checking and savings during the month until it is needed.
Those days that it's not needed the daily average balance on
the loan is driven down and the interest cost is driven down.
Bringing the balance back up when drawing out money only
drives interest cost up slightly. Savings is greater than cost.
Every dollar counts. You really need to see this in the
dynamic amortization calculator to get the feel for the impact.
Most Americans are way better off than the media exposes.
Do you know what the average credit score in america is???
If you asked Joe average he'd say something like 580 or 620.
It's higher. Look it up yourself. Google: Average Credit Score.
http://www.google.com/search?q=Average+Credit+Score&rls=com.microsoft:*:IE-SearchBox&ie=UTF-8&oe=UTF-8&sourceid=ie7&rlz=1I7TSHB
Also, guess what the national daily average checking account balance is?
$1,200.00 to $1,500.00. This daily average reserve is chipping away at
mortgage balance once you have the right tools.
This operation is no different than the "Sweeps" methods already in
place for commercial borrowers. This has been working for decades
but the american homeowner is not being made aware of these facts
of use.
With an Equity Accelerator income goes toward principal, the bank
will only take the interest only debt to satisfy the demand and the
rest offsets the outstanding principal which triggers a much less
interest demand for the following month.
JOHN: ?? Need more on this. Where/How did IO come into play?
All lines inserted (WE USE) are interest only. There is no need for any
other type of line. Minimum payment and mid term lines are
dangerous to the consumer.
Many banks will force this on the consumer if the consumer is not
aware of the tricks and tactics used by lenders. The only viable line
is a true I/O variable rate line based on prime or libor, which ever
is better in the economic window. We are currently using prime.
It's the better index right now. The excess immediately applies
to the following months demand.Since bills are only paid 7 out of 15
days per month there exists 23 to 15 days remaining in the month
that lazy money normally sitting in checking and savings is doing
a homeowner no good.
JOHN: ??? Again, even if you move “lazy money” up by one month,
all you’re doing is shifting expenses back to the HELOC, which costs
more interest.
IFS: Your math is wrong. Again. This is why it is important to see
the math. You can only guess what is happening. To see the math
working is worth the nickle ride.
JOHN: Also, am I reading this right: your HELOC can hit 18 percent?
That’s a credit card rate. Most HELOCs I’m familiar with
(including my own) are substantially cheaper.
IFS: HELOC rates can be capped. Some lenders who are now non
existent did offer rate caps.
Rates on HELOC's can fall under the control of the state.
Each State is different. The state allows up to 24% in some areas.
18% is the norm. Then bank can do what ever they like.
Most opt to take the maximum cause they can.
Now.... Can we please migrate to a more open minded discussion and
allow us to have a much more thorough, gentlemans debate?
With all the factual data?
Please?
Tuesday, November 18, 2008
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