You can do it on your own

Your Money

November 26, 2006|By Humberto Cruz | Humberto Cruz,Tribune Media Services

When my wife, Georgina, and I paid off our $100,000 mortgage early 19 years ago, we saved $97,468.70 in interest.

We did it simply by enclosing a second check with our regular mortgage payment each month.

If your goal is to pay off your mortgage early, you can do as we did without having to fall for gimmicky strategies that overstate your savings or hide your cost.

And there are plenty out there.

"Would you like to pay off your mortgage in 15 or even 10 years without having to change your current lifestyle?" begins a typical pitch among several I've come across. Although details vary, the basic idea is to turn your mortgage into a "cash-flow management account" that works like a bank.

You do it by depositing your entire paycheck and any other income you receive "into" the mortgage - that is, into the cash-flow management account. All deposits reduce the outstanding balance on your loan.

The companies promoting these programs typically offer free online bill-paying and free debit/automated teller machine cards as easy ways to make withdrawals, in addition to unlimited paper checks.

If you are depositing more than you are taking out and doing so regularly, you stand to save more in interest than if you simply send extra payments toward the principal from time to time.

And by having your paycheck deposited directly into these accounts you create an element of discipline and forced savings that is lacking when you must remember - and decide - to send extra payments on the principal on your own.

Problem is, the marketing literature I've seen is often misleading, comparing apples and oranges and enticing homeowners to refinance their mortgage by taking on a home equity line of credit that provides for the unlimited checking, bill-paying and ATM access.

By sleight-of-hand math, this line of credit, which charges a higher interest rate than the mortgage, is made out to be a savings move.

For example, one of these programs boasts that a homeowner paying 6.5 percent interest on a 30-year, $300,000 mortgage could have the mortgage paid off in 15 years by using a cash-flow management account tied to a variable-rate home equity line of credit charging 7.72 percent to start.

To realize the same interest savings made possible by the early payoff, the homeowner would have to find a 30-year mortgage charging a mere 3.83 percent, the marketing materials claim.

In reality, however, what makes the early mortgage payoff possible is not the establishment of the line of credit but the assumption that this homeowner would save $800 a month into the cash-flow management account. So why not simply keep the existing mortgage at 6.5 percent and send an extra $800 into the principal each month?

"If the person were to apply that $800 in savings toward the existing mortgage instead of refinancing into the newfangled home equity line of credit, the result would be paying off the mortgage in 14 years and three months" or 15 months earlier, said David Jacobs, a fee-only certified financial planner with Pathfinder Financial Services LLC in Kailua, Hawaii.

Not only that, but the homeowner would save an additional $45,000 in interest over the life of the loan compared with the line of credit, Jacobs said.

Besides the line-of-credit costs, a one-time fee for setting up and managing these cash flow accounts can run as high as 1 percent of the loan balance. If you were to apply to the mortgage principal the fees saved by not using one of these services, you could reduce your mortgage payoff time by another year, Jacobs said.

"These schemes take the simple idea of making extra payments toward your principal and make it look more complicated so they can charge for what you could simply accomplish on your own," he said.

Humberto Cruz writes for Tribune Media Services.

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