Did you know that on your typical 30-year mortgage, it takes approximately 21 years just to pay down less than half of the principal of your loan?
The Mortgage industry's big secret has been kept away from the public since the Roosevelt administration. This little known secret has been taking you (and every other homeowner) for a very costly ride. Your 6% LOW INTEREST MORTGAGE IS REALLY costing you upwards of 60% or more!
You might be asking how you could possibly be paying THAT much without knowing it? It is because ALL mortgages are front end loaded, meaning you're paying off the interest first. So during all of those first years, you aren't paying down the principle. Instead, you're buying the banker a new Mercedes. Most of us realize how a mortgage works, and we are aware that we're paying off the interest first, but no one has come out and spelled out exactly what affect that has on the total interest you end up paying. This withholding of information is the biggest “little white lie” in the banking world today.
Does this scare you at all? Hopefully it makes you a bit angry as well. We have been led to believe, that this is simply the way mortgages work, and that we have no choice. After all, who has the cash to just go out and pay cash for their home? The banking industry is perfectly content with the way things are. Have you noticed that in virtually every town in the US, there seems to be a bank on every corner? Have you ever stopped to think that the banking industry is a business that earns money by using money? Your Money!
What's more of an eye opening statistic is that in just 5 years now, the bank has already made a great profit on the average mortgage. Let's look at a traditional 30 year fixed mortgage for $150,000 at 6%. Let's take a good look at what is happening here: (If you would like a visual, there are many online mortgage calculators that will allow you to print the amortization table and see these facts :) Each year, the consumer pays $10,792 but a different portion of that total gets credited to Principal and to Interest. In the first year, $8950 of the payments goes straight to the lender and the remaining $1842 gets credited back to the consumer.
Here are some other facts gleamed from this schedule: - It takes 19 years before just half the monthly payment goes to Principal, the consumer ($5482 to Principal, $5309 to Interest). - After 7 years, the consumer has paid $75,600 but only $15,541 goes to Principal. - After 10 years, over 84% of the starting balance is still owed. - After 21 years, half of the starting balance is still owed. At that point, the consumer will have paid $226,800 with only $75,000 of it going to Principal. The numbers are heavily skewed in favor of the lender because they are designed to be.
It's due to something many consumers are familiar with, front-end loaded interest. Even though the monthly payment is fixed, each payment has a different contribution to Principal than Interest, and the contribution to Interest in the first years is much greater than in the last years. The result of this system is that the lender collects their interest first, up front!
Most consumers know that the interest on mortgage loans is front-end loaded, purposely stacked against them. But we also found that those same consumers, no matter how educated, as well as mortgage industry experts, do not realize that the front-end loaded interest completely throws off the fixed interest rate schedule. Take a close look back at Year 1. The consumer pays $10,792 but only $1842 of it gets credited back to Principal. That's all?
What if he sold his house after that first year? Would it seem like he paid a 6.0% rate? Even after 10 years, the consumer pays the lender almost $108,000 but less than $25,000 of that is going back to pay off the Principal. That's not a 6.0% rate is it? The same holds true for even longer periods of time like 20 and 25 years. So if a 30-year fixed is kept for even 1 month less than 30 years, the rate consumers really wind up paying on it is higher. How much higher?
The Effective Rate Formula reveals what the actual, real interest rate would be if a front-end loaded loan was kept for less than the entire 30-year term. Holding on to that low 6.0% fixed-rate 30-year loan for 10 years results in paying an actual 43.48% interest rate. Keeping it for 7 years results in paying a staggering 68% interest rate to the lender. Keeping it for only 5 years results in the equivalent of a 102% rate. Holding it for 3 years yields an actual 182% rate and 1 year a 580% rate! The numbers prove that the 30-year fixed rate mortgage is equivalent to a giant credit card with an astronomical APR. Millions upon millions of American consumers have this credit card, this massive liability, which serves as nothing but a giant mountain standing in the way of their financial hopes and dreams. The mountain's bigger than Mount Everest yet remains invisible due to the deceptive nature of the game. And no matter how much more consumers earn at work and no matter how much their other investments return, it winds up being meaningless in the long run because that home loan, that 107% APR'd “credit card” is sucking all the wealth-building power out of them.”
Homeowners are being taken on a 30-year cab ride with the meter running. There must be a better way! It's a week night, and after a hard day's work you have plopped down on the couch to watch a little TV. You are making payments on your 30 Mortgage and the television commercials are telling you it's time again to refinance. “Consolidate that Credit Card Debt”, “Lower Your Monthly Payments…..“Refinance NOW & Save”, “It's Easy…No Closing Costs”. You've heard it all before, right?? Do you think it's possible that the banking industry wants you to refinance so that they can sell you yet another frontloaded mortgage and leaving you with a principal to pay off in another 20 – 30 (and now even 40 & 50) years?
Do you see how their game has them raking in that interest. They have the wonders of compound interest working FOR the bank, and against YOU the homeowner. So how do we beat the banks at their own game? Well I believe that United First Financial is certainly taking a step in the right direction with their Money Merge Account.
The Money Merge Account (MMA) System is a work-around solution designed to achieve an accelerated pay down of home loan mortgages in the United States, and is provided by United First Financial. It is based on the Current Account Mortgage concept based in the UK, Australia and Europe (see: http://en.wikipedia.org/wiki/The_One_account ) which results in homeowners paying less than half (on average) of the normal interest they would have paid on a normal amortization schedule. This concept has been around for over 10 years and 1/3 of all mortgages in these countries are current account mortgages. There is much misinformation about this concept among the American public... and especially by those who have not actually used the software themselves, and who do not understand the varying impacts of a closed end loan, versus an open-ended line of credit. Because this program achieves dramatic results, many are naturally skeptical.
However this concept is based on math, and once the math is understood, the concept is understood. In the US, banks make a huge amount of money off of "money float." Consumers pay 6% for a mortgage, but get 2-3% for a savings account, and usually 0-1% interest for a checking account. That money sitting in the bank results in profits for the bank (money float), but the money is not being put to work efficiently for the account holder.
A CAM - Current Account Mortgage - puts the money float to work for the customer. One of the most heavily praised (and awarded) CAM mortgages is the One Account - now owned by the Royal Bank of Scotland, but started by Richard Branson of Virgin Airline fame. The concept of the One Account / CAM is that the homeowner finances the home in an equity line of credit, deposits income into it and writes checks out of it. This puts every penny, not being spent, to work to keep the principle balance of the loan down, thus saving interest.
This is NOT exactly how the Money Merge Account works... but because the exact concept of the Current Account Mortgage cannot be achieved in the US easily, due to US banking laws, The Money Merge Account utilizes two accounts to achieve the beneficial effects of the CAM. An opened ended line of credit is used, in conjunction with the closed ended primary mortgage, and a software program makes specific calculations based on the homeowner's own financial variables.
The software that is part of the Money Merge Account is sophisticated... recalculating the variables with each new transaction recorded into the software (outgoing bills, dates and amounts paid, interest rates, income and dates received, etc.) The algorithm used for the software is designed to optimize the results of the Money Merge Account and, in effect, it learns from the client's history, thus becoming even more efficient at producing targeted results. The Money Merge account will pay off a 30 year mortgage (on average) in as little as 8 to 11 years, saving thousands in interest.
This pay down is accomplished without the homeowner changing their lifestyle, or the way they spend their money. It often has no effect on the current cash flow at all… and accomplishes the acceleration of the mortgage by simply putting the homeowner's money float to work FOR the homeowner, instead of for the bank. Results will vary from client to client based on debts rolled into equity line account, discretionary income and individual money float. All clients are given a detailed financial analysis prior to purchasing the software and the company (United First Financial) provides a MONEY BACK GUARANTEE based on the software performing as good, or better, than the Analysis.
When the Analysis shows the mortgage paid off... this also INCLUDES all debt included in the numbers. The Analysis also shows the total interest paid... which includes all interest on the Equity Line of Credit side as well. The program is about becoming debt free... not just mortgage free. For homeowners who do not keep their home or mortgage more than a few years, the Money Merge Account is simply an equity-building program. Since homes only appreciate through 2 methods... principal pay down or rising RE values. In slow market conditions, where homes are not appreciating, building equity through principle pay down is the only means of building equity at all.
This is important to know for people who financed their homes with Adjustable Rate Mortgages, or Negative Amortization mortgages. Right now, in the US there are two conditions coming together that are perilous for some homeowners... a slow real estate market in many areas (keeping real estate values flat, or even dropping in some cases), as well as a period when ARM's are about to have a rate adjustment. Experts are predicting that 1 in 4 ARM's will go into foreclosure. In any market conditions... building equity faster means homeowners have more financial stability. If the homeowners income has not risen to where they can easily handle the interest rate increases for the ARM... the equity in the home can be tapped through several means (including the MMA - Money Merge Account), OR simply having more equity means the homeowner can move into their next home even faster. Real estate investors are also finding the software tool invaluable in building a portfolio more quickly.
Faster equity building in property 1, means that the property can be leveraged to get property 2 even faster. Savvy investors and financial planners are combining the power of the MMA with their investment know-how to build wealth much faster for themselves, and their clients.
For more information about this program... ask someone who actually OWNS the software to show you their results. Have an Analysis run on YOUR numbers, attend a product education seminar or webinar. See if the MMA is right for you... and if you can qualify. This is not magic... it is math.
The truth lies in the bottom line. Knowledge is power.
Rob Alley, Realtor
The Avery Group at Roy Wheeler
540-250-3275
roballey@roywheeler.com
http://www.robsellscharlottesville.comhttp://www.forestlakesliving.comhttp://www.theaverygroup.comhttp://www.charlottesvilleshortsale.comhttp://www.charlottesvillevarealestate.blogspot.com
