The HELOC: A Powerful Financial Tool When Used with Money Merge Account.
It's Not Business As Usual Anymore!
Written By: Mike Smela, founder of PhysicianLender and NFI Hunters Inc., and a vice president and national mentor for Carteret Mortgage. Email Mike at mjsmela@yahoo.com.
(Publishers Note:This article is written to help consumers understand the HELOC and Money Merge Account Concept. We recommend that you print a copy and distribute to your past clients and financial planner partners to show them how they can pay off their mortgage quicker and how to use it as a financial tool.)
Most people think of their home equity line of credit as another debt; a lending vehicle most often used to consolidate credit cards, help pay for college, or to have just in case you need to "borrow" equity from your home for emergency situtations. What most people (and even most mortgage, banking, and investment professionals) don't know is that an equity line of credit has the rules and features to actually become one of your most powerful financial assets!
To truly understand how a "loan" can become a powerful financial "asset", we must understand three very important issues:
Stagnant money versus active money.
The differences between "closed end" loans and "open end" loans.
The concept of interest cancellation.
(Listen to a short explanation of HELOC & MMA.)
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Stagnant Money Vs. Active Money
From the time of our youth, we were always taught that saving money was good. Most of us, at one time in our lives, were given a piggy bank as a place we could begin to save our coins and dollars. As we got older, Mom and Dad took us to our local bank to deposit the money in our piggy bank and birthday money into an "interest bearing" savings account.
The bank would faithfully hold our hard earned money and actually pay us "interest" so we could start accumulating wealth. When we reached our teen years and got our first jobs, we went back to our trusted bank and opened our first checking account. Checking accounts provided more and easier ways to access and deposit money. If we were lucky, our bank even provided "FREE" checking. If we weren't so lucky, our bank actually charged us fees for them to hold OUR money. In either case, our checking account rarely paid US any interest, while the bank used our money to make money for their shareholders and to pay for all the signs on the top of every city's tallest buildings. And so our "education" into the American banking system began. To this day, most American's maintain a checking account and some form of savings and/or "high yield" money market account. Of course we do. That's the way we've always been taught (by our parents, our school system, the banks and the media) and that's the "normal" way to bank.
Let's think about this for a minute. We bust our butts working 40-60+ hours every week to earn our money. We than take our previous rewards and deposit (or direct deposit) it into our checking account. There it sits, waiting for us to do something with it. OUR money makes us little or NO interest. But we do have access to our funds through checks, on-line banking, auto-bill pay and ATM/debit cards. We have relatively easy access to our money, but we get virtually NO FINANCIAL BENEFIT from our checking account. The same is true with a savings or money market account (unless you really consider 1/2% to 5% annual yield a financial benefit)! And in many cases, we actually get CHARGED FEES if our balance drops below a certain level, if we write too many checks or simply because "thems' with the gold make the rules".
In reality, OUR money provides us NO FINANCIAL BENEFIT. It is truly "STAGNANT" money, at least for us. On the other hand, our trusted bank utilizes OUR money, along with the money of all our neighbors, and lends it out, invests it, or securitizes it to make LOTS of money for...THE BANK!!! So, really, our money isn't stagnant. It's just stagnant for US. But what can we do? We need easy access to our money and most other financial vehicles, that actually pay a decent rate of return, don't allow us the flexibility to access our funds without charging exorbinant fees and/or "substantial penalties for early withdrawl". Before we answer that dilemma, let's look at another issue: closed-end versus open-ended loans.
Closed-end Vs. Open-end Loans
Closed-end and open-end loans have very different features and rules that can lead to very different results. Closed-end loans (mortgage loans and most installment loans) are like a one-way street. The lender will only apply payments once a month and only if the minimum agreed upon payment is made. If your mortgage payment is $1,000.00 per month and you only send $999.99, your lender will not accept nor apply your payment. At the same time, if you make your regular monthly payment on the first of the month, then send another $500 half way through the month, the bank will gladly accept your payment, put it in one of their accounts, and credit your money to your mortgage when they receive your next scheduled payment at the first of the next month. Your extra $500 payment will not benefit you the day it is received by the bank.
Closed-end loans also don't allow you to access the equity you have built up over time. If you originally borrowed $200,000 on your home loan, have religiously paid your mortgage on time for 10+ years and need to borrow back $50,000 because you lost your job, the rules of your closed-end mortgage wouldn't allow you to access these funds (your equity).
Furthermore, the interest on a closed-end amortized loan is front-loaded in the lender's favor. Interest is calculated by multiplying the month-end balance by your interest rate. If you originally borrowed $200,000 at 6% interest on a 30-year fixed rate loan, your payments are contracted at $1199.10 for 360 months. Of your first payment, $1000.00 is applied to interest (83% of your payment) and only $199.10 (17% of your payment) is applied to pay down your principal. Such a deal! In month number two; your principal contribution grows by a whopping $1.00. Over the live of your 30-year mortgage, you will pay a total of $231,682 in interest charges to your lender in addition to the $200,000 you originally borrowed. That brings your total payments to $431,682.
