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November 3, 2003, February 24, 2004
Postscript
"I am enclosing a pamphlet I just
paid $45 for called Mortgage Relief System. It promises that if I follow
the scheme outlined, my mortgage will be paid down in a fraction of the time it
would take ordinarily. The methodology looks plausible to me, but I would like
your opinion."
Well, it is neither illegal nor absurdly
illogical, which is more than can be said for most of the quick-repayment
schemes I come across.
Under this scheme, you establish a line of
credit, which you use in part to pay down your mortgage. You fund most current
expenses with a credit card that has an interest free grace period. Your
paycheck is used to pay down the credit line, and to pay off the credit card
when due. Current savings (income that is not spent) are also used to pay down
the credit line.
The idea is that instead of leaving your
money in the bank earning 1% or less until month-end, when it is used to repay
the 6% mortgage, you borrow on a home equity line at 4% and use it to pay down
the balance of the mortgage immediately. By using your paycheck when it is
received to pay down the 4% line, and by taking advantage of the grace period on
credit cards (30 to 50 days), you minimize the amount kept in the bank.
It sounded plausible, but I was skeptical. In
the first place, nothing is said about the interest rate on the credit line,
which is not always going to be below the rate on the mortgage. My gut told me
the scheme couldn�t possibly work if the credit line rate was higher.
Furthermore, you can take advantage of the grace period on credit cards without
tying it to a mortgage. I have been doing it for 40 years.
In addition, I had the feeling that customers
of Mortgage Relief should have gotten a spreadsheet for their $45, and wondered
why they hadn�t? So I set out to develop a spreadsheet of my own that could
quantify the benefits � if there were any.
The major question I wanted the spreadsheet to answer was, how large is the benefit of using the Mortgage Relief scheme if
you don�t have any surplus income but only just enough to make the scheduled
payment? This is the critical question because we know that if you use surplus
income to make extra payments to principal, you pay down the mortgage more
quickly. This is so whether you apply the income directly to the mortgage, as
most borrowers do, or whether you follow the Mortgage Relief procedure where you
use a credit line to pay down the mortgage and current income to pay down the
credit line.
I spent much of my air time between
Philadelphia and San Francisco on this project, and finally gave it up. Once I
removed surplus income from the equation, I could not find a way to make the
Mortgage Relief scheme work.
I could be wrong. If the proponents of the
scheme can develop a worksheet that will show a benefit from other than the
application of surplus income, I will publicly apologize and send them lots of
business.
February 24, 2004 Postscript. As far as I can
tell, the Tardus system works the same way (see www.tardus.com).
I registered with them so I could use their calculator, which quantifies the
benefit from the system when you tell it about your mortgage, income, non-debt
related expenses, and other debt. The savings are very substantial when
there is a large spread between income and the sum of mortgage payment and
expenses. When that spread shrinks, so do the savings, indicating that what
primarily drives the system is the application of surplus income to pay down mortgage
debt. In contrast to the $45 paid for Mortgage Relief System, however, Tardus
charges $3500 or 1% of the loan, whichever is larger.
Copyright Jack Guttentag 2003
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