There is a tremendous amount of publicity going into the ideas of lower debt levels and accelerating mortgage payoffs—especially at a time when home values are no longer skyrocketing and many homeowners are either “upside-down” in their houses or at least are coming to the realization that they can no longer use their homes as piggy banks.

While there is a tremendous amount of publicity, there is also tremendous confusion. Many are selling these programs but have no idea why they work and how to compare one from another and see whether they are in the best interests of their clients. I am not surprised about the confusion as we work in an industry that had no idea that adjustable rate mortgages would not be right for certain clients and helped sell many homes to clients they could not afford. In running an advanced school for this industry over many years—I have found that confusion can run rampant. So why should equity acceleration be any different?

Here are the financial concepts behind equity acceleration.

• First, a large prepayment on a loan early in the term of the loan is worth many times money prepaid later on. For example, if you took $5,000 and prepaid your mortgage in the first month, this would be worth more than prepaying $100 per month for the next 60 months. The earlier you remove principal from a loan, the less time that principal is available to be charged compound interest. By using a HELOC as a secondary instrument, some equity acceleration programs can fuel early and large prepayments.
  
  
• Second, putting your income in a checking account each month means you are obtaining little value or no value from that money. The bank that holds the checking account is using your money for free. By depositing that money in an open line of credit, it will pay down the balance on the line and be working for you. For example, if you borrow $5,000 on a HELOC in order to pay down your first mortgage as in the aforementioned paragraph, but you deposit a $5,000 pay check in the same account, your balance is now zero. Now, as you pay expenses during the month, the balance will then rise back to $5,000. But if you paid the expenses equally during the month, the average balance would be only $2,500 for the month. In other words, you borrowed $5,000 but only paid interest on half of that. If your home equity line was charging 8.0%, your effective interest rate would be 4.0% in this simplistic example. You will not find checking accounts giving you 4.0% in interest and even if you could—the money you “removed” from compounding on your first mortgage would add another benefit to using your money in this way. That benefit makes the worth of the money much more than 4.0%.
  
  
• Third, your discretionary income can be put to work for you automatically. The average American has a few hundred dollars per month that they can spend they way they would like. That is why we call it discretionary. Usually, we would let it sit in our checking account until we spend it (98% of the time) or move it to savings (2% of the time). We would not use it to pay down our mortgage because we would not have use of the money. So it sits there and disappears. But if you were using your line of credit as a checking account, that money would further lower the balance on what you owe while it sits there. If it sits there long enough, you can transfer the money to pay off more of your first mortgage. If you need the money in the future, you can still borrow it from the “open” home equity line. In other words, we reversed tendencies. At the present time we use any excess money we have monthly to pay down our mortgage only as a last resort. With these programs, utilizing excess money to pay down our mortgage can become the first option. Changing tendencies or the paradigm is what this is all about.

• Fourth, if the equity acceleration program has a live automated component, it can act like a GPS to direct your efforts. Imagine you leave your house on a long driving trip to a place you have never been before. There are lots of turns. You can run “Mapquest” or you can use a GPS. Which will get you there quicker? Well, if you use map-driven static directions, the first time you veer off course because of a poorly marked road, you can get lost. You need turn around and get back to where you veered of course. You may have to stop to read the map.  If you have a “living, breathing” GPS—when you make a wrong turn, the system automatically adjusts to get you back on course.

Imagine your quest to eliminate debt more quickly as a road trip. You will get off course many times over the years. Is the system automatically adjusting? Does the system tell you what the true cost of purchases are so that you can make good qualified decisions? Right now we spend, spend, spend without thinking. With help we can adjust our spending habits to strengthen the probability that we will reach our goals—and the speed with which we obtain those goals. You can even adjust how we use the bank’s money so that we hold onto our money as long as possible—because it is working for us every day.  If the tool chosen is static, you will not receive that help and you will not be as efficient using the aforementioned tools and strategies. What is it worth to you to have your mortgage paid off even two years more quickly than a static plan? Thousands or even tens of thousands of dollars!

• Finally, there is still a strategy to be employed when paying off debts. Those who have been qualifying clients for mortgages for years have known that it is better to pay off certain debts than others. For one debt we can save the client $500 per month by paying $5,000 and for another it may take $40,000 to achieve the same result. Debt elimination plans that employ “snowball” strategies actually look at the payoff efficiencies. Eliminating one debt, they use the savings to attack the next debt and so on. Further, credit restoration programs may actually go to creditors and negotiate a reduction in debt owed (settlements)—but these can negatively affect credit histories. Even credit histories that are bad can get worse.

So the next question is which strategies are best for your clients?  Obviously, if they are drowning in debt and don’t own a home, the strategy may be different than if they have only one debt (a mortgage) and they desire to pay that one debt off more quickly because they are coming to retirement. Complicating the scenario   is the fact that many of these programs offer you the ability to set up second income sources (who does not need that in this environment) while you increase the referrals for your primary business. So you have a decision to make—where to turn. Hopefully this work will help you make a better educated decision and if you want help making a decision—email me at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it I will send you another article and find out more about your clientele and goals and give you one or more choices. One thing I will say, a new product line that can help your primary business is the ultimate synergy-but it will not come without effort and tenacity.