New Mortgage Product Puts You In Control
To say that the mortgage environment has experienced dramatic changes over the last year would be an understatement. Many loan products have simply disappeared and those that still exist have had extreme makeovers to their program guidelines. However, in the midst of all of the streamlining and product reduction, there have been a few new products that have begun to attract some attention.
When I say “new” I simply mean that they are new to the United States. They have been used effectively for many years in several other countries and they provide a unique solution to both homeowners that have a desire to pay down their mortgage early and to those desiring to more carefully manage the equity in their homes.
While known by several different names and presented in different sales models, the primary premise is the same. The loan combines your checking account with your mortgage loan balance and as a result allows you to pay down the loan balance much quicker.
Let me explain how it works. First of all, it is important to realize that the loan is set up similar to a Home Equity Line Of Credit (HELOC) and has an adjustable rate. However, as you will soon understand, the adjustable rate has very little impact on the effectiveness of the loan. When you receive your paycheck, it is deposited into your checking account. Every night, the balance remaining in your checking account is swept into your mortgage balance, effectively making a direct payment towards your principal. Throughout the month as you pay your bills and as those payments clear your account, the checks are funded by the bank based on draws from your mortgage line of credit. These payments obviously increase your mortgage balance. However, you can see that if you are spending less than you are earning, this strategy will reduce your mortgage balance much quicker, while at the same time, giving you continued access to your equity when you need it.
Now, here is where it gets more interesting, and why the loan actually reduces the cost of money over time. As we all know, the majority of the monthly mortgage payment for a traditional fixed rate mortgage is interest and the interest is actually calculated up front at the time that you close on your loan. It never changes; even if you pay additional principal to the bank. This new loan product calculates interest charges based on the loan’s average daily balance. So in an ideal world you would benefit by receiving all of your pay at the beginning of the month and paying all of your bills at the end of the month. For most of us that is not the way we manage our cash flow and that is ok. The math works very nicely regardless of the timing of your cash flow. By using this simple method of interest calculation, your overall interest cost is much lower because your loan balance gets pushed lower more often. If your goal is to pay down your loan balance quicker, this loan will help you accomplish it and save you thousands of dollars in interest cost over the life of the loan.
Because this mortgage is a line of credit, as you pay down principal balance, the amount continues to be available to you for future use. Thus, it gives you control over the use of the equity in your home so that you can be your own bank and put the equity to work accomplishing other financial goals if you desire.
As always, this type of mortgage is not for everyone. It is geared towards homeowners who have good credit and have a positive cash flow each month. It can also work well for home owners who have fluctuating income and would like to have a way to mange the ebbs and flows of their personal or business cash flows. You can use the loan to either purchase or refinance and is typically available for primary or 2nd homes. However, some variations will allow use for investment properties.
Finally, it is important to realize that there are several variations of this loan product being marketed. Some are in the form of a software tool and a HELOC second mortgage. This product is much less effective as it puts much more of the emphasis on the user of the software tool (you) in order to manage your own deposits and payments. Further, the software is sold for about $3,500. The more effective loan actually does all of the money management for you in the background and requires no change in your current actions or spending habits.
Whether you have a goal to pay down your mortgage balance or you just want the ability to control the equity in your home, this new mortgage product can give you the flexibility to manage your mortgage in a way that allows you to choose.
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