Time Value of Money - Real Gain/Loss

A while ago, someone came to me with some product, guaranteed to pay off my mortgage in 7 years, while not effecting my spending or raising my payment. They also said they could pay off credit cards lickety split as well, but that will add time to the 7yr estimate..




As a CPA, I am curious of any scheme that says (basically) "we can do a better job than you at managing your money," so I asked the tough questions. Naturally, my sales person was a sales person and not the crafter of the formula (had absolutely no idea how it worked). While I couldn't get actual amortization tables from her as to how it worked (mathwise), I could get information from physical data. It involved setting up (essentially) a home equity line against your home, and paying your bills from the line.




After analysing the data, excelling out a payment module I figured out she was right, and that it would work. It just requires a lot of work and discipline that most people don't have.




This is how to do it:


Now -- make a budget of how you are spending your money right now. You'd better make it accurate, because you can't really change it if it is going to work. You will have the illusion of more cash flow, but you won't actually be making more money.




Now comes the tricky part in this economy -- get a Home Equity Line Of Credit - or HELOC. I think the ideal HELOC would be a refinanced full HELOC (1st mtg), but it can be used from a normal HELOC, it just might take a little longer, as the interest rate is not usually as low. Be careful, as this account can't have restrictions as to how many payments are made, and checks written. Starting with your highest interest credit, roll it into your HELOC. If you don't have any credit cards, write a check to your mortgage holder. You don't want to use all your HELOC, leave a little room for interest posting, etc.

Now, deposit your paycheck into the HELOC when you get paid, and pay your bills out of the HELOC when you pay your bills -- that simple. When you have room for another bill on your HELOC (car, house) - pay it off. It will work - now I will tell you why it works.




Currently, your checking account probably doesn't give you interest. If you use a credit union, or savings account you might get a little, but generally not much at all. By depositing your paycheck into the HELOC, you are accomplishing two things: 1. it is in effect a payment. You will not have to make an additional payment on your HELOC for the month. and 2. You are receiving interest for the time your money is not being used (by paying down the principal). This interest will in effect increase your cash flow. The lack of payments on whatever bill was transferred into the HELOC, and the HELOC itself increases your cash flow. All the increased cash flow goes to paying down the HELOC (PROVIDED YOU DO NOT INCREASE YOUR SPENDING WITH THIS NEW FOUND CASH)



If you want to put in the work, you can do it yourself. I think the salesperson was just selling the 1st mtg HELOC, and the software to accomplish the most efficient way of doing it -- your choice!