Large part of this chapter is contributed by Ms. Ashley Carlyle

POC ALSO WORKS REVERSE WAY: PAYING OFF HOME MORTGAGE EARLY

Mortgage payments such as home, car etc. can be paid early by utilizing POC (it may not be a good idea though). Home mortgage payments are typically made monthly. If a person has a 30-year mortgage, 360 payments (30 years x 12 months = 360 payments) must be made to pay the mortgage in full. One way to reduce the number of years on the mortgage, and save money, is to make biweekly payments.

Twenty-six biweekly payments are equal to 13 full-sized payments. By making 13 payments each year,

instead of 12 payments, the mortgage will be paid off a few years earlier.

Extra payments can also be made in other ways, as long as the lender agrees to the terms. For example, pay an extra 1/12 with each month’s payment or pay one extra payment before the end of the year. In addition to shaving time off the length of the mortgage, an extra payment made before December 31st each year is eligible for a tax deduction on the extra interest payment. Depending on the individual’s tax bracket and the amount of the monthly mortgage interest, the savings could be substantial. The tax refund money received could be invested in a Roth IRA or other pension fund. The money would grow tax free and, in the case of the Roth IRA, remain tax free on withdrawal. Still, another option is to make a payment of several thousand dollars on the home mortgage after 10, 15, or 20 years. Extra payments will greatly reduce the number of remaining mortgage payments. The ability to save money by making extra or early mortgage payments, and then investing the savings in a tax free fund, is one of the many benefits of home ownership. Table 29 below is an example of the financial rewards that an individual would reap over time by investing the hypothetical annual tax refund received for making an extra mortgage payment at the end of the year.

Table 61

Table 61 shows the difference in the end values of both a $300 and $400 hypothetical tax refund deposited

annually for 40 years. In both examples, the beginning balance is $300 and $400, respectively, and the interest rate is 10%, compounded monthly, starting at the beginning of the year.

Beginning Balance in $	Annual Deposit in $	10-Year End Value in $ at 10%	15-Year End Value in $ at 10%	20-Year End Value in $ at 10%	30-Year End Value in $ at 10%	40-Year End Value in $ at 10%
300	300	5,702.74	11,231.56	20,328.18	59,919.85	167,096.15
400	400	7,603.65	14,975.41	27,104.23	79,893.11	222,794.80

Sample Mortgage Repayment Methods

Straight method:

Loan amount: $100,000.00

Term of the loan: 30 Years

Interest rate: 7.000%, compounded monthly

Monthly mortgage payment: $665.30

First monthly payment: January 1, 2007

Last monthly payment: December 1, 2036

Extra payment method:

Loan amount: $100,000.00

Term of the loan: 30 Years

Interest rate: 7.000%, compounded monthly

Monthly mortgage payment: $665.30

Monthly prepayment: $55.44, starting June 2007 (665.30 divided by 12 months = 55.44)
First monthly payment: January 1, 2007

Last monthly payment: November 1, 2030

Table 62

Table 62 shows how the extra payment method will reduce a 30-year mortgage to 23 years.

Method	Monthly Mortgage in $	Extra Payment in $ Beginning June 2007	First Payment	Last Payment
Straight	665.30	0	Jan. 1, 2007	Dec. 1, 2036
Extra-Payment	665.30	55.44	Jan. 1, 2007	Nov. 1, 2030

Note: Using the extra payment method, the mortgage will be paid off approximately 6 years earlier than the

straight method. (Year 2036 – Year 2030 = 6 years).

Table 63

Table 63 shows the value of $665.30/year investment (equal to one extra mortgage payment per year) at the end of 30 years (in 5-year increments) at various interest rates (6% to 10%), compounded monthly.

Year	Annual Deposit in $	6%	7%	8%	9%	10%
5	665.30	4,660.33	4,786.63	4,917.66	5,053.59	5,194.63
10	665.30	10,049.03	10,629.14	11,253.01	11,924.24	12,646.77
15	665.30	17,317.58	18,911.63	20,691.71	22,681.50	24,907.85
20	665.30	27,121.76	30,653.09	34,753.92	39,523.94	45,081.12
25	665.30	40,346.13	47,298.08	55,704.43	65,893.82	78,272.37
30	665.30	58,183.83	70,894.45	86,917.47	107,180.64	132,882.23

Note: Some lending institutions may charge a onetime or yearly set-up fee (e.g., $500.00) to accept an extra payment.

Table 64

Table 64 shows the cumulative savings of a person who pays off a 30-year mortgage in 23 years, and then invests $665.30/month (the amount of the monthly mortgage payment) for seven years at various interest rates (6% to 10%), compounded monthly.

Year	Monthly Deposit in $	6%	7%	8%	9%	10%
7	665.30	70,251.89	72,936.16	75,751.54	78,705.08	81,804.18

Money Merge Account (MMA)

The MMA (also called Australian Mortgage) is a loan program which utilizes costly proprietary software* to help homeowners pay off their mortgage earlier; possibly, saving some homeowners $100,000 or more over the life of the loan. According to the Web article, Is a Money Merge Account a Good Way to Pay Off Your Mortgage? MMAs work as follows:

The homeowner sets up a home-equity line of credit (HELOC), borrowing against the value of his property.

Some large sum is withdrawn from the HELOC and used to pay down the primary mortgage.

The homeowner does not deposit his paychecks, etc. into a traditional savings account [which typically earns 1% to 3%, compounded monthly or annually], but applies them to pay down the HELOC.

From time-to-time, another large chunk of money is taken out of the HELOC and applied to the primary mortgage.

In case of emergency, the homeowner takes more money out of the HELOC.Though the HELOC will likely have a higher interest rate than the primary mortgage [which typically carries an interest rate of 5 to 8%, compounded monthly], it’s actually cheaper to maintain because of the way the interest is calculated. [The loan is reduced daily because MMAs utilize the daily compounding method.]

Source: Is a Money Merge Account a Good Way to Pay Off Your Mortgage? Monday, 1st October 2007 (by J.D.)

Get Rich Slowly: personal finance that makes cents. http://www.getrichslowly.org/blog/2007/10/01/is-a-money-merge-account-a-good-way-to-pay-off-your-mortgage/

*According to various MMA options online, the average cost of proprietary (non-free) software is $3,000.

The following example from the Web article, Money Merge Accounts: Are They A Good Deal For Home Borrowers? Explains how a 30-year mortgage can be paid off early:

Every time you receive a paycheck, the whole thing goes straight towards first paying off any balance in your money merge account, then the entire remainder of your check goes towards paying the interest, then the principal of your home loan.

Let’s say you had a mortgage with $1,500 payments and you set up a money merge account.

Each month, you received $3,500 in paychecks, but only spent $1,200 (and sometimes less). That means that automatically $2,300 (and sometimes more) goes towards that mortgage each month - an extra $800 [$2,300 - $1,500 = $800] towards principal every single month.

This means a 30 year mortgage would be paid off in 13 years and two months.

Source: Money Merge Accounts: Are They A Good Deal For Home Borrowers?

March 3, 2007 @ 12:00 pm - Written by Trent. Categories: Debt, Housing.

The Simple Dollar: financial talk for the rest of us. http://www.thesimpledollar.com/2007/03/03/money-merge-accounts-are-they-a-good-deal-for-home-borrowers/

Although a MMA may sound appealing, this type of early mortgage payoff program may not be right for everyone. Individuals who routinely spend more than they earn will end up paying more in interest over time with the HELOC; and, the upfront cost for proprietary software can be expensive ($3,000 on average). Anyone interested in setting up such an account would be wise to research the topic thoroughly before making a decision to do so. The Internet alone contains hundreds of thousands of Web sites on money merge accounts. To see a list of some of the advantages and the disadvantages of a MMA, go to Aston Cooper’s Web blog: Aston Cooper Hits Back! Saturday, August 25, 2007.

Old Wikipedia for Money Merge Account.

http://ashtoncooper.blogspot.com/2007/08/old-wikipedia-for-money-merge-account.html

Interest-Only (IO) Mortgage Loans

Unlike a traditional 15-year or 30-year mortgage (which requires a monthly payment of the principal and

interest on the loan), an interest-only mortgage requires a monthly payment of the interest only for the term of the loan (usually 5 or 10 years). The rationale behind an IO loan is that the homeowner/investor will earn a higher rate of return than the mortgage interest rate on the loan* by investing the excess cash in stocks, savings, etc. If the investments are profitable, the IO loan holder will have the money to refinance or pay off the mortgage once the IO mortgage reaches maturity.

Depending on the homeowner’s knowledge of investment and/or saving strategies, an interest-only

mortgage program may or may not prove beneficial. For a list of some of the advantages and disadvantages of IO mortgage programs, go to the Web article, What are the benefits of interest only mortgages and why are they so popular?, posted on MORTGAGENewsDaily. As stated in the aforementioned article

, the following information offers perspective homeowners some words of caution:

An interest-only loan is not a magic pill and misguided home-buyers shouldn't rely on unprecedented,

unbridled home appreciation or increased wage earnings, commissions, or investment equity to satisfy the balloon principal after the interest-only mortgage reaches maturity.

Source: MORTGAGENewsDaily. Tuesday, August 19, 2008. What are the benefits of interest only mortgages and why are they so popular? http://www.mortgagenewsdaily.com/wiki/Interest_Only_Mortgage_Loans.asp

In general, individuals in very high tax brackets would derive more benefit through tax savings from taking out an IO loan than those in low tax brackets. Regardless of income level, study the pros and cons of all mortgage payoff programs available (or seek the advice of a certified financial planner) before making a decision.

*Example: If the home mortgage interest is 6%, that is more or less 6% saving from the principal

payment every month, then one needs to get a rate of return in the non-payment principal deferred investment account, or interest only method, better than 6% + 3% inflation rate in tax deferred

investment, such as some kind of pension fund. If invested in a yearly taxable account, then

the rate of return has to be better than 6% + 3% inflation rate + taxable % which is usually 15 to 30% of the profit from investment. This means that the rate of return in this situation has to be at least 11% or greater to be meaningful. The calculations may not be completely accurate, but this is the concept.

Suggested Readings:

The Federal Reserve Board. Last update: August 27, 2007. Interest-Only Mortgage Payments

and Payment-Option ARMs. Are They for You?

http://www.federalreserve.gov/pubs/mortgage_interestonly/howstuffworks.

How Interest-only Loans Work by Charles W. Bryant.

.htm/printable Interest-Only Mortgage Tutorial. Copyright Jack Guttentag 2006.

http://www.mtgprofessor.com/tutorials2/interest_only.htm

Pros & Cons of Early Mortgage Payoff

There are pros and cons to paying off a mortgage early according to the National Endowment for

Financial Education (2005) article, Should

You Pay Off Your Mortgage Early?

Some advantages to paying off your mortgage early are as follows:

Providing Emotional Security…from the anxiety of owing money…

Investing for the Future...you could be earning interest with your [mortgage payment] funds.

Meeting Retirement Needs…[you] free up your money for other things…

Reducing Loan Stresses…you remove the risk of "owing more than you own"…[and] you avoid

being hit by climbing rates if the interest on your loan is variable…

Some drawbacks to paying off your mortgage early are below:

Missing Investing Opportunities… you can lose the opportunity to invest and build up a secure

retirement nest egg…

Losing Tax Savings…you’ll lose the interest deduction…

To see the complete checklists of pros and cons, go to the AARP website:

AARP.org Retirement Planning. Should You Pay Off Your Mortgage Early? By the

National Endowment for Financial Education. 2005.

Another drawback to paying off the mortgage early is that the property could be lost through

a lawsuit. When the homeowner has little equity* in the property, there is less risk of losing the asset. To learn about more ways to protect "your family castle," read the article, Don’t Let a Lawsuit

Kick You Out of Your Home: How To Protect Your Family Castle, by Glenn M. Terrones,

Esq. www.terroneslaw.com/Docs/AssetProtect.pdf (View using Foxfire in html)

Early payoff of the mortgage may leave a homeowner short of funds in the event of an emergency; therefore, the homeowner may want to have a line of credit available to cover any unforeseen problems. A Home Equity Line of Credit (HELOC) or a home equity loan allows the homeowner to borrow money, using the home’s equity as collateral. Perspective borrowers need to understand the difference between a HELOC and a home equity loan beforehand. "A HELOC is a line of revolving credit with an adjustable interest rate, whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate." http://en.wikipedia.org/wiki/Home_equity_loan

To see an example of how home equity is calculated and an example of how a HELOC works

, go to Bankrate.com. Home Equity Basics. Ch 1: What equity debt is. Updated: April 1, 2006. http://www.bankrate.com/brm/green/loan/basics1-1a.asp

Avoid the temptation to use the HELOC for purposes other than emergencies, including making

investments in the hope of getting a higher rate of return (unless the investments are without risk and/or can be divested at will). Misuse of a line of revolving credit may create more debt.

*Equity is the difference between how much the home is worth (fair market value) and how much is owed on the mortgage. As the mortgage is paid down or as the property appreciates in value, the equity increases.