Enrolling to an Equity Accelerator program ?

Question

My mom is considering equity accelerator through her mortgage loan. Is it really necessary to enroll into this program to pay bi weekly? There's also a fee of $9.00 a month which is not much but I was wondering if it would be waived if she just pay bi weekly on her own without enrolling. And there's an addition one time payment of $49 for enrolling....I'm sure this program would save her money but not sure if enrollment is necessary. Thanks.

Answer 1

No, she does not need to enroll to the program. Just simply sent in an extra check whenever she has money or do a calculation and send extra money with the mortgage payment each month. Make sure specify the extra amount is applied to the principal on the check before you send the payment.

But, double check the loan doc doesn't stated "pre-payment penalty" before doing it.

Answer 2

No, it's not necessary to enroll into a program such as you describe. The simplest way simply is to add an additional amount to the principal payment, and so indicate on each month's payment coupon. It costs nothing, and gives your mom control over how much she pays down every month.

The fee is too much. Way too much. You're paying someone $108 a year to provide a service that your mom can do on her own for free. Over the course of a mortgage that's roughly $2,000. Plus, of course, that $49.

No, I'm not sure that program would save her money. Depending where she is in her mortgage, the interest rate she's paying, and a variety of other factors, it might pay off a 30 year mortgage in, maybe, 23 years. So, if she stays in the house for 23 years, she'll have a paid-off mortgage. But she hasn't "saved" that much money, because for 23 years she'll have made extra principle payments.

True, she'll have saved some interest. But, remember, interest can be (and usually is) tax deductible. So, depending on your mom's income tax bracket, she may have "saved" about 30% less than she thinks...because she'll have gotten the income tax deduction from that interest she paid.

Then, on top of that, there's the lost opportunity cost of the additional principle payments. Let's say she can pay an extra $50 a month to principle...or put that $50 into a savings account. Or, if she's still working, she can put it into an IRA or Keogh plan. If she uses it to pay off the principle, it's gone...until either she sells the property or pays off the mortgage (in which case it's really still gone). Meanwhile, let's say her mortgage is 6%. That's the same as "saving" at a 6% rate.

I'm not an accountant, so check with an accountant for financial advice. However....

On the other hand, let's say she puts it into an IRA or Keogh that yields 8% long-term. There are plenty of those. First. she may be able to deduct the $50 a month ($600 a year) from her taxable income. That'll save her maybe $200 a year. Then the $600 grows tax free. And if she's earning 8% on her investment, that's a better "rate of return" than paying off a 6% mortgage.

Most of these equity accelerator programs are lousy ideas. First, you're paying a pretty hefty fee for something you could do yourself. And second, it often doesn't even make sense financially.

Hope that helps.