Saturday, July 11, 2020

Mortgage Acceleration Loan? Maybe Not!

Complicating your finances often doesn't help.
Whenever you see a financial article accompanied by a stock photo of a happy couple staring into a computer screen, watch out, you are about to be bamboozled!

I use a lot of mantras or rules of thumb to keep me out of trouble.  One of them is that the more complicated a financial transaction is, the more likely it is to screw the consumer.   If you buy a used car from your neighbor, you hand them cash, and they hand you the keys and the title - simple as that.

But if you trade-in your car to a dealer, that complicates things.   Finance the new car through them, it complicates it even further.  Buy an extended warranty or service plan and undercoating and paint sealer, it gets even more complicated.  Lease the car and you end up not even knowing what you paid for it, only what the monthly payment was.  What was one simple transaction is now four or five or more bundled together, and at each transaction, there is a chance for the dealer to put a little padding in, here and there.   The most straightforward deals are the best deals - and they are hard to come by, by design.

So when I read this online article about "Mortgage Acceleration Loans" I had to laugh at the idiotic complexity of it all.  Consider this description of one such loan:
One type of mortgage accelerator loan is sometimes called a HELOC accelerator. This type of loan combines a bank account with a mortgage and HELOC, or home equity line of credit, into one product. Instead of a traditional mortgage or adjustable-rate mortgage, borrowers finance a mortgage using the HELOC and then begin depositing their paychecks into the HELOC account. Then, monthly expenses other than mortgage payments—like utilities, car payments, grocery bills and insurance—are funded by draws against the line of credit. The cash that’s left goes toward the mortgage.
Did you understand any of that?   How on earth does this "accelerate" paydown of your mortgage debt?  If anything, it sounds like it would perpetuate it, as the homeowner would be tempted to spend more and pay less on the note.   I talked about HELOCs before, and they really are no bargain.  So what is the advantage of this loan?  The reason stated is somewhat confusing:
[It] “allows homeowners to pay down more interest in the short term while giving them access to the equity built up in the property,”
Don't understand?  Neither did I.   And if someone explains something to you and you don't understand it, chances are, you are not an idiot, but rather they are trying to pull the wool over your eyes.  In this instance, the key words are "access to equity built up in the property" - the siren song of refinancing. We were told this lie again and again from the 1990's onward, and it lead to the mortgage meltdown of 2008.  Borrowing money using your house as collateral is not "tapping the equity" in your house or "cashing out the equity" in your house.  It is borrowing yet more money that has to be paid back.   In 2008, the problem was, inflated home values allowed people to borrow more money than their house was really worth.  In other words, this was "phantom equity" that didn't exist.  The loan still needed to be paid back, and as a result many lost their homes, while others struggled to pay back loans when the house was "underwater" - many people are still underwater from loans taken out back then.

So what is going on here isn't some great way of "accelerating" your mortgage by paying less interest - it is just complicating things.  If you want to pay less interest on your mortgage, then pay an additional $100 a month on it - that will "accelerate" the mortgage by a year or two, depending on the balance of your mortgage. Double your payments and you could pay it off in a few years. It is as simple as that. The amount of "interest saved" by having your paycheck deposited into this account and then drawing most of it back out again is trivial.   We are talking about days of interest, not years.  It is an entirely too complicated way of handling your finances.

So why do people do this?  I think in part because people think there is some sort of "secret" to getting ahead in life, and this involves complicated deals.  You can't just consume less and save more - no, that is too simple.  You need to get flyer miles, clip coupons, get BOGOS, cash-back deals, and so on and so forth.  You need to lease a car to "free up your cash flow" and take advantage of "opportunity cost" even though you're not quite sure what it means and your bank account is none the fatter for it.

I often opine that Simple answers to complex questions are often the wrong answers.   For example, the complex question of racial injustice can't be answered by "white power" - wrong answer.  "Defund the Police" isn't much better - it is just a slogan. You won't solve the middle-east peace process by "pushing Israel into the sea!" as the Iranians propose.  Flat-taxes won't solve our fiscal problems, spending less will.  Going to the gold standard won't stabilize the economy, as history has shown.

But maybe there is a corollary to that aphorism - complex answers to simple problems are usually the wrong answers as well.  Buying a cup of coffee isn't a complex problem.  Buying one with a cash-back coffee-saver club discount using bitcoin is a complex answer to a simple problem - an unnecessarily complex answer.  Just paying cash is the simplest way, using a credit card one level above that.  Borrowing money using a variable-rate interest loan using your home as collateral to pay off that credit card is just ridiculous.

And yea, I've done it, in the past, so I know whereof I speak.  Refinancing, Home Equity Lines of Credit, and more and more borrowing isn't "tapping equity" it is borrowing more money - throwing gasoline on the fire of debt.  If you use it as a lifeline to get out from under high interest debt, fine - but most people, myself included, end up spending more, convinced they are financial superstars figuring out this neat trick to get out of credit card debt (and into HELOC debt) and run up their credit cards again and again.   And again, I know whereof I speak, having done this stupid thing.

The punchline, of course, is that the whole article is "sponsored content" but was not labeled as such by MSNBC.   It is only in a little pop-up on the page that you read this tidbit:
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here’s an explanation for how we make money. [whoring]
In other words, it is sponsored content - an ad - disguising itself as an article.   "Strict editorial integrity" in their parlance includes outright prostitution.   But by their standards, it's OK.  I would not buy a used car from them.

To be fair, they do warn you:
Though there’s buzz around mortgage accelerator loans, these programs aren’t for everyone. Most have an annual fee — just like a credit card — and those are funds you could sink directly into paying your mortgage. Plus, for a less-than-disciplined borrower, the draw of having a home equity line of credit could actually enable them to live above their means, adding years and hefty interest debt over time.
Paying an annual fee on top of your mortgage?  Makes no sense.  Might as well apply that fee to the balance of the loan.  And as they put it, the "less-than-disciplined borrower" will end up over a barrel.  Not said is that you could lose your house over this, if you end up hopelessly in debt with your mortgage balance actually increasing over time.

So who would benefit from such a weird mortgage?  Not you and me, and likely not most people in the USA - it is a popular product in high-tax countries for people in high-tax brackets:
Accelerator mortgages tend to be of particular value for higher rate or additional rate taxpayers, as well as for people with large savings who don’t rely on accrued interest to finance their day-to-day lives,” Bullara says. “The major advantage for high-end taxpayers is that they do not have to pay tax on their savings interest. This type of loan is better for a high-net worth borrower that doesn’t live on a tight budget each month.”
In other words, this doesn't work for us little people, but in fact, presents a risk.   All risk, no benefit - not hard to see this isn't a good idea for the majority of Americans.
This type of mortgage accelerator program has been popular in other countries, including Australia and the United Kingdom, but is just beginning to gain traction in the U.S.
Maybe in the tax-happy UK and Australia this "make sense" but not here.  In fact, such a mortgage could be an utter fiasco for most Americans:
Another watch-out for homebuyers considering a mortgage accelerator loan is that they could come with higher interest rates and fees than other mortgage types. 
“If those interest rates and fees are higher, you could still be worse off overall,” Bullara says. “If it looks like you’ll pay more than you’ll save, it may be worth considering a more basic home loan with a lower rate and no fees.
What's not to like?  Higher interest rates and the temptation to spend more?

The problem with any type of refinancing is that the borrower is looking for easy cash - maybe they got into credit card trouble, maybe they want to remodel their home.  The banks dangle out this big sum of cash, and the borrower doesn't realize he is throwing away thousands in "closing fees" and whatnot.  I've even seen borrowers go to higher interest rate mortgages in this time of ultra-low rates, just so they can grab at that wad of cash. They end up with more debt and higher monthly payments and then wonder why it all goes horribly wrong.

Once in a great while, you find a borrower who refinances for sound reasons - to get a substantially lower interest rate than their old loan (like 1% less or more) and/or to avoid paying PMI any more (as the value of their home has increased).   If they're smart, they'll go for a loan with the same term or shorter term as the remaining term on their previous loan.  The net result is the mortgage really is accelerated and they pay less interest.  But few borrowers do this.

Most reset their loans for another 30 years, and take cash-out, but since their rate is lower, their monthly payment may be the same, perhaps lower - so they think they came out ahead.   They fail to notice the thousands in loan origination fees and closing costs and they fall for the idea they are "cashing out" the "equity" in their home, instead of merely borrowing more money.   But eventually, that borrowed money has to be paid back.  And when you take a hamburger at McDonald's, put it on a credit card, and then refinance that credit card with a HELOC, well, you are paying a boatload of interest on some food you pooped out 30 years ago.

It makes no sense at all.  Nor do these "mortgage acceleration loans" which accelerate nothing.

These "financial" articles are often chock-full of bad advice.  Almost everything from Bankrate cannot be trusted, as it is selling some sort of product to you.  Most of these articles fall into two categories - getting you to borrow more money (like the Experian "Seven ways to make money!" - as if borrowing was "making" money) or some sort of scheme to get you to invest what little money you have.  Motley Fool has gone all-in on the latter, exhorting people that that need to learn the secret tips 'n tricks from them to become a millionaire.   Such tricks do not exist.

But the plethora of such articles tells me there is an audience for this sort of thing, and as such, an awful lot of people who are in, or will end up in, financial pain.   These are the folks who think the system is stacked against them.   After all, all they did was follow the sage advice of CNBC or MSN Money!

What could possibly go wrong?