Dave Ramsey: Forget mortgage accelerator plans
May 29, 2010 at 12:29 a.m.
Q: Dear Dave: How do you feel about mortgage accelerator plans? Can you please explain them? - Doug
A: Dear Doug: Basically, there are two types of mortgage accelerator plans floating around out there. First, there's the old bi-weekly mortgage where you make half of a payment every two weeks. This will drop the length of time you'll pay on a 30-year mortgage down to about 22 years. Most companies will charge a fee to service these programs, but I think that's ridiculous. There's no way I'd pay someone to do this for me.
Think about it. There are 26 two-week periods in a year, and 26 half payments equals 13 whole payments. So, you're making an extra payment each year. That's why your mortgage gets paid off early. You can accomplish the same thing by writing a check for the principal only once a year. If you want to get really detailed, you can do the same thing each month by writing a check for one-twelfth of a payment.
The other kind of mortgage accelerator plan out there is a total rip-off. I'm talking about one where some companies will try to sell you a $3,500-piece of software tied in with a home equity line of credit, or HELOC. These things are often called money merge accounts. In this situation, you pay your bills out of the HELOC, and your paychecks are deposited against the HELOC. Then, they'll apply whatever's left against your mortgage, and it "magically" pays off your mortgage faster.
The problem is that no matter how many times you move the shell, the pea is still underneath. Whether you use a HELOC or just a yellow pad to make a budget, if you want to make extra principal payments on your first mortgage, you have to live on less than you make. And there's no way I'm paying some rip-off company $3,500 for the privilege. Talk about stupid! You can do that on your own by making a decision to sit down every month with a pen and a piece of paper and write out your own monthly budget.
Now you know why I'm not a big fan of mortgage accelerator plans you have to buy. Here's the truth, Doug. There's no easy, magical formula when it comes to getting out of debt. It takes a lot of hard work and discipline. You can accelerate your own early mortgage payoff by living on less than you make and learning to control the person you see in the mirror every day!
Q: Dear Dave: If I understand your budget plan, we're supposed to allocate every dollar toward something. If we did that, it would leave our account balance at zero. What do you do if your bank requires you to maintain a minimum balance in your account and charges you a service fee if you don't? - Kristina
A: Dear Kristina: I think you misunderstood my plan. When doing a monthly budget, you should allocate every single dollar of monthly income, not every dollar in your account.
Your monthly budget should be based on income minus outgo. You always want to have a balance of some kind in your accounts. Otherwise, you'll end up paying a visit to the land of bounced checks, kiddo. And that's not fun for anyone except the bank, because they'll charge you for the trip!
For financial help, visit daveramsey.com.