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Mortgage Checking Account Overview
The Traditional System
A traditional 30yr fixed amortized loan has a fixed interest rate and borrowers using these loans pay a fixed amount each month to the lender. Each monthly payment consists of two components: interest and principal. In the early years of the loan most of the monthly payment goes toward paying the bank interest. This type of loan structure heavily favors banks because almost all of a borrower's monthly payment goes toward interest. In fact, it's not until the 20 year 2 month mark that the principal portion of the payment equals the interest portion. Since the average American only stays in their home for 5-7 years, they barely make a dent in the principal of their mortgage.
Checking accounts are other common products offered by banks. Banks offer checking accounts because they give the banks access to money at a very low cost. Banks pay very little, or in many cases zero, interest on their checking accounts. Banks use the money the general public deposits into their accounts to make loans to other consumers. What a great deal for the banks! They can use our money to make loans to other borrowers and earn interest. This is why banks condition us to keep our liquid funds in a checking account that earns little or no interest.
Essentially, banks are borrowing money at an extremely low rate through checking deposits from the public and then loaning this money back to the public in the form of mortgages with high interest rates. The new mortgage-checking account system teaches clients how to use their money to work for them instead of the banks.
The Mortgage-Checking System
Combined Accounts
The mortgage-checking system teaches clients the benefits of combining their mortgage, savings and checking accounts.
Through combining your financial accounts, you create an environment where your money is working for you instead of working for the banks. This is possible because your income can now sit against your debt while you're not using it. When a pay check is deposited into a mortgage account, the balance in the mortgage account is instantly reduced. Therefore, you are getting charged interest on a smaller principal balance. Every day that the balance is reduced, you are saving money.
The Mortgage Checking Account (MCA)
A traditional fixed mortgage does not allow borrowers to deposit their money into the account one day and then pull that money back out the next day. So in order to allow your money to reduce the mortgage debt and still be accessible to you, we use a Mortgage Checking Account.
Mortgage Checking Accounts or MCAs are very specific types of Home Equity Lines Of Credit or HELOC. A HELOC can be used as a Mortgage Checking Account because it is an open-ended loan. An open-ended loan is one in which you can pay money into them and pull that money back out when you want it. The HELOCs we use will have check books that draw directly on them. Often they will have credit cards that draw on them similar to how a debit card draws on a checking account. Also, you can transfer funds in and out of this account online. These features make it possible for clients to use HELOCs as their new checking accounts.
Interest in a HELOC is calculated on a daily basis. Therefore, each day that your income is sitting in your HELOC, reducing the balance in the HELOC, the bank is charging you interest on a smaller balance. For example, if you have a $10,000 balance in your HELOC and deposit a $5,000 pay check into the HELOC, you will now be charged interest on $5,000 instead of $10,000.
The mortgage checking account does not replace a client's first mortgage. Therefore, they will have 2 mortgage accounts: their current 1st mortgage, and the HELOC or MCA.
The Credit Card
The credit card is a valuable tool in this program because by purchasing your monthly expenses on a credit card you are allowing your income to stay in the mortgage checking account longer. The longer your money remains in the mortgage checking account, the longer you are charged interest on a smaller principal balance. As long as the credit card is paid off in full each month, you don't have to pay any interest on the money you spent from the credit card.
Since the MCA is used as the new checking account, the balance in this account will be fluctuating throughout the process of paying off the mortgage. When a deposit is made, the balance decreases. When the credit card is paid off or when mortgage payments are made, the balance increases.
Putting It Together
In a simplified scenario, here is how the program works. At the beginning of the month a client will make a mortgage payment of the amount determined by the software. The money for this payment will come from the MCA or HELOC and will be paid into the 1st mortgage. This transaction reduces the debt in the 1st mortgage and moves the client further down the amortization schedule. This same transaction increases the debt in the HELOC. Now, we are able to deposit our paycheck into the HELOC causing this money to sit against the newly created debt. This deposit reduces the balance in the HELOC which means that the bank is instantly charging us less interest.
Now that the balance is reduced, we spend money on the credit card to allow our money to sit in the HELOC for as long as possible. We carry this reduced balance for the majority of the month. At the end of the month, we will pay the credit card off before incurring any interest charges from the credit card.
Essentially, clients need to follow 3 simple steps each month to use this program effectively. These steps are as follows:
- Change where you deposit your money. Instead of storing your money in a checking account that doesn't earn interest, deposit the money into the HELOC so it can work against your debt.
- Pay for your monthly expenses using a credit card and pay off the balance each month. Through spending on a credit card during the month, clients are able to keep more money in the HELOC for a longer period.
- Consult our online software once month before making the mortgage payment. Our software will direct you to pay the optimal amount of money to your 1st mortgage to ensure you are paying as little interest as possible. Consumer Debt Consolidation
Many of the clients we work with will have consumer debt that needs to be paid off. Consumer debt comes in the form of car loans, credit card balances, student loans, second mortgages, and many others.
The mortgage checking account system directs clients to pay these debts off using the funds available in the HELOC. By doing so, the debts are consolidated in the HELOC environment.
Now that the debt is consolidated in the HELOC, we can attack it more efficiently for a couple of reasons.
- Normally the interest rate in the HELOC is lower than on consumer debt.
- Income can now sit against this debt while it's not being used.
- HELOCs aren't amortized loans. As the period over which a loan is amortized increases, monthly interest requirements to satisfy that loan will decrease.
Example: If I have a $20,000 car loan amortized over 5 years at 7% interest, my payment will be $396. During the early years of this loan, only a small portion of this payment is going to principal and the rest is going to the bank as interest. This same $20,000 paid off by a HELOC at 9% interest will only require a $150 payment to interest. The other $246 ($396-$150) can now be applied directly to the principal of the debt. Since more money is going towards the principal Therefore, the $20,000 will be paid off much quicker and I will pay far less in interest.
More Efficient Payments
Through using this program, clients' monthly payments become more efficient. Through consulting our software once a month before making their mortgage payments, clients find the optimal amount to pay for each month. This optimal payment will often include extra principal being paid to the mortgage. Since this extra principal paid moves the client further down the amortization schedule, the next minimum payment that gets sent to the lender will now have a greater portion allocated to principal. Therefore, less of the payment will be going toward interest causing the payment to be more efficient as illustrated in the following graph.
Effectual Interest Rate
Many people wonder why it makes sense to pay money from a higher interest rate HELOC into their lower interest rate 1st mortgage. They are concerned that by transferring $5,000 of debt from a lower interest rate loan to a higher interest rate loan they will be paying more interest. However, by using our program a person will actually pay less in interest if the $5,000 debt is the HELOC than in their 1st mortgage. Less interest is paid because the average daily balance in the HELOC is actually much less then $5,000.
Example: Let's say that I transfer $5,000 from my 9% HELOC to my 6% 1st mortgage creating a $5,000 debt in the HELOC. Now if I get paid $4,500 the next day and deposit this pay check in the HELOC, I now only have a $500 balance. Therefore, I'm being charged interest on only $500. I'd rather pay 9% interest on $500 than 6% interest on 5,000.
The interest paid to the HELOC depends upon the average daily balance not the amount of debt transferred.
The effectual interest rate is the real interest rate someone pays on the debt they are working to pay off. The mortgage checking system has a very low effectual interest rate due to its efficiency of paying off debt. To find the effectual interest rate on the debt use the following equation.
Annual Effectual Interest Rate = (Total Interest Paid / Total Debt) / # of yrs to payoff
Importance of the Online Software
The online software is vital to the success of this program because it shows clients exactly what to do with their money so that their money is working as hard as it possible can be. The software considers the balances and interest rates on their loans as well as their income and expenses to calculate the optimal monthly mortgage payment. This monthly mortgage payment is a very important number because it ensures that the least amount of interest is being paid.
Some people ask why they can't just do this program on their own without software help. If they try to do this program without the guidance of the software, they will likely create too much debt in the HELOC costing them more in interest.
Likewise, if they are transferring too little to the 1st mortgage they aren't taking full advantage of the money they do have.
The mortgage checking software computes the necessary data to ensure that the client's money is used as efficiently as possible.
If do-it-yourselfers try this on their own, they will find that the work required in calculating an optimal payment is very time consuming. In addition, it will be next to impossible for them to payoff their home as efficiently as our system. On average, if it takes them 2-3 months longer to payoff their home doing it themselves, they have already paid for the program.
Conclusion
In conclusion, when a person commits to enrolling themselves into the SFG System, they are committing themselves to changing the way they think about their money and view finances. We will teach a person to think more like a bank, and less like the average American who struggles to get out of debt and become financially free.
The benefits of the SFG System to the client are threefold. We teach a person to think of their money differently and act more like a bank so that they become more liquid. Once a person reaches a level of liquidity, they are able to pay down their debts more efficiently. After, or even during the process of becoming debt free, we teach the client how to build wealth.
Liquidity * Freedom * Wealth
Through the SFG System, the client will be educated to make smarter financial decisions throughout the remainder of their life. This system helps people get in control of their finances and forces their money to work harder for them.