“United First Financial is offering a program that will eliminate your mortgage in 1/3 to 1/2 the time … They are asking $3,500 for the program. Comments?”

It never ceases to amaze me how widespread and deep-seated the belief is that somewhere out there must be a good fairy who will solve all of our financial problems. This belief sustains lotteries, which help keep poor people poor, and a host of schemes directed at homeowners that promise to pay down their mortgage loans quicker and easier.

Some of these schemes are outright frauds, such as the one peddled by Success Trust and Holding that I warned readers against last year. It took until August of this year before the SEC took action against them, by which time they had relieved more than 500 homeowners of several million dollars.

At the opposite end of the spectrum are schemes that discipline borrowers to make extra payments, of which the most important are biweekly programs. So long as borrowers understand that they don’t need a biweekly program to make extra payments, and that what they are purchasing is only a convenient way to discipline themselves to make the extra payments, these programs are fine.

Within the last two years, a third type of early-payoff scheme has appeared with a new twist. This scheme provides borrowers with both a disciplined way to make extra payments and a way to reduce their bank deposit, with the interest savings on the smaller bank deposit also applied to the mortgage balance.

Last year I described the CMG plan, which allows the borrower to use a mortgage taken from CMG as if it were a checking account. The borrower earns the mortgage rate rather than the deposit rate on the amount that he would otherwise have held in his deposit account. The difference is applied to the mortgage.

The UFF plan is a variant that does not require that you take a mortgage from them. UFF assumes you already have a first mortgage, and it guides you on opening a second mortgage in the form of a home equity line of credit (HELOC), which plays a central role in the scheme. Here is an example, which I have oversimplified to reveal exactly where the savings come from and how much they are likely to be.

Assume the borrower’s monthly paycheck is $8,000, and on the first day of the month he does the following: a) Draws $8,000 on his HELOC, which is used immediately to reduce his mortgage balance, and b) applies his paycheck of $8,000 to pay down the HELOC. On day 2, therefore, his HELOC balance is zero and his mortgage balance is lower by $8,000.

As the month progresses, he pays his expenses by drawing on the HELOC, and the HELOC balance gradually rises to $8,000. However, the average balance will only be about $4,000. For the month as a whole, therefore, he has saved interest on $8,000 of the mortgage while incurring interest on $4,000 of the HELOC. Assuming both are priced at 6 percent, he has saved $4,000 x .06/12, or $20. Over a year, that adds to $240. Of course, if the paycheck is $16,000 instead of $8,000, the number will be $480, and if the paycheck is $4,000 the number will be $120.

For several reasons, these calculations overstate the savings. The HELOC as a second lien will almost always have a higher rate than the first mortgage. Further, it will take some days for the borrower’s paycheck to be credited to his HELOC. Finally, and most important of all, the date when the mortgage is credited for the extra payment depends on the policies of the lender servicing the mortgage. In some cases, a payment will be credited to the balance at the end of the preceding month, which works to the borrower’s advantage, but in other cases, credit is not given until the end of the current month, which would reduce and perhaps eliminate any savings.

Note that a one-time payment of $3,500 on a 6 percent mortgage would save $210 of interest a year. This is probably more than most borrowers would save using the UFF program.

Of course, if you spend less than your paycheck and apply the balance to your mortgage, it is a different story. The claims by UFF that you can pay off your mortgage in one-third or one-half the time, depend on your doing exactly that.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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