In part 1 of this series we reviewed how mortgages work, that a home is not an asset and the principles of wealth creation. Here are the Principles of Prosperity in review:
1. THINK - Owning a prosperity mind-set eliminates poverty; scarcity thinking keeps you stuck.
2. SEE � Increase your prosperity by adopting a macro- economic point of view�a �big picture� perspective in which you can see how each one of your economic decisions affects all the others. Avoid micro-economic �tunnel vision.�
3. MEASURE - Awareness and measurement of opportunity costs enables you to recover them. Ignore this at your peril.
4. FLOW - The true measure of prosperity is cash flow. Don't focus on net worth alone.
5. CONTROL - Those with the gold make the rules; stay in control of your money rather than relinquishing control to others.
6. MOVE - The velocity of money is the movement of dollars through assets. Movement accelerates prosperity; accumulation slows it down. Avoid accumulation.
7. MULTIPLY - Prosperity comes readily when your money �multiplies��meaning that one dollar does many jobs. Your money is disabled when each dollar performs only one or two jobs.
Mortgage Prepayment plans:
In general mortgage prepayment plans fall under two types; automated (the bank has control) and manual (the home-owner has control). If you choose to prepay your mortgage, and there are sound financial principles for not doing so, please do it on your own terms! Pay Plan 26 offered by Countrywide Financial now Bank of America is a simple plan. In a nutshell, a homeowner makes a principal and interest payment every two weeks. The homeowner will make a half payment every 2 weeks or 26 times per year. That means that a homeowner who signs up for this program will make 13 principal and interest payments per year, but the 13th payment will go to principal. These payments are automated payments that the bank withdraws from a homeowner�s account every two weeks. Depending on the bank, the payments will be applied in one of two ways, either in one extra principal and interest payment per year or one and a half payments twice a year. There is a small difference in interest savings depending on the way the payments are applied.
Let�s look at what a bi-saver program like Pay Plan 26 really does:
1) A bi-saver program started immediately will turn a 30-year mortgage into a 24-25 year mortgage saving the homeowner thousands of dollars in interest payments.
2) A bi-saver program allows the bank to collect fees for a service the homeowner can provide for himself at no charge. Simply dividing the monthly payment by 12 and applying that amount monthly to each principal and interest payment will save a homeowner additional interest payments in addition to the fees assessed by the bank for its program.
3) A bi-saver program allows the bank ready access to a homeowner�s bank account
4) A bi-saver program saves the homeowner very little in the first five years of the loan. As an illustration a homeowner who purchases a $125000 home at 6.75% interest will pay $40989.50 in interest. Enrolled in Pay Plan 26 that homeowner will make $4053.75 in extra payments to the bank will pay $40384.30 in interest and another $240 in fees. His total interest savings then will be $365.20. That is $4053.75 in additional payments to save $365.20. By year 10 the homeowner will save significantly more money in interest payments. The difference becomes much more pronounced by year 10 with the savings totaling $3373.09
It is very important when you buy a home to determine how long you truly plan to be in the home. There is so little equity build up in the first 5 years of homeownership that it makes very little sense to buy a home if you know that you won�t be in the home longer than 5 years. Data available on the Internet from the Census Bureau and the National Association of Realtors indicates that the average length of home ownership is 6-8 years. Banks understand this. When the average homeowner enrolls in a bi-saver program, he guarantees the bank cash flow, while carving out little benefit for himself.
Be very cautious if you choose to participate in a bi-weekly program in which the bank uses a third party to collect and deliver payments. The third party processor may charge fees for set up and monthly transaction fees. Additionally the homeowner can end up in a bind if the loan is sold to another bank and the third party processor fails to deliver the payment to the new lender.
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Ouida Vincent is an active real estate investor and entrepreneur. Unfortunately people often pay more to live in their largest asset, a home, than they have to. This article is being published in 3 parts. Because it uses illustrations and graphs and active links that don't appear in the individual articles, it has been published in its entirety on my weblog at
http://www.ouidavincentsblog.blogspot.com
