Entrepreneurs wanted. Really?!?

In Mortgage Accelerator Blog, Mortgage Accelerator Problems by Ken Stone (October 8, 2008 8:11 pm)

I was reading through my local newspaper over the weekend and I noticed an ad by one of traditional mortgage accelerator program offerings.  The headline: “Entrepreneurs Wanted!”

REALLY?!?

Here’s my beef with UFirst (who ran the ad):  They’re a multi level marketing firm recruiting folks to sell their software, etc.  - that’s all fine and well, right?  Yes - except:

  • If you’re going to be advising folks on how to get out of debt - wouldn’t you want to know what you’re talking about first?

A colleague and good friend of mine was approached by a UFirst Rep earlier this year.  The rep was excited to talk with him about how great the UFirst software was - and how it fit perfectly with his practice and his goals for helping his clients.  30 minutes later the Rep admitted that he had lost his job in construction just 90 days earlier - and thought he could make some quick money selling software.  He didn’t have the first clue that what he was advising people to do would actually hurt them financially and cause them to take longer to pay off their mortgages early.

True story.

  • Just because most believe (including conventional wisdom) that paying off their mortgage early utilizing traditional principal reduction techniques (including the UFirst program among others) doesn’t mean that approach is actually the best or fastest way to help homeowners own their home free and clear.

Let’s forget for a moment the question of how fast you might actually be able to pay off your home by applying additional principal - and how much money you might actually be able to save - and simply address if this kind of move is a smart financial approach.

Most everyone I talk with feels that paying off their home is a smart financial move.  They are motivated by a desire to eliminate extra interest expense on their mortgage (saving them money).  But the real underlying motivation is to remove the fear of being foreclosed - the fear of losing their home.

Let’s look at that concern.  If you own your home free and clear the only bills you need to worry about annually are your property taxes and your homeowner’s insurance (if you choose to insure your home).  As long as you can make those bills, you’re set.

But what about someone who is well on their way to paying off their home - even really really close to the finish line.  Let’s say they owe $20,000 on their $500,000 home.  And then trouble strikes.  They’re out of a job.  They get in an accident and can’t work.  You fill in the blank here - life throws us a curve ball every once in a while.

If this person has been putting all their extra money into paying off their home early … what relief exists for them?  The sad answer is NONE!  What if they’ve been saving money - AND paying off their home early.  Once the savings are gone - they’re in the same sad place.

And if you were the bank and you had a home that owed $20K (worth $500K)  that stopped making mortgage payments - and another home that owed $400K (worth $500K) which would you foreclose on first?

UFirst advocates two methodologies for applying their concepts.  A Home Equity Line of Credit, or a credit card.  I’ve been talking about the problems associated with Home Equity Lines of Credit for many years - sadly the concerns I’ve been raising are now reality for far too many Americans (and getting a credit card to pay off debt seems like the height of stupidity to me in terms of what they’re recommending).  These “resources” are not liquid.  So if you deposit all your money into one of these accounts (as UFirst advocates) and then tried to pay your bills from the account (as they advocate) and if in between deposit and writing a check the account is frozen you’re out of luck.  You’ve just put your hard earned money in an account that won’t be giving it back to you.  You think it should - you’ve been told it would.  You even thought of this account like a savings account.

But unlike a savings account, you can lose access to your credit card and Home Equity Line of Credit if your bank decides something isn’t right.  And that something might have nothing to do with you - or even your house.  It might have to do with their lending portfolio - or the ratio of bad debts on their books.  Freezing your account might simply be a loss mitigation move on their part. 

So why am I so excited about this ad over the weekend?  The economy is stinking it up right now, and folks are out of work or looking to make extra money on the side.  When the economy stinks consumers try to do things they think will make them safer.  And some will think that paying off their mortgage early will help their financial cause.  (BTW: I’m convinced that paying down your mortgage early utilizing traditional mortgage acceleration techniques is a mistake during good times and bad.  Look at my DVD and book for more information about my approach - there’s a link right next to this entry.)

And there will be a new crew of entrepreneurs out there telling you that what you already believe is exactly right.  And for a not so modest investment in their program, you’ll be able to accomplish your goals even faster.  And they won’t know what they’re talking about … because they’ll be entrepreneurs, not experts.  But the public won’t question it because they’ll be hearing what they already think is true.

My I humbly suggest that the person you want advising you about how to improve your financial situation should be a well informed and educated professional.  Not an entrepreneur looking to pick up some quick money.

These programs put you in harms way - and at much greater financial risk for every day between now and when your home is paid off for the thing you’re trying to avoid!  A solution that takes you from a stronger financial position (with extra money in your pocket each month) to a weaker financial position (with less money in your pocket).

Conventional wisdom is going to get a lot of people in serious trouble during these troubled financial times.

Do me a favor and forward a link to this entry to all your friends.  They’ll thank you when they can weather the storm in great financial shape.  PS - you - and they - will pay off your mortgages faster than you would have if you follow my advice.

Thanks for reading!

To your optimized financial health,

Ken

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