Debt Acceleration Program and Credit Repair Companies

Introduction

I have a FB friend who owns a credit repair company.  His posts and the people who comment on his posts intrigue me because it’s a glimpse into the other side of the credit spectrum.  It makes me grateful for taking that personal finance class in college and thankful for the social-economic position I’m in.  Anyway, he posted a question last week, “Is living in a home with a mortgage an asset or a liability?”  I’m sure the majority of you who are homeowners would say it’s an asset.  He and I got into a discussion, and he mentioned that most homeowners refinance every 5-6 years and they are continuously paying interest since that’s how mortgages work.

 

Mortgages

Let’s talk about mortgages first.  THIS WILL NOT BE A RENT VS BUY DEBATE.  It seems like my friend’s argument is that mortgages are evil because you are paying mostly interest in the first 5 years, and since the average homeowner refinances every 5-6 years, then they are continuously paying interest.  I think it’s clear here that the issue isn’t the mortgage itself, but it’s what caused the homeowner to refinance every 5 years.  If you do a zero-cost refinance and shaving a point off your mortgage, you should take that all day, every day.  If you are refinancing because you want to take out some equity to buy a fancy car, that may not be the best reason to refinance.  A mortgage in and of itself is a great tool for someone who wants to leverage their money and get a huge loan with the lowest rates.  If we didn’t have mortgages, then we’d have far fewer homeowners since no one has that much cash sitting around.  Anyway, let’s move on since I’m pretty sure I’m preaching to the choir here.

 

debtprogram

Debt acceleration program

Eventually, he linked me to this video – https://www.youtube.com/watch?v=2BSscPzl47k.  The video is 6 minutes long, but you’ll roll your eyes so far back that you’ll black out by the 3 minute mark (assuming you even last that long.)  If you don’t want to watch it, let me give you the Cliff notes version – the video wants to help low credit people (who most likely have credit card debt) budget their money better to have some $500 extra a month, and to put that $500 towards their mortgage so they’ll pay off their house in say 20 years instead of 30 years.  Can you already figure out what the issue is here?  Heck, even my wife, who doesn’t know anything about finance, who overheard the video said, “Yeah but what about the opportunity cost?”  EXACTLY!  If people with bad credit saved an extra $500 a month, why would they want to put that money towards paying down a 5% mortgage vs a 20%+ credit card debt?!?

 

When 0% makes sense

In fact, 2/3 of Americans would have issues coming up with $1,000 to pay for an emergency.  That’s very disturbing and eye-opening.  So if this person could somehow save $500 a month, wouldn’t it be in their best interest to sock that money away (even at 0% interest) to save up for a rainy day vs having no liquidity for emergencies?  Look, I’m not try to bash my friend or credit repair agencies.  If they can help people restore people’s credit and improve their scores 100 points, GREAT!  But that’s the first step.  The second step is to help people actually save money by not buying the latest iPhones or showy cars.  If they are still overspending and racking up credit card debt, they’ll never get out of that vicious cycle.  For instance, I just had to bite my tongue and not say anything when I saw my friend post this:

creditrepair

 

  • Mark Ostermann

    How is the student with credit issues going to be able to afford those BMW repair/maintenance bills…

    • Miles per Day

      Exactly the point of the post Mark. Makes you face palm yourself.

  • Mark Ostermann

    I sometimes wonder if renting would have made more sense. In certain areas where renting is cheaper then buying (not many but some) it makes a ton of sense. But in a regular area if you were to put away all the money you spend on improvements, upkeep, maintenance etc. into a brokerage account who would end up better in the long run? I am sure someone has done a study. The downside is you would have a payment in retirement which is something you don’t want. Interesting to say the least.

    • anthonyjh21

      I think the biggest question you have to ask yourself is how long do you expect to be there? There’s plenty of resources but if you you sell before 4-5 years then renting is probably best. Sometimes the answer appears clear cut when you make it. That is until something comes up and you decide to move sooner than you thought. There’s definitely pros and cons to buying vs renting.

  • anthonyjh21

    I think people get in trouble when they go into the home buying process unprepared. I won’t clog this up with the myriad of things to consider, but make no mistake there are many. When we bought our new home in 2012, despite feeling prepared, we still had many learning lessons. You won’t have all the answers but no matter what, you have to have your ass covered financially, and that includes cash on hand for emergencies. Buying a home, even new as ours is, will suck you dry with the million little costs that no one really told you about.

    This idea of debt acceleration when you probably already have credit card debt though is just bat-shit crazy. I think that some people just need a crash course in budgeting/finances for dummies. The classic YNAB would work well for those who need to start from the ground up. Sometimes it takes some eye-opening experiences for people to realize just how far up shit creek they are in being financial noobs. The problem is many live their daily lives in denial of what’s already there, only facing the truth when it smacks them in the face. I guess my point here is too many people get a mortgage when they probably aren’t ready. Or in this case pay down a mortgage while higher interest cc’s eat them alive. If you pay off debts (lowest % to highest), build up a down payment, get your credit 750+ and have some life stability you’ll be on the right track.

  • Tsai Huang

    In my opinion, your best post so far, Vinh. It is real, original, and stick it to the Man. Have you consider writing more on PF topics rather than bank shutdowns?

    • Miles per Day

      I do. I’ve written about PF in the past and hope to do more in the future.

      • Tsai Huang

        Yeah, your posts on car leases were hard to argue with. We paid cash for our Nissan Leaf 2 years ago based on conventional wisdom of buying Japanese car and drive till it dies, but we didn’t factoring how fast the battery technology could evolve. If fast-exchangable EV batteries become the norm in 5 years, all charging station businesses will go bankrupt and we will be screwed (although I hope Nissan will offer to convert our car to exchangable batteries by then). Still love our Leaf though!

  • Ken

    The 66% of people in America can’t afford a $1,000 emergency is shocking and pathetic. And I bet those people are all driving new cars and have the latest $800 phones and eat out all the time. Financial literacy in this country is terrible, but without the irresponsible we wouldn’t have huge signup bonuses for credit cards and 5% interest rates for prepaid cards 😉

    • anthonyjh21

      Reminds me of neighbors financing their hardscape project (pavers, retaining walls, stairs etc). All homes here have nothing in the back yard, just dirt and weeds and require major work. They said that it was expensive but worth it because they were able to finance the entire project with 6 months no interest.

      The company they used has outrageous prices, close to double the next competitor (I had a dozen quotes when looking into our yard as well). The company gets people on the hook with the 6 month 0% spiel and is able to land the job and charge twice the price. Even if the customers pay off the debt within 6 months, they’re overpaying for the same product they’d get elsewhere so they’re really saving nothing here.

      It took us almost 2 years to fully have our backyard landscaped with pavers and the whole 9 yards. The difference is I did what work I could, bought items only when on sale (love home improvement discounted gift cards) and only paid for work to be done that was absolutely necessary (pavers). I understand not everyone can do what we did but in that case it’s all the more reason to have a cheap cement pad and some gravel for a back yard and call it a day.

      The disconnect happens when people believe that they aren’t actually paying for an item or service right now. Further, people somehow think they deserve it and that time will allow them to live in acuna matata land and that it’ll eventually take care of itself because hey, everyone else has used this company and their friends can’t be wrong too, right? Gotta keep up with the Joneses.

      • Ken

        I don’t know why people seem to always go with the “get your stuff now and pay nothing for 6 months” crap that so many people fall for. It’s probably why most people have ZERO retirement, they think the government will be there to hold their hand and bail them out and take care of them once they retire.

        • Tsai Huang

          Actually, this post got me thinking about taking advantage of the 0% interest offers from credit cards to help pay down mortgage principle early. Any downsides anyone can think of?

          • Ken

            I don’t know your specific situation, and I’m not a financial adviser, but I think putting mortgage principal on a credit card is a terrible idea. I don’t understand why anybody would want to do this. Care to explain?

          • Tsai Huang

            Well, I have a good chunk of money for MS float. Since WF is clamping down on the 5%, I am trying to find a better use for this money. I maxed out on all the Netspend/Mango 5% interest savings accounts, and I like churning Propel World so don’t want to get banned by WF for life by going big on the 5% cards during their dying days.

            My mortgage is now at 3.75%; pretty good for CA and only 3 years in so no desire to refi (Vinh’s post explained it). I recently received lots of 0% BT offers, some with 2% fee (12 months), and some 3% fee (18 months).

            My thinking is, by BT only a portion of my credit line for each of the cards that charges the 2% fee (thus not increase my credit utilization by a lot), I can pool a good chunk of money to pay my mortgage principle and get an effective return of 1.75%, which beats any savings account returns I know of without jumping through any hoops. Plus, by paying a lump sum towards the principle early, it lowers my monthly mortgage interest going forward so free up more money for, say, private labeling(?!)

            I am certain that I will have this money down the road (in fact, will have more money when my Paypal accounts unfreeze next month) to pay the BT off, so I can’t think of any downside to it.

            Any comments/critiques?

          • anthonyjh21

            I think it’s extremely dangerous to count your chickens before they’re hatched. The only way you’ll be certain you have the money down the road is to wait until that day comes that you’re in fact paid what you think you will be. Anything else is just building bridges on toothpicks.

            Are you on a fixed % conventional loan? I’m not following what you mean by how reducing your monthly interest going forward will free up money in the near term? Unless I’m missing something here all you’ll do is pay your mortgage off quicker, not reduce your monthly payment.

          • Tsai Huang

            I had a good conversation with my loan officer last night. You are right about the monthly interest. I wrongly assume that the interest amount will get re-adjusted every year (like a bank account) based on the amount of principle is left.

            FYI, I am on a 30 year fixed conventional loan (ARM is the biggest scam ever). I pay PITI plus some extra each month (lament chargesmart…)

          • Miles per Day

            Interesting. I thought it would readjust too. Guess you’re not really saving anything unless you refi, at which time it’ll “readjust”

          • Tsai Huang

            Yeah I know. However, per my loan officer, it makes more sense to refi early on, so long as the rate difference is large enough.

            Since the % of your monthly mortgage towards the principle increases as you go further into your mortgage term, it makes no sense to refi, readjust your % toward principle, and extend your term (unless you plan on passing the debt onto your “beneficiary”)

            So it seems to me that refi make sense for young mortgages, say 5 years or less, and/or when the rate dips significantly, say, 1% or more? (Or of course if you want to reduce the term and pay more each month). These numbers are speculative and I need to crunch the numbers more, but the logic make sense to me.

            Any mortgage guru want to chime in on this?

          • anthonyjh21

            I think you and are in the same boat. I’m also in California with a conventional loan fixed 3.5%. Further, we have no PMI attached to the loan. All are conditions for us to keep the 30 year loan as is. In fact, we’re keeping it and turning it into a rental property. Between the loan terms, no PMI, market appreciation and Prop 13 there’s plenty of incentive to stay the course.

            Definitely not a mortgage guru but I think you have the right idea here in that a refi makes sense anytime you save money with a lower rate (after fees) or to remove PMI or get out of an ARM loan. Given the way amortized loans are structured (front loaded with interest) it only makes sense that you’d do this earlier in the loan rather than later.

          • Tsai Huang

            Totally with you there! Too bad CA home prices are soaring due to foreign investor $$, otherwise I wouldn’t mind getting more place with the current rate. In spring 2013, my realtor was assigned with over 25 million USD by one of her foreign clients to buy as many properties as she could in SoCal area. Good think we were friends so she left alone the properties we were interested, otherwise we would not be able to compete with her.

            We are grateful for what we have, but we do crave for more. Don’t we all just waiting for another recession? Certainly it will help the credit card offers

            Hm… In light of that, maybe we should consider voting for the egomaniac (hey, not taking any sides here. I am sure the person would agree with the description anyway) in November. Will file for Canadian immigration first, of course (just kidding… eh?)

          • Miles per Day

            It boils down to this. If someone gave you $20K cash, would u put it into paying off your 3.75% mortgage or would you put it into an index fund and hope to make 5%? Or would you use that 20K as extra float for your MS or reselling gig? Once you have that answer, then you’ll have answered whether you should BT and pay down your mortgage.

          • Ken

            Don’t count on Paypal unfreezing your account on a specific date, or pretty much anything else they promise. They are the most unpredictable company ever. I had to verify my account 6 times to buy the staples discount GCs this morning. SIX!

          • Tsai Huang

            Totally with you there. Yesterday I was on the phone for an hour with Paypal so I can get the ebay GC deal (and still it didn’t work!!). When is ebay going to fire Paypal completely?!

            Yeah, got 4 PP accounts locked due to PPMCC and PPBDC merry-go-round. I opened a new one earlier this year for strictly online payments but got lots of problems at ebay. Does anyone have updates on the Paypal lockdown lawsuit?

          • Miles per Day

            Tsai, that’s a ticking timebomb. If you can’t pay off that BT fully when it ends, you’ll be slapped with a huge APR that will wipe out any gains you had by paying down your mortgage early. Now if you are paying for PMI, then it MIGHT make sense, but only if you know for 100% (not 99%) that you will pay off the BT exactly when it ends. I don’t recommend this for most people; plus, you’ll also be carrying a high utilization on your credit score too.

            If you’re not paying PMI and wanting to do what’s in that stupid video, DON’T. Save that money for a rainy day. Put it in an index fund where you can liquidate ASAP if an emergency happens. The emergency fund “insurance” is worth paying the 5% on your mortgage.

          • Mark Ostermann

            Wouldn’t paying down your principle with the money do the same thing but save you on the 2% fee? You would still lower your interest in the long term but would save the full 3.75% instead of only 1.75%.

          • Tsai Huang

            The key is you will have your MS money intact during the 12-month period. You make the 1.75% return with someone else’s money so you still have your MS money to play with for 12 months, which (hopefully) can help generate even more returns or trips

          • Mark Ostermann

            Gotcha…I knew there was a catch. Risky proposition if something goes wrong though and you don’t have the money at the end of it. Not sure the risk is worth the 1.75%.

          • Tsai Huang

            Can’t believe my comment cause such a disturbance in the Force! Will comment in your new post

          • anthonyjh21

            Getting rid of PMI is definitely one of those “monkey off your back” situations. If you can pull it off I definitely recommend this. We had to fight tooth and nail between a shady appraisal (about 10% below market value) and the banks PMI review but in the end we paid around $400 for the appraisal and a one time $2,700 principle payment to have the PMI removed. Had we not challenged based on market value we’d of owed over $25,000 to remove PMI.

            So yeah it’s a pain in the ass but highly worth getting rid of PMI if you can afford to do so (or market conditions allow for it). PMI is how the banks really stick it to you so the sooner it’s gone the better. New FHA loans are stuck with it (reason to refinance) so you also need to make sure you even have the option to remove it.

    • Miles per Day

      It’s sad that the irresponsible are helping fund our travel. I guess in every game, there has to be a winner and a loser. I just hope the irresponsible learn to be responsible one day.