Myths and Misconceptions

Myth #1
You can come close to matching the performance of the Accelerator by pre-paying your current mortgage. TRUE

Paying extra each month, making an extra annual payment or adopting a bi-weekly payment plan will all reduce your loan term and save you interest. However, when we surveyed consumers about pre-paying their current loan, most said they did not follow through. Here are the top reasons why:

• Pre-paying locks up the funds permanently, unless you refinance or use a home equity line of credit to get it back. If you sign up for a bi-weekly payment plan, you are also locking yourself into 26 annual payments, further restricting your flexibility.
• You would never put all your spare cash against your mortgage, even if you dedicate some cash regularly to pre-paying it.

The Accelerator maximizes your pre-payments and interest savings because it allows you to:

• Flow every spare dollar you have against your loan balance until you need it for bills or investments.
• Withdrawal it immediately in the event of emergencies or investment opportunities.

No other loan offers such flexibility and financial power. This loan is a home equity line of credit that allows unlimited payment and withdrawal privileges. No fixed monthly payment is required if you are below your line's credit limit. Conversely, you can deposit every dollar you earn into the account until you need the funds for bills or long-term investments.

Myth #2
Ordinary spending becomes long-term debt through the Accelerator. FALSE

This myth grew out of the fact that you pay all of your bills from your Accelerator account to maximize the value of your cash. However, this loan does not change your family income and expense levels (except to save you some interest charges.) If you have positive cash flow, your income covers your monthly bills just as it did before getting the Accelerator. And your positive cash flow helps your balance trends down, not up. If you did not deposit your monthly income into the account and still used it to pay bills, your balance would increase. So, we do not recommend this loan for people with negative monthly cash flow because we don't want ordinary spending to drive up long-term debt.

Myth #3
An adjustable interest rate is too risky. FALSE

The total cost of a loan is driven by rate, balance and term (Interest Triangle), not just your rate. A higher-rate loan will cost less than a low rate loan if you reduce the balance quickly. Also, adjustable rates may be more volatile than fixed rates, but you pay a premium for the security of the fixed rate. Over time, adjustable rates usually match or beat the performance of fixed rates. (See our full White Paper about Fixed Rate vs. ARM Loans.)

So, deciding not to take out the Accelerator solely because it has an adjustable rate is making a long-term decision on a short-term consideration. You need to analyze the full picture (rate, balance, term) before deciding.

Myth #4
The starting interest rate might be higher on the Accelerator. IT DEPENDS

First, with the LIBOR index at an historically low point, starting rates on the Accelerator will be lower than most fixed loan rates. Plus, you have a range of margins available on the Accelerator. If you buy down that margin to 1.5%, your starting interest rate will be dramatically better than today's fixed rate products. Second, this loan focuses on balance reduction instead of interest rate. If you have the cash flow and/or reserves to attack your balance aggressively, the interest you save will more than make up for a jump in your loan interest rate. Third, making a decision about a loan based on the starting rate is short-sighted. The 1-month LIBOR index’s average rate over the last ten years is 4.23%. Add your preferred margin to that average and you will get a sense for the average interest rate you will have over the life of this loan. Adjustable rates go down as well as up, so you could end up with a better rate on the Accelerator over time.

Myth #5
You have to put all your savings in the loan to make it work. FALSE

We recommend that you put your savings to the best possible use. Checking account balances and emergency funds kept in CDs usually earn less than your loan's interest rate, so it makes good financial sense to move those funds into the Accelerator. But, if you can earn a better return investing your savings elsewhere, it makes no sense to leave the funds in the Accelerator. Plus, whenever you have cash reserves earning less than your current interest rate, even temporarily, it would make sense to deposit them into the Accelerator to reduce what you owe and save interest until you find a better investment opportunity.

Myth #6
Consumers have little discipline so easy access to home equity is too tempting to abuse. FALSE

We give our clients more credit than that. We offer the Home Ownership Accelerator to people with excellent credit and positive cash flow. They already exhibit a strong ability to manage credit. In fact, we have not seen any change in the financial behavior of the thousands of people who have already adopted the Accelerator. Indeed, Accelerator clients report that the cash flow benefits of this product induce a more conservative approach, because every dollar saved now has a powerful impact on debt reduction. Finally, we know that good-credit people already receive a lot of offers from credit card sellers and banks peddling traditional equity lines of credit. We are not giving our clients equity access that they don't already have.

Myth #7
Better to get a low-rate mortgage and invest extra income. FALSE

The fact is you can do both. If your goal is not to pay down your mortgage debt until you retire, you can still use the Home Ownership Accelerator to maximize the power of your cash flow before you invest it (income flows into this account, saving interest, until a good investment opportunity arises), or in between investments as an extremely powerful sweep account. And, as you approach retirement and begin to rebalance your portfolio, the relative return on the Accelerator may complement your overall strategy even more. Finally, when you do retire, you may still cash out investments and pay down your home loan. But, with the Accelerator, you can pay down the balance without closing the line, so you can still support long-term investment plans well into retirement.