Your client does not need a line of credit to eliminate their debt.

Why your client doesn't need a line of credit to eliminate their debt…

We are often asked about the difference between our program, the Financial Compass, and a program that is a mortgage cycler which uses a HELOC 2nd and requires the regular use of software by the client.

With a mortgage cycler, you need to have a HELOC 2nd or be able to qualify for one. And you need to have room on it to pay for the (up to $3500 or more) software and also take a chunk of money out of it to pay against your 1st mortgage. You deposit your income into the HELOC in order to lower your average daily balance and pay your bills out of it later in the month, working to minimize the HELOC costs. You need to either input all of your financial transactions into the software each month or reconcile accounts for the life of the program (several years). Over time the program is designed to periodically have you take out money from the HELOC and put it against your 1st mortgage. And then "rebuild" the money you took out through your discretionary income and applied to your 1st mortgage.

In theory, this could work for a very disciplined person like a financial professional who will perform the necessary input and not over spend. Where I do see a problem with a mortgage cycler is in the wild card.

That wild card would be the consumer. As we all know, the majority of the consumers we have seen in the mortgage industry are not extremely disciplined. If you give them a HELOC with a check book and an ATM card attached to it they are most likely going to over spend and will not gain the proposed savings from the mortgage cycler program. We all know this. We’ve watched clients over the years come in for a cash out refi and wipe out their credit card debt. Then they go out and rack up their cards again and come back to use up more of their equity to do it all over. Do we really think this is someone who is going to faithfully input all of their financial transactions into the software every month and also not overspend out of their HELOC? Many have already shown that they do not have the discipline needed to reduce their debt. Is that going to change overnight because they were sold a program and given instruction to input all of their financial transactions into a software program? They need and deserve more than that.

Now what happens if they have an emergency and have to use the available credit in their HELOC? What happens if the bank freezes or reduces the available credit in the HELOC which we have seen happen for the last several months? Or if they have to refi out of their 1st due to an adjustment or negative amortization? People can, and have, lost the available credit in the HELOC or the HELOC itself. Now you have an expensive software service that you can no longer use and a savings program that no longer works.

Your average consumer needs a program where they don’t have to do any additional work, give up their time, or learn how to use software and are not given “wide open” credit cards again. We get them out of debt over time in a fully administered debt roll down program that only frees up credit as we accelerate the pay down over time, which is safer for the consumer. We help them to learn to live off of cash and not credit as they go through the program. We're helping them to establish new habits that will improve their financial outlook and change their future. And very importantly, we are using a flexible payment over time to not only eliminate their debt, but then that available cash can be used to beef up their retirement plan or other investments. And that is key. If they get used to spending less on their debt they will consume that money and not contribute what is needed to their retirement. All you have to do is look at the assets of many of your clients in the forties and fifties to see how many are not building up an adequate retirement.

Another factor to consider is that in a mortgage cycler the client has to deposit all of their income into the line of credit to receive the "benefits" of the program. Most of the people I talk to don't like the idea of depositing all of their income into a line of credit. And that's another difference between our programs. We are able to give the client a fixed monthly payment amount that will achieve the goals in our program. That leaves the client with the rest of their income available to them in their own bank account to use as they need. We also set up 2 or more drafts per month so that we can mirror the payments as close to the time the client was sending them out before getting into the plan. And if the client needs to make an adjustment to their program payments it's easy to do. We have a very flexible program.

We do all of the work for the consumer through our TPA (Third party administrator) to ensure their success along with ensuring on time payments which can protect and improve their fico and debt to income ratios leading to easier to qualify borrowers the next time a refinance can save them additional money. And they may be able to go rate and term as opposed to cash out giving them a better rate too.

Since we don't qualify by credit or equity, we have a program that is available to a much larger market, and can often help consumers who do not qualify for a loan today. Our program also works with many investment strategies including equity management. It also gives the consumer the ability to make choices in what they want to do with their money and how to invest when they have eliminated or reduced their debts and just have a mortgage left.

It also may make more sense for the client to leverage their mortgage and invest in their retirement at that point. While mortgage cyclers are generally marketed to pay off your mortgage, that is often the wrong strategy for the consumer who has more expensive compounded interest rate debt that should be addressed well before the mortgage. But the easier sell is to target the mortgage as it elates an emotional response to help close the sale. Our program goes after the most expensive debt first, and provides options other programs don’t. We aren't going to dictate to the consumer where or how they should invest their money, That's something they can strategize with their financial professional on. We create choices and options for the client that they would not have had on their own.

The other reason I see the mortgage cycler pushed with a line of credit is, in my personal opinion, the need for an MLM company to be able to pay the salesperson and their up line out of the new untapped line of credit. We’re not an MLM nor do we need a line of credit to capture the discretionary income and calculate the most efficient manner to get your client out of debt while bringing options and flexibility back to their finances.

Further more, we have created a mortgage cycler ourselves and decided to shelve it as it doesn’t create either dependable savings or the level of savings our current program can achieve. This goes back to the possibility that the client will slowly use up the available credit in the line or have an emergency or necessity that requires them to use it. The Fed’s own research has shown that homeowners with a HELOC have a lower personal savings rate (at times as bad as -13%) than homeowners without a HELOC. We want to keep your client out of trouble, not put them into a trap similar to the cash out refi trap that repeats itself.

While there are many arguments that can be made over whether a cycler will reduce the cost of the line of credit, it’s very difficult to argue against the fact that most consumers have been going deeper into debt and do not have the discipline needed to escape the cash out refi and home equity line of credit traps that continuously siphon off their home equity and leave them deeper in debt. Some companies are starting to use a credit card as the line of credit for their program. Credit cards are often the reason the client got into trouble in the first place. It doesn't sound like a good idea to me and that's going to be easy to sell against for our people. Without the availability of a HELOC or ability to qualify for a personal line of credit, these programs that once marketed as "not a debt roll down program" and bad mouthed it are now starting to move in that direction themselves.

We've been doing this for 10 years and have thousands of successful clients in our program. We've been doing it the right way for the last 10 years and have a mature program that is continually tweaked and improved. Other companies are just now getting started and will no doubt have the bugs and "growing pains" to go through associated with a new program.
And they have to overcome their previous negative stance towards a debt roll down program, which has worked successfully for years. And we didn't burn our clients by giving them a program that stopped working when they lost their HELOC.

I suggest to the people I meet that offer the mortgage cycler that they include our program in their menu of services to cover the larger market that their product can not help. It doesn't take much convincing. It just makes sense to be able to help more people that need it and to be able to place them in the best program for their needs. At the end of the day, that's why we're here.