9 Year Mortgage – Some Thoughts

So, the other weekend I was bopping along to the radio while cleaning my house.  A commercial came on for something called “9 Year Mortgage.”  My planner antenna went up as I thought, “Sounds a little scammy, but I’ll check it out.”  And, check it out I did.

The site’s proprietor/mascot/person-whose-face-is-plastered-on-it is a fellow by the name of Howard Ruff.  Now, if you weren’t paying attention during the last prolonged recession (late ’70s), then you missed out on the bear-liest of bears, Mr. Ruff himself.  About 5 years ago I managed to get my hands on a book of his called “How to Prosper During the Coming Bad Years,” originally published in 1979.  It included helpful information on hoarding precious metals and food.  For the coming bad years.

You know, the apocalyptic wasteland of starvation and hyperinflation of the ’80s and ’90s.

Anyways, I check out how the site claims to get a person out of debt pretty quickly, but they’re such teases about how the whole system works.  Since the time frames they discuss are reasonable for someone who actually pays off their debts without using fictional techniques, I’m led to suspect that they’re using a variant of the debt snowball.  So I’m all “Not bad.  Sounds reasonable.  I wonder how much this costs.”

Oh sweet goodness, I am clearly in the wrong business.

According to the site, the cost of the plan is about 10% of the interest savings generated.  So, I’m going to try to roughly model how they might charge fees.  To do that, I’ll make a totally made up list of debts and see what the fee maybe could be.  I’ll try to be reasonable.

Let’s give our experimental household a recently refinanced mortgage, one auto loan, a student loan and some revolving credit card debt.

Fictional Household Debt Principal Rate Term Remaining
Mortgage $150,000 5.00% 30 years
Auto Loan $18,000 7.00% 4 years
Student Loan $10,000 6.00% 5 years
Credit Card 1 $4,000 19.00% 4 years
Credit Card 2 $2,000 20.00% 4 years
Total $184,000

Now, this isn’t too out-of-bounds for the average person.*  There are a lot of people who are trying to get out of far worse debt.  Now that we have our list of debts, and how long they would take to pay off, let’s figure up out total interest expense if we made only minimum payments, over the full payment period.

Fictional Household Debt Monthly Payment Total Interest Over The Life of the Loan Total Principal Paid Over the Life of the Loan
Mortgage $805.23 $139,884 $150,000
Auto Loan $431.03 $4,040 $18,000
Student Loan $193.33 $1600 $10,000
Credit Card 1 $119.60 $1741 $4,000
Credit Card 2 $60.86 $921 $2,000
Totals $1,610.05 $148,186 $184,000

Okay.  Now, let’s make a debt snowball that ends with the mortgage being paid off in nine years.  I’m going to add some money to the pool of cash available for paying down the debts, to simulate budget counseling and an enthusiastic client.  I used the What Is The Cost Debt Snowball Calculator.  I reverse engineered an additional contribution of $510 per month to have all the debts paid off from October first of 2012 to October of 2021.  You can do the same by entering the numbers above and making the total monthly payment equal $2120 per month.

The calculator shows that our model household would pay a total of about $45,000 over the next three years.**  Now, if we take $45,000 from $148,186 we get an interest savings of $103,186.  Ten percent of that is $10,319.

$10,319 is a lot of money.

Now, if you’re someone who needs a lot of help at making a budget, needs a lot of help building a debt snowball, and needs lots of counseling and hand-holding while being intensely committed to one, focused goal; then this might be the right thing for you.  But, then, I wonder why you wouldn’t hire a financial planner in person to help you do this?  The amount of money I estimate that this model would pay out is more than ample to hire a skilled financial planner.  So why not do that?

Also, if you’re even reasonably skilled at addition and subtraction, and can use basic internet forms; why wouldn’t you just do this for yourself?  You’d save, by my estimate, about ten thousand dollars.

So, while I have no reason to think this is any sort of scam, I really don’t think it’s a good deal for most people.

* Sadly.
** You’ll notice the original interest expense amount I calculate and the interest expense the website calculates are different.  Since I’m just roughly modeling this to illustrate a larger point, I don’t care that much.  Let’s stick on the larger point.
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