Myths and Misconceptions

As with any new innovation, you must break through the confusion and competitive clutter to find the truth about the product you are considering. Some myths and misconceptions have already grown up around the Home Ownership Accelerator, and we would like to clear them up for you.

Myth #1
You can match the performance of the Accelerator by pre-paying your current mortgage.

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

Myth #3
An adjustable interest rate is too risky

Myth #4
The starting interest rate is higher on the Accelerator

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

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

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

Myth #1
You can match the performance of the Accelerator by pre-paying your current mortgage. Basically 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 because:

• Pre-paying locks up the funds permanently, unless you apply for a loan (refinance), or take out 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 did pre-pay it.

• They may have plans to pre-pay, but never actually started.

• They started a pre-pay plan, but it quickly fell to the way side.

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. Bi-weekly payment plans are attached to traditional mortgages to increase pay-down speed, but they offer no withdrawal privileges and lock you into a strict series of payments.

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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, your monthly incoming cash flow more than offsets your monthly bills, so 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 long-term negative monthly cash flow problems because we don't want ordinary spending to drive up long-term debt.

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Myth #3
An adjustable interest rate is too risky. FALSE
The total cost of a loan is driven by rate, balance and term. (See Diagram). 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 Comparative Graph). 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 before deciding.

In a speech to a credit union group, former Fed Chairman Alan Greenspan questioned whether fixed-rate mortgages were the most cost-effective means of financing a home purchase. He said "American homeowners clearly like the certainty of fixed mortgage payments" but pay several thousands of dollars a year for the comfort.

Greenspan said homeowners "might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade"

Greenspan noted that if homeowners are "willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home." Feb. 24, 2004

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Myth #4
The starting interest rate is higher on the Accelerator. IT DEPENDS
First, you have a range of margins available on the Accelerator. If you buy down that margin to .75%, your starting interest rate will be very competitive with today's fixed rate products. Second, this loan focuses on balance reduction, not 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 possibly higher rate. Third, the Accelerator is tied to the 1-month LIBOR index, which is currently above its historic mean. That means it is as likely to drop as it is to rise over the next few years. So while an accelerator rate may be higher than your current loan, but adjustable rates go down as well as up, and you may end up with a better rate on the Accelerator over time (See Comparative Graph). Most people switching to this loan currently have fixed rates in the low 5's, and adjustable rates in the 4's.

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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.

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Myth #6
Consumers have little discipline so access to home equity is too tempting to abuse. FALSE
We give our clients more credit than that. We only 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 endless offers from credit card sellers and bank peddling traditional equity lines of credit. We are not giving our clients equity access that they don't already have.

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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.