All In One Mortgage

[AZRedhawk44]

Anyone here have an All In One mortgage?

I just had a call with a lender that provides these.  Local lender here in the PHX market is called Life Changer Loan, but it has other names in other markets.

The gist of it goes like this:  Rather than a 30 year fixed mortgage where you pay a fixed amount every month, you have a line of credit equal to the appraised value of your house.  You deposit your savings and monthly paychecks into this giant HELOC-like instrument.  You pay your bills off of it as debts.  But, you don't have a "mortgage payment."  You just have this line of credit.  The objective is to bring your balance to $0. 

The appeal to this is that if you have a solid positive cash flow, you can pay off your home in 5-10 years rather than the typical 30 years.  Then you have no mortgage payment at all and can catch up on investments, or use your equity to purchase additional real estate (as an investment).  It makes it very easy to pay off principal on the house and still have access to that equity if an emergency or temporary strain on finances comes up.  On a typical 30 year mortgage, if you pay extra towards principal you can't just borrow it back 3 months later if you need it.  With this, you can.  If pushed to do so, you could go jobless for 2 years and live off the equity, then spend the remainder on medical bills.  You'd lose your house obviously, but it's an option (a bad one, but it's there).

The drawback is obviously that you have no "savings."  You just have a lower outstanding compounded balance since you're holding all your money in the mortgage credit line.

My house is worth about $500K or so in the current market and I owe about $110K on it, having bought it around 15 years ago at about $160K financed.  I also owe about $55K on some rural land that is pinching my finances.  I was considering one of these loans...  I would end up with a $360K line of credit on the house, I'd pay off the rural land by adding $55K to the house balance, so I'd have about $165K outstanding.  I could have the house paid off in a little over 4 years and the land paid off now.

Trouble is, the interest rate is higher.  About 8.5%, versus about 4.25% on my current mortgage and 4% on my land.

The flexibility and large credit line is appealing though, with all the construction projects in my future over the next 5-10 years as I aim to develop the rural land.

[Brad Johnson]

Sounds convoluted, and will likely take a hell of a lot of financial discipline. Also, the catch is in the name... it's still a loan. Only now it's a loan with higher interest.

The "no mortgage payment" part sounds fishy. If you aren't paying, you aren't... paying. With the higher interest, that means every time you exercise the "don't have a payment" option, you extend the repayment period. Only now, you've extended it at twice the interest which then compounds over time.

Also, how does it affect your homestead status? I wouldn't be surprised if the terms include waiving HS status so the loan company has first dibs in the event of default. That's bad. Like really, really bad as HS exemptions traditionally give you a ton of legal protection if your finances go south. Waive those protections and you might as well be living in a rental if you get in a hard money bind.

I don't see any payout difference between an AIO and simply making extra principal payments every month. Pay an extra 15% per month to principal on a standard loan and you can pay off a 30 year mortgage in 18 years, plus shaving approximately 67% off the interest load.

My gut says don't.

Brad

[cordex]

Doubling your interest rate sounds like a high price for the value you'd get out of it.

[AZRedhawk44]

The "no mortgage payment" part sounds fishy. If you aren't paying, you aren't... paying. With the higher interest, that means every time you exercise the "don't have a payment" option, you extend the repayment period. Only now, you've extended it at twice the interest which then compounds over time.

Let's take easy numbers.  $100K outstanding balance, and you make $10K a month.  You have $5K a month in expenses other than your mortgage.

Month 1:  $100K balance
Deposit $10K, you have a $90K balance
Pay bills, you have a $95K balance
Interest accrual on $95K takes you to $96K

Month 2:  $96K balance
Deposit $10K, you have $86K balance
Pay bills, you have $91K balance
Interest accrual on $91K takes you to $92K

So we do this, making $4K progress every month (unless we have an outlier month that sets us back... a need for major car repairs, deposit/financing a new car, home repairs, something like that).  Assuming none of those things, we have the $100K paid off in about 25 months.

This of course leaves us with $0 in the bank, but we do have our $100K line of credit against the house in the first place.  So we bank out of it for a couple more months until we have a positive account balance, and move on with life.  Either use the line of credit for other investments, or close it and move in a different direction and go back to traditional banking.

This happens with commercial real estate financing frequently.  It's less frequently used in residential/personal markets.

[HankB]

Instead of getting something that is maybe a bit on the dodgy side (especially with the higher interest) I'd look REAL hard at the cost/benefit of paying additional principal when I could in order to retire the current mortgage sooner.

[cordex]

If you already have a little bit of savings set aside, then why couldn't you just make the appropriate curtailments each month and keep your existing rate?

If you were starting off with zero savings, it would give you some flexibility.  If your pay was highly seasonal like a farmer, maybe that would make sense.  But in the example you gave, I don't see the value over just making the extra payments.

[Brad Johnson]

So it's essentially a HELOC by another name, only with your existing principal rolled into the net balance.

Tempting, but only if exercised with extreme financial prudence and rigid budget discipline.

There's still the question of HS Exemption, and that's a big, big issue.

Brad

[MechAg94]

So it's essentially a HELOC by another name, only with your existing principal rolled into the net balance.

Tempting, but only if exercised with extreme financial prudence and rigid budget discipline.

There's still the question of HS Exemption, and that's a big, big issue.

Brad

Or if you don't have rigid financial discipline, a good way to get into a lot of debt really fast.  And it would be rather easy to not pay attention and lose track of the amount of debt you owe. 

My current house was paid off after about 18 to 19 years.  I mostly just paid $100 over the monthly payment with a little more as the payoff point got closer.  That was mortgage only with me covering insurance and taxes separately. 

I tend to like doing things myself so I doubt I would be a good candidate for this.

[Ben]

Count me in the "just pay extra principle every month" camp.

[230RN]

Count me in the "just pay extra principle every month" camp.

Ditto.  I'm sure they make it sound good, but I get creeped out at the thought of concentrating all my risks in one place.  And how do they report to the credit bureaus?

I'm out of the picture since I've been renting at a senior citizen's apartment building for a good many years (which distributes some risks) but that concentrated liability thing makes my ears perk up like a dog's at anything unusual.