Mortgage Relief System: Does it Work?

November 3, 2003, February 24, 2004 Postscript

"I am enclosing a pamphlet I just paid $45 for called Mortgage Relief System. It promises that if I follow the scheme outlined, my mortgage will be paid down in a fraction of the time it would take ordinarily. The methodology looks plausible to me, but I would like your opinion."

Well, it is neither illegal nor absurdly illogical, which is more than can be said for most of the quick-repayment schemes I come across.

Under this scheme, you establish a line of credit, which you use in part to pay down your mortgage. You fund most current expenses with a credit card that has an interest free grace period. Your paycheck is used to pay down the credit line, and to pay off the credit card when due. Current savings (income that is not spent) are also used to pay down the credit line.

The idea is that instead of leaving your money in the bank earning 1% or less until month-end, when it is used to repay the 6% mortgage, you borrow on a home equity line at 4% and use it to pay down the balance of the mortgage immediately. By using your paycheck when it is received to pay down the 4% line, and by taking advantage of the grace period on credit cards (30 to 50 days), you minimize the amount kept in the bank.

It sounded plausible, but I was skeptical. In the first place, nothing is said about the interest rate on the credit line, which is not always going to be below the rate on the mortgage. My gut told me the scheme couldn’t possibly work if the credit line rate was higher. Furthermore, you can take advantage of the grace period on credit cards without tying it to a mortgage. I have been doing it for 40 years.

In addition, I had the feeling that customers of Mortgage Relief should have gotten a spreadsheet for their $45, and wondered why they hadn’t? So I set out to develop a spreadsheet of my own that could quantify the benefits – if there were any.

The major question I wanted the spreadsheet to answer was, how large is the benefit of using the Mortgage Relief scheme if you don’t have any surplus income but only just enough to make the scheduled payment? This is the critical question because we know that if you use surplus income to make extra payments to principal, you pay down the mortgage more quickly. This is so whether you apply the income directly to the mortgage, as most borrowers do, or whether you follow the Mortgage Relief procedure where you use a credit line to pay down the mortgage and current income to pay down the credit line.

I spent much of my air time between Philadelphia and San Francisco on this project, and finally gave it up. Once I removed surplus income from the equation, I could not find a way to make the Mortgage Relief scheme work.

I could be wrong. If the proponents of the scheme can develop a worksheet that will show a benefit from other than the application of surplus income, I will publicly apologize and send them lots of business.

February 24, 2004 Postscript. As far as I can tell, the Tardus system works the same way (see www.tardus.com). I registered with them so I could use their calculator, which quantifies the benefit from the system when you tell it about your mortgage, income, non-debt related expenses, and other debt. The savings are very substantial when there is a large spread between income and the sum of mortgage payment and expenses. When that spread shrinks, so do the savings, indicating that what primarily drives the system is the application of surplus income to pay down mortgage debt. In contrast to the $45 paid for Mortgage Relief System, however, Tardus charges $3500 or 1% of the loan, whichever is larger.