Hi everybody. It has been a couple of days, and I am finally getting around to finishing this post on the HOA and how it works. Thanks for being patient. I have had a lot of commments with regard to my first two posts so it is important that this gets posted as quickly as possible. Thanks for your input!
The truth of the matter is that the HOA product works by using your own money. That is where all the control comes in. Let's take a real life example and follow the flow of money through the loan.
In February 08 I closed an HOA loan for a young couple wh0 borrowed about $227,000 and had a net income of approximately $8,000.00 per month. In addition they had savings pattern of about 8% per month and had very little credit card and installment debt. Now, keep your eye on the mortgage balance.
When the loan is closed your mortgage account becomes your checking account. In the case above the couple received approximately $4000.00 semi monthly. On the first of the month $4000.00 is directly deposited to the mortgage/checking account. The $227,000.00 now becomes $223,000 and your interest is calculated dailey on the lesser amount. Remember, your mortgage account and checking account are the same so you still have access to the $4000.00 you just deposited and by which you reduced your mortgage balance. The money stays in the account for 10 days and you now decide that you must pay some bills and write checks for $3000.00. Your balance is changed to $226,000 and your interest is calculated dailey on that amount.
On the 15th of the month your paychecks are again directly deposited to your account and now your balance is reduced to $222,000.00 and this is the amount on which your dailey interest is calculated. On the 25th of the month you again write checks for $3000.00 and get some spending money for you and our family with your debit card. Your balance pops back up to $225,000 and on the 1st of the next month your paychecks are deposited directly to the checking/mortgage account. The cycle starts all over again and is essentially duplicated until the loan is paid off.
Let's examine what you have accomlished with this process. First, the money you did spend each month stayed in your checking/mortgage account before it was spent and kept your balance low, reducing, interest cost and allowing more money to be applied to principle. Second the money left over at the end of the month reduces your interest cost by showing up the next month in the form of a lower principle balance.
By reducing interest costs and allowing principle to be paid even in just small amounts will greatly reduce the term of your loan and in some cases by as much as 15 and 20 years. Reducing the term reduces the total interest cost if you remember the example of the trianlge that I used in last weeks blog..........and it is all done without refinancing ever because you are using your own M O N E Y!
At the outset of this post I stated this was a real life example. I spoke to the client just yesterday. Tonia told me they had paid down their principle balance by $50,000 in just two years. Two years and a reduction of $50,000 pretty freaking awesome. Others have had the same success and at this pace they will be mortgage debt free within just 6 or 7 years............. and they still have access to the $227,000 they originally borrowed for the next 24 years or until they close the account. They have just changed their banking relationship to the bank of ME.
I hope I have made this clear and you can follow, but if you can't here is a link that will explain the HOA process in a five minute video presentation. http://www.hoamovie.com/
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