A generation ago, more than half of all homeowners in the U.S. owned their
houses outright, with no mortgage payments. Today, that number is less than
one-third, and falling.
The culprit has been the propensity of homeowners to refinance their
mortgages multiple times, which extends the term of the loan and interest paid
on it. And that interest is a killer, even without re-fi's: For a 30-year,
fixed-rate mortgage with 6 percent interest on a $250,000 loan, the owner ends
up paying $539,598.47, of which $289,595.47 is interest that accounts for the
bulk of the payments in the first 22 years of the loan.
But if an owner were systematically paying down more of the principal in the
early years the loan, the term and total amount of the payout could be reduced
significantly. That's the simplified premise behind SMARTEquity, a
software program devised by Canadian company ComCorp Communications that is now
being offered in the U.S. through a partnership with the Washington, D.C.–based
National Organization of
American Homeowners (NOAH).
"What we have to do is get people out of this re-fi mindset,” says John
Walsh, NOAH's founder and chairman. Walsh thinks the best way to get homeowners
thinking about this is during the buying stage, and NOAH recently started
pitching SMARTEquity to builders as a free incentive they could give to buyers,
like a granite countertop. "If we could get 1,000 builders to offer this to 50
buyers each, by this time next year this program would be viral.” NOAH's
optimistic goal, he says, is to have 70 percent of all homeowners mortgage-free
within 10 years.
Cash flow systems such as SMARTEquity have been popular in Australia and
Great Britain for decades. ComCorp Communications, a real estate investment firm
based in Ottawa, Ontario, developed SMARTEquity about five years ago, and more
than 5,000 Canadian homeowners have used it, says its president and CEO Mark
The key to the system is what's known as a "sweep account.” Here's
how it works: Let's say a homeowner borrows $250,000 to purchase a house
with a 30-year, fixed-rate, 6 percent loan. He establishes a separate line of
credit or savings account, from which he draws $2,500 per month and applies that
amount to the mortgage principal. By doing so, the total mortgage loan is
recalculated and the owner saves himself more than $12,000 in future interest
payments. The owner uses the line of credit like a checking account into which
he deposits his monthly income and pays bills. The owner is able to zero out
this credit line in eight months and pays only $66.52 interest on it.
By repeating this process over the course of the mortgage, the owner would
retire his house loan in 16 years and reduce the total interest paid by more
than $100,000. The interest on the line of credit, on the other hand, would be
For builders, the "high perceived value” of SMARTEquity as a buyer incentive
could lead to more referrals, says Montserin. And builders buying in bulk could
lower the software's $1,600-per-user cost to under $1,000, he says.
When asked why homeowners need the software, Montserin asserts "the short
answer is: systems work.” To make his point, he notes that while most overweight
people know they should eat less and exercise more, few do without following
some kind of regimen. The same is true about mortgage reductions. Only 3 percent
of people now actually pay down their principal, "and if you don't have a system
the chances for success are slim to none that you will.”