The Jan 8, 2008 Wall Street Journal (Section C1) talks about the Bank’s CD Price War. Since the FED has lowered the federal-funds target rate to 4.25% some banks have followed the FED’s lead and lowered rates paid to depositors, but other banks and financial institutions like Countrywide Financial Corp. and E*Trade Financial Corp. are in need of deposits to fund loans and build up their capital levels. Why? It’s because these institutions have set aside billions of dollars to cover loans that have gone bad due to existing foreclosures and the expectation of foreclosures to come. So they need more deposits to keep the financial wheels rolling. To attract deposits from savers they offer higher interest rates on bank accounts and Certificates of Deposit (CD’s) so consumers who are savers can now earn 5% on one-year CD’s and 4% on bank accounts at Charles Schwab. The article warns that banks are collecting less interest on loans because of the FED’s rate reductions, but if they are paying more to attract deposits, the banks will be in a profit squeeze.
GMAC, as a large player in the subprime mortgage market certainly has also been affected by the need to cover bad loans. But, GMAC Bank in partnership with CMG Financial almost three years ago did something innovative that can offer homeowners who are savers a very special benefit above and beyond a slightly higher interest rate on deposits. These two financial innovators partnered to introduce to the US market a home equity line of credit with an attached full service bank account, called the Home Ownership Accelerator. Consumers think of HELOC’s as being in the same position as a second mortgage, not a first mortgage. So HELOC’s are thought to be 15-25% of the value of a home. But the Home Ownership Accelerator is a first position HELOC and the line of credit can be up to 80% of the value of the home. This allows for the HOA to be a financial power tool for savvy homeowners. They earn interest on their bank deposits at the level of their mortgage, typically 6-8%, much higher than what other banks are offering. And since the bank account and the line of credit are combined, any deposits essentially reduce the amount of the line of credit borrowed and so reduce the interest paid. For a homeowner who is a saver, this can result in paying off the home loan in half the time and reducing interest expense by hundreds of thousands of dollars. The HOA more efficiently rewards savings than the tax law subsidizes interest expense. Home loan interest expense is calculated monthly, but interest paid on deposits is compounded daily so deposited dollars compound faster than interest expense dollars. Also, instead of paying income tax on interest earned from bank deposits and CD’s those dollars instead simply reduce the loan balance and thus are not taxed twice like other investment returns. Naturally the home owner still gets the benefit of income tax deductions on whatever interest is paid, but think of the hundreds of thousands of dollars not paid in interest expense that can be invested.
Savers who are also homeowners with a mortgage should look into the HOA financial power tool to see how much they can benefit. Ask to be shown the HOA simulator at www.cmghome.com
Chosen Cheng
CMG Mortgage Services
408 802-0658
ccheng@cmgcobblestone.com
