Our exclusive interview with Dan Hultquist: Part 2 Join us for part two of our exclusive interview with Dan Hultquist as we discuss when the debt snowball and avalanche strategies don’t work, how to create a debt avalanche with a reverse mortgage, the advantages of a HECM line of credit, and the tools our industry needs to effectively illustrate a HECM Debt Consolidation.
Shannon Hicks
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
1 Comment
There can be great value to the HECM consolidation solution in that it eliminates the debts that are paid off; however, total debt is not decreased but in fact increased by the upfront costs of a HECM. That seems to be what those who only carry a hammer (explained later) wanted to hear from me.
Correct me but last I checked, there are more than a few people who have financial problems who are not even half the age of 62. Some of our own originators, processors, underwriters, (captive and independent) trainers, and other reverse mortgage personnel who are not yet even close to be being 62 years old may need financial help. Knowing the “snow” strategies can be very useful to them as it can be for those over 62 who either do not want or need a reverse mortgage (the other 99% of seniors). I realize that some with hammers (reverse mortgage only promoters) see screws as something that need a good whack but not everything like screws are nails.
Most people have never learned the cash flow approach to paying off debt which I will illustrate with a specific example. You only have three debts, 1) a credit card with a unpaid balance of $5,000 with a 24% interest rate and a payment of $175 owe per month, 2) a car loan of $375 per month with an unpaid balance of $2,000 with a 7% rate and 3) a personal loan from your college of $500 at a 12% interest rate but a payment of just $20 per month. Then you receive an expected bonus from work with a net payment to you of $1,700, to which loan or loans would you apply this money, if that is the best use of this bonus?
Let us look at the snowball approach first. How long will it take to pay off these debts starting with the lowest balances first? In each approach, we will assume the payment on each debt paid off will be used to pay off the next debt in that strategy and for nothing else. Further let us assume that the borrower has sufficient cash flow to make the same $175 payment on the credit card debt and does not reduce it to match the minimum required payment as it goes down over time.
The snowball approach will result in the payoff of the school debt immediately with the car loan unpaid balance going down to $800 but there is now $395 (includes the $20 associated with the school debt before payoff) to pay down the car loan each month rather than just $375. The car loan will be paid off in a little over 2 months (which we will assume will be just 2 months). With $570 to pay down pay down the credit card balance each month, it will take an additional 9.4 months to pay off the credit card for a total of 11.4 months (really 12 months with a partial payment in the 12th month).
Let us look at the snow avalanche method. After using the net bonus to pay down the credit card debt to $3,300, there is no increase in payments from debt being paid off. The car loan is paid off in about 5 months so that available cash flow increases by $375 per month which can be used to pay down the credit card debt, making that payoff. With a payment of $550 per month, it will take another 5.3 months to pay off the credit card debt with the school debt paid in full by the end of the 11th month, a little less time and cost than the snow ball method.
As to the cash flow method, debt with highest payment to debt is generally paid down first. The percentage of payment to unpaid balance on each debt is as follows: 1) for the school debt — 2.5%, 2) for the car debt — 18.75%, and 3) for the credit card debt — 3.5%. Under this method, the highest percentage of debt payment to the unpaid balance of the related debt is paid off first. In this case that is the car loan; the bonus pays that debt down to $300. That means the payment for the first month on the credit card debt is $250 (an increase of $75 in cash flow that month) and the next month the payment rises to $550 and continuing in that amount until the credit card is paid off. The car loan is paid off in 10.8 months and the school debt in about 11.3 months (again really 12 months ending in a slightly lower partial payment than under the snowball method).
So why consider the cash flow method over the other two? The answer is easy. The cash flow method can provide the greatest amount of additional cash flow per month for the longest period of time. For example, under the snowball approach cash flow is only $20 better for the first two months than it was in the past. Then for the next 9 months, it was $395 better.
With the snow avalanche method, the payoff was quicker but the cash flow did not increase for 5 months. Then it rose by $375 per month for the next 5 months finally increasing to part of the $550 coming from both the payoff of the car loan and the credit cards in the 11th month which was sufficient to pay off the remaining school debt also in the 11th month.
Back in the later 1980s, I was carrying a lot of mid-term debt due to buying increasing interests in my CPA partnership. The debt payment squeeze was very strong and there was little “free cash” despite guaranteed payments along with high profit distributions coming in. To give my wife peace of mind in relationship to the cash needs of raising two small children, I used the “cash flow” concept of paying down the debt to allow her some breathing room. As demonstrated on a very small scale above, it worked much better in providing needed cash flow than either “snow” method would have. What most people do not realize is that profit distributions may more than pay for debt servicing, BUT then comes trying to pay the income tax on those distributions. Yeah, there were months when the debt payoff increased cash flow had to be used for healthcare for the boys and other unexpected life events but at least we had the needed cash despite what using that cash flow meant in increasing the period until total payoff and its related cost. As you can see this method is based on personal experience.