A "Nest-Egg" mortgage which combines the benefits of
a conventional home mortgage, a home equity loan, and an individual
retirement account ("IRA"), including a method and computer
system for operating and implementing same.
What is claimed is:
1. A method, implemented on a computer for implementing a nest
egg mortgage plan which comprises: determining an amount of mortgage
for which an applicant would qualify and a predetermined term of
repayment of principal therefor based on conventional lending practices;
creating an accelerated payment schedule for such mortgage so that
the principal is repaid within a shorter time than the predetermined
term of the mortgage; applying the difference between the accelerated
payments and nonaccelerated payments as a source of equity; providing
an equity loan against the source of equity; applying the loan to
generate an investment vehicle; and automatically computing the
amounts for each of the previously recited steps using a computer,
whereby amounts placed in the investment vehicle increase over the
term of the mortgage while the equity loan and mortgage principal
are repaid to by the end of the term of the mortgage, and wherein
said applying step further comprises automatically creating an investment
vehicle and automatically transferring amounts borrowed from said
loan into said investment vehicle.
2. The method of claim 1 wherein the accelerated payment schedule
is created by providing a bi-weekly mortgage payment plan.
3. The method of claim 1 wherein the equity loan is provided as
a home equity loan.
4. The method of claim 1 which further comprises selecting the
investment vehicle to be an individual retirement account, a savings
account, a securities investment account, an insurance policy, an
annuity, or combinations thereof.
5. The method of claim 1 which further comprises generating all
paperwork in connection with the mortgage plan before the mortgage
6. The method of claim 1 which further comprises utilizing a computer
means to operate and implement the mortgage plan.
7. The method of claim 1 which further comprises providing the
source of equity by applying the differences between the accelerated
payments and non-accelerated payments in the first few years of
the loan; and repaying the equity loan with the difference between
the accelerated payments and the non-accelerated payments in the
last few years of the loan.
8. A computer-based system for operating and implementing a nest
egg mortgage plan comprising: means for determining an amount of
mortgage for which an applicant would qualify and a term of repayment
of principal therefor based on conventional lending practices; means
for creating an accelerated payment schedule for such mortgage so
that the principal is repaid within a shorter time than the term
of the mortgage; means for applying the difference between the accelerated
payments and non-accelerated payments as a source of equity; means
for providing an equity loan against said source of equity; means
for applying said loan to generate an investment vehicle whereby
amounts placed in said investment vehicle increase over the term
of the mortgage while the equity loan and mortgage principal are
repaid by the end of the term of the mortgage and a computer operatively
associated with each of said previously recited means for automatically
determining amounts for operating and implementing the nest egg
mortgage plan, and wherein said means for applying further comprises
means for automatically creating an investment vehicle and means
for automatically transferring amounts borrowed from said loan into
said investment vehicle.
9. The system of claim 8 wherein the means for creating an accelerated
payment schedule is a bi-weekly mortgage payment plan.
10. The system of claim 8 wherein the equity loan is a home equity
11. The system of claim 8 wherein the investment vehicle is an
individual retirement account, a savings account, a securities investment
account, an insurance policy, an annuity, or combinations thereof.
12. The system of claim 8 further comprising computer means for
operating and implementing said system.
13. The system of claim 11 wherein the computer means automatically
provides the equity loan by applying the differences between the
accelerated payments and non-accelerated payments in the first few
years of the loan, and automatically repays the equity loan with
the difference between the accelerated payments and the non-accelerated
payments in the last few years of the loan.
The present invention relates to a new concept in home mortgages
that includes a growing, thriving, savings plan which provides savings
far beyond the equity created by conventional mortgages. This concept
includes the combination of the desirable features of a mortgage
loan, a home equity loan, and an ongoing savings plan, such as a
growing individual retirement account ("IRA"), all from
the same borrower.
BACKGROUND OF THE INVENTION
The economics and life styles of America are built on the backs
of its immigrants. From every corner of the world, waves of foreign
labor came seeking jobs, housing, and a taste of the good life.
For most, jobs were tough, life was tougher, and housing depended
on what they could afford to rent.
In a short generation or two, these people realized that drawers
full of rent receipts were not getting them their piece of the American
dream and that home ownership was the answer. The Great American
dream, became, in reality, the Great American Mortgage.
A traditional mortgage allows affordable monthly payments over
a long term, and enabled the mortgagee to build meaningful equity.
Combined with rising real-estate values and normal (or sometimes
abnormal) inflation, the mortgagee was able to amass a modicum of
For a long time, the success of America was based on population
growth leading to housing booms, leading to baby-booms (i.e., more
population growth), in turn leading to more housing booms--all of
which leads to more mortgages being issued by financial institutions.
Though interrupted by wars, the cycles of business, and the insecurity
of the stock-market and other investments, housing growth remains
as one of the most accurate measures of America's economic pulse.
There have been numerous kinds of mortgages used to facilitate
the financing of real property, but the most common provisions require
the borrower to pay equal periodic installments, which include an
interest payment and a principal payment, over a period of time
until the mortgage was paid. The premise of the agreement between
lender and borrower is based on a specific interest rate for a specific
number of payments over a specific term. This has been the backbone
of the home mortgage business until recently, when fluctuations
in the interest rates that banks pay, and the rates of their mortgage
loans, have caused the banks to suffer adverse consequences.
In attempting to solve this problem, the banks have instituted
the adjustable rate mortgage ("ARM") which permits the
rate, and therefore the borrower's payments, to fluctuate, usually
along with some other market instrument, to maintain the bank's
profitability. Unfortunately, ARMs may adversely affect the borrower
to the point that he cannot afford rising payments. In that situation,
the bank forecloses, the mortgagee loses the house, and nobody wins.
Recently, systems have been proposed to combine home mortgages
with other investment vehicles. One such system creates mortgage
plans based upon mortgages which are least partially collateralized
by investment vehicles (U.S. Pat. No. 4,876,648). Also, a personal
financial management system has been suggested which applies client
funds that would normally be used to amortize a mortgage to instead
increase the value of a designated asset account (U.S. Pat. No.
4,953,085). While these systems have merit, the mortgagee is relying
upon the investment vehicle or investment account to reimburse the
bank for all or at least a major portion of the amount borrowed
after a predetermined term.
The present invention provides an alternate plan to these newly
proposed systems, as well as to the ARMs or other conventional mortgages,
in a simpler, more reliable, mortgagee-attractive mortgage plan.
This system gives the bank greater income and a more certain outcome,
while also protecting the borrower from the unpredictability of
adjustable rates or investment conditions, and creating a vastly
larger equity over the period of the mortgage.
SUMMARY OF THE INVENTION
The present invention relates to a system and a method for operating
and implementing a nest egg mortgage plan which comprises determining
an amount of mortgage for which an applicant would qualify and a
predetermined term of repayment of principal therefor based on conventional
lending practices, creating an accelerated payment schedule for
such mortgage so that the principal is repaid within a shorter time
than the predetermined term of the mortgage, applying the difference
between the accelerated payments and non-accelerated payments as
a source of equity, providing an equity loan against the source
of equity, and applying the loan to generate an investment vehicle.
Thus, amounts placed in the investment vehicle increase in value
over the term of the mortgage while the equity loan and mortgage
principal are repaid to the lending institution by the end of the
term of the mortgage.
Preferably, the accelerated payment schedule is created by providing
a bi-weekly mortgage payment plan, and the equity loan is provided
as a home equity loan. The investment vehicle may be an individual
retirement account, a savings account, a securities investment account,
an insurance policy, an annuity, or combinations thereof. In this
system and method, all paperwork in connection with the mortgage
plan is generated before the mortgage is implemented, and computer
means is utilized to operate and implement the mortgage plan.
The system of the invention includes the respective means to carry
out the previously described method steps. Preferably the means
for creating an accelerated payment schedule is a bi-weekly mortgage
payment plan, and the equity loan and investment vehicle are as
The invention also relates to a nest egg mortgage comprising an
amount of mortgage principal, a predetermined term for repayment
of such principal, an accelerated payment schedule of repayment
of mortgage principal over a term which is shorter than the predetermined
term, an equity source created by the difference between the accelerated
payments and non-accelerated payments, an equity loan accessible
against the source of equity, and an investment vehicle for receiving
the equity loan. The investment vehicle increases over the predetermined
term of the mortgage while the equity loan and mortgage principal
are repaid by the end of the predetermined term of the mortgage.
Preferably, the accelerated payment schedule is a bi-weekly mortgage
payment plan, and the investment vehicle is an individual retirement
account, a savings account, a securities investment account, an
insurance policy, an annuity, or combinations thereof. Also, the
equity loan is a home equity loan which is made annually into the
investment vehicle. Finally, the predetermined term generally is
between 15 and 30 years.
BRIEF DESCRIPTION OF THE DRAWINGS
FIGS. 1-4 represent a schematic flow chart which describes the
data processing methodology and structure in accordance with the
DETAILED DESCRIPTION OF THE INVENTION
The present invention includes a very specific methodology for
projecting specific monthly payments over a specific term, while
also creating an automatically borrowable home equity loan, with
amounts borrowed therefrom automatically shunted into an investment
vehicle. Preferably, this investment vehicle will be an IRA so that
the mortgagor can receive maximum benefits under the tax laws. However,
this investment vehicle may also be an insurance policy, mutual
fund, stocks, bonds, etc., or a combination thereof, depending on
the homeowner's option. Also, any of the currently known types of
insurance policies may be utilized herein as the investment vehicle.
For the purpose of illustration, an IRA investment vehicle will
be discussed herein.
The capital needed to fund the IRA can come from either of the
following sources: additional payments (i.e., required prepayments)
of the mortgage, or amounts borrowed from a home equity loan based
on the equity in the home or the equity created by repayment of
the mortgage principal. In addition, this source can combined with
greater benefits to the mortgagee.
A most preferred system for making required prepayments of the
mortgage is the so-called "bi-weekly" mortgage. This mortgage
requires the payment of one-half the amount of a conventional amortized
mortgage payment every other week. For example, assuming a conventional
mortgage payment of $1200 per month, twelve times per year, the
bi-weekly mortgage payment would be $600, paid every two weeks.
This creates two extra payments (equal to one extra conventional
mortgage monthly payment) each year. Over a 15 year loan on a $100,000
mortgage at 10% interest rate, for example, these extra payments
amount to about $18,000. This amount is used to reduce principal
of the mortgage, so that the bi-weekly payment pays down the mortgage
in just over 12 years, rather than 15.
Instead of completing the mortgage payments in the twelve year
period, however, the system of the present invention requires that
the mortgagee continue to make bi-weekly payments for the full term
of the loan, i.e., 15 years as in the previous examples, as will
be further explained below.
The additional payments each year allow an equity to be built up
due to the faster repayment of principal of the mortgage. This equity
then can serve as the basis of a home equity loan from which an
amount may be borrowed annually by the mortgagee and placed in a
savings vehicle, such as an IRA.
The benefits of the present system are that, after the complete
term of the mortgage is completed:
1. the mortgage is paid;
2. the home equity loan is paid; and
3. a sizable nest-egg, over and above the mortgage property has
been created and is available to the homeowner in an IRA account.
The bank or lender is much more profitable with this system than
with a convention mortgage. In addition to the interest and amortization
of the mortgage, the lending institution receives the home equity
loan interest and amortization plus income from use of the mortgagee's
IRA funds which are deposited with the lending institution.
The benefits to the homeowner include:
1. Automatic integration of features.
2. Maximum tax savings.
3. Low-cost IRA savings.
4. Largest accumulation of wealth.
5. The bi-weekly payment feature.
6. Forced savings into IRA account.
7. Provides an equity source for family emergencies.
8. Potential for adding on features for additional financial opportunities.
These savings created by automatic integration of computer projected
benefits. All elements of the mortgage function causatively and
automatically: The bi-weekly mortgage payment automatically causes
a home equity loan to be created after the first year of payments.
This requires no further agreements, paperwork, applications, appraisals
or legal fees. Moreover, the home equity loan, in turn, automatically
causes an IRA to be created without new application or paperwork.
All of the mechanics are included in the original mortgage loan
In conventional mortgages, the mortgagee must cover such expenses
at closing as mortgage tax, points, legal fees, etc., and this can
amount to approximately $5,000 (on a $100,000 loan). Similar costs
are also incurred if the mortgagee opts for a home equity loan at
a later date. Therefore, this automatic procedure at mortgage origination
saves such similar costs (i.e., approximately $5,000 for this example).
Maximum tax savings are achieved by combining two types of loans
that the Federal Tax Regulations consider tax-deductible: home mortgages
and home equity loans. Thus, the mortgagee enjoys maximum tax deductibility
on his returns.
FIGS. 1-4 represent a schematic flow chart describing the data
processing methodology and structure in accordance with the principles
of the invention. This methodology is used to generate a monthly
report of the balances of the various accounts maintained during
the course of a 15 year mortgage.
In box 1 of FIG. 1, the following program variables are initialized:
PV: Present Value of Mortgage; initialized to the mortgage amount
PAYMENT: Set to monthly payment needed to service mortgagee's principal
and interest payment according to conventional 15 year payback plan.
SAVINGS: Set to amount to borrow from home equity account each
year for funding IRA account.
LOAN: Current amount in home equity loan; initialized to 0.
IRA: Current amount in IRA account; initialized to 0.
YEAR: Year of mortgage; initialized to 1.
Test 2 represents the outer loop of the Nest-Egg Mortgage calculation
procedure. The YEAR variable is tested to determine if it is greater
than 15. If so, the Nest-Egg Mortgage has been completed, and the
procedure is exited.
If the Year is less than 15, test 4 is used to determine if the
present value of the mortgage is greater than 0; i.e. if the primary
mortgage has not yet been satisfied. If not, an amortization table
for the next 12 months is generated in box 6. If full payment of
the primary mortgage has been made, PV is then set to zero in box
The Nest-Egg algorithm now calls for a month by month analysis
to begin. The variables used in this month by month analysis are
initialized in box 7. They are:
TOT INT: Total Interest This Year: Initialized to 0.
Tax Deductible Interest This Year: Initialized to 0.
MONTH: Initialized to 1.
Entry point B on the flow chart of FIG. 2 represents the top of
the inner loop; i.e., a month by month analysis using the algorithm.
Test 9 is used to see if the MONTH variable is greater than 12.
If it is, one is added to the YEAR variable in box 10, and control
is transferred to Entry Point A of FIG. 1.
If not, test 11 checks if PV is greater than 0; i.e., is there
more to pay on the primary mortgage. If not, the variable PAYMENT,
representing the monthly principal and interest payment is added
to the EQUITY variable in box 12. If there is additional amounts
to pay on the variable, this month's principal is deducted from
the PV variable, and this month's interest is added to the TOT INT
variable, all in box 13. Common flow is rejoined at box 14, where
the LOAN (Home Equity Loan) variable is adjusted to include the
interest accrued in the last month. This interest is also added
to the TOT INT variable in box 16. In box 17, the interest accrued
on the IRA account over the last month is added onto the IRA balance.
In test 17, the MONTH and YEAR variables are tested to determine
if it is the first month of a new mortgage year, and if it is at
least one full year into the mortgage. If yes, test 18 checks to
see if PV is greater than zero; i.e., has the primary mortgage been
satisfied or not. If PV was greater than zero, the monthly payment
stored in PAYMENT is subtracted from the PV variable in box 19.
The PAYMENT is then to added to the EQUITY variable in box 20.
Control from the no output of test 17 is rejoined at test 21, where
it is checked to determine if it is the first month of a new mortgage
year, and it is at least one full year into the mortgage, and it
is not the last year of the mortgage. If all of these conditions
are met, control is transferred to Entry Point D.
At test 22, the EQUITY variable is checked to see if it is greater
than the SAVINGS variable. If it is, the amount to transfer into
the IRA each year stored in SAVINGS is added to the current LOAN
balance and to the current IRA balance in box 23.
Control is rejoined at Entry Point D prior to test 24, where the
PV variable is checked to see if it is greater than zero; i.e. has
the primary mortgage been satisfied. This is shown in FIG. 4. If
the answer to this is yes, control is transferred past boxes 25,
26 and 27 to box 28. If the answer was no, indicating that more
payments were to be made against the primary mortgage, the servicing
of the home equity loan takes place. In box 25, the available equity
is calculated by deducting the purchase price of the house from
the current contents of the EQUITY variable. IN box 26, the LOAN
balance is then adjusted by deducting the amount previously calculated
as the available equity. The EQUITY variable is then adjusted by
subtracting the available equity to return the EQUITY variable to
be equal to the original purchase price of the house.
Control is rejoined at box 28, where the monthly summary is printed.
The month is incremented by one in box 29, and control is transferred
to Entry Point B at the completion of this month's processing.
Next to the property and home, the IRA account can be the largest
creator of wealth most Americans will ever achieve. It accumulates
tax-free (deferred) income over a long term for the length of the
mortgage. Even after the pay-back of the equity loan, the size of
the accumulated IRA is surprising: for a 15 year "Nest-Egg"
mortgage in accordance with the present invention, amounts accumulated
in an IRA would be as follows:
______________________________________ Size of Mortgage IRA ______________________________________
$100,000 $24,443.96 $125,000 30,561.50 $150,000 36,706,02 $200,000
48,968.05 $250,000 61,203.25 ______________________________________
*Assumptions: mortgage interest rate: 10% home equity loan interest
rate: 11.5% IRA tax deferred interest rate: 8.5%
Over 70% of all Americans are still eligible to deduct IRA donations
from taxable income. Added to the tax-deductions taken on the mortgage
and home equity loans from which the IRA money is generated, the
homeowner achieves maximum possible savings on his IRA.
Thus, the IRA account (or other investment savings or life insurance,
etc.) provides for financial independence at retirement. This "Nest-Egg"
is basically what the average home-buyer seeks to achieve when he
takes on a mortgage. However, the forced savings inherent in the
present Nest-Egg mortgage enhances this purpose, creating a second
Nest-Egg after the home. A simple way to look at the end result
is that the present Nest-Egg mortgage is a 25% enhancement policy:
it creates a Nest-Egg of at least 25% again as large as the original
Of course, should the home owner already have an IRA through his
place of employment, then, considering the $2000 IRA limitation,
the funds created by the Nest-Egg mortgage may be used in another
financial vehicle, such as life insurance, annuities, stock investment,
etc., or in combinations of the above, with automatic cost averaging.
Assuming the mortgagee already has an IRA at his work-place, he
may opt at the mortgage origination to create a mortgage insurance
policy, so should he die while the mortgage is still running, the
family might retain the home, or, since it would be "mortgaged-out",
sell it at full market value. The mortgagee may instead opt to convert
his savings to any other form of savings vehicle at any time while
the mortgage is in force, without disturbing the prescribed payments.
The Nest-Egg mortgage, by virtue of its automatic savings program,
thus provides the family available cash in case of: accident, loss
of employment, health emergency, natural disaster, education funding,
etc., which enhances family stability and household integrity. This
system is also consistent with national societal objectives endorsed
by Congress in providing tax-shelters to home ownership and retirement