Money Merge Accounts

I got a call from a client of mine, and later that same day received an email from a company called United First Financial, regarding something called a Money Merge Account. The commissions that United First offered to pay me (as a mortgage professional) to sell their program to my client base was quite handsome. My customer indicated that she had been told by another lender that she could sign up for this very program, and that it would pay off her mortgage in 8-10 years. Even better, she was told that it would not affect in the least her current standard of living. She had a concern about the $3500 outlay required and asked if I knew anything about it. Feeling like it was no mere coincidence that I was simultaneously emailed by the very vendor of this “amazing” new product, I decided to go along for the ride and see what this was all about.

Well the long story short is about what I expected. There is no way on earth to pay off you mortgage in 8-10 years without sending in extra payments. But I will give United First credit in that the program they offer is a unique tool. If used as directed, it creates a discipline in the consumer such that they spend ALL their disposable income toward paying down their mortgage. In fact, they do offer a nice looking software program on-line that recalculates the remaining terms of your loan, and interest saved to date, etc. with each additional early payment the consumer makes. On the other hand they promote the use of a home equity line of credit (HELOC), as if it were your primary checking account, in conjunction with the program. I am not sure why the HELOC is needed in this scheme, other than for the affect of creating the need for their on-line software, to manage the movements of money in and out of that account. What they fail to mention is that this HELOC actually adds unnecessary interest charge to the whole affair, which is counter productive to the affect any consumer would want to achieve by making early payments to begin with. And then of course there is that $3500 up front charge to consider.

For example, if you go through their presentation they use the example of a consumer with a $200,000 loan. In the example the consumer has $5000/mo in net income and expenses of $4000/mo., which leaves $1000/mo. in disposable income. The interest rate used in the example is 6%, so our consumer has a payment of $1199.10/mo. (which is part of the $4000/mo. they currently spend). Now if you use their program in this example, the loan will pay off in just 10.41 years. That’s great right? But if the same person had just taken the extra $1000/mo. and sent it in without using the fancy program, they would have paid off their loan in 10.13 years. The difference is entirely owing to the extra interest charge created by the use of the HELOC in the manner they prescribe.

In the end I am reminded of the “bi-weekly” pay plan that lenders used to sell like it was a magic trick. Likewise back then there were stand alone companies that would “administer” the payment plan for a large up front fee. But consumers soon discovered that the plan merely generated one extra payment a year towards principal (something they could do by themselves), and that is what caused their 30 year loan to pay-off in just 22 years. Today you can get a bi-weekly payment set up with any mortgage company for a small set up fee of $100-300.  Now I am a big fan of making extra payments to your mortgage whenever you can. If you need help with discipline then just take a 10 year fixed rate mortgage in the first place, and then you won’t have that nagging $1000/mo. in disposable income left each month. I won’t even charge the extra $3500 for solving your problem. But I would strongly disagree with the notion that there will be no change to your standard of living as a result.

For expert advice on this or any other aspect of home finance, call the professional. Dan Smith can be reached at 303-674-0201 or visit him on the web at www.ColoradoHomeLoans.com anytime!