Above is a video of a news report of the how this loan product works. It basically works like this. Someone offers to show you a special mortgage calculator to help you pay off your loan quicker. The catch you have to pay them something like $3500. You then put your paycheck into a home equity line of credit instead of a checking account.
According to some banks, this "Money Merge Account" will pay off your mortgage in 1/3 of the time.
For example, The Money Merge Account program uses an advanced equity line of credit as a vehicle or a tool to drive the program. The equity line of credit must have the capacity to operate similarly to a primary checking account and be set up with an open-end interest calculation (rather than a closed-end interest calculation). Combined with the Money Merge Account's web-based system, this creates a formula in which the money in your line of credit account generates an interest cancellation on your primary mortgage.
The online Money Merge Account system makes a connection between your bank account, the advanced line of credit, and your primary mortgage. Each time you deposit income into your account, it registers as a decrease to your mortgage balance. By decreasing your mortgage balance, you now lower the balance on which interest accrues. By decreasing the balance on which interest accrues, you increase the portion of your monthly payment which is credited toward your principal pay down. The algorithms in the proprietary Money Merge Account system are systematically programmed to create the highest interest savings possible in the least amount of time.
Deposit your paycheck into your current checking and/or savings account. As soon as the funds clear, the amount you designate is transferred from your checking and/or savings account into your Money Merge Account managed line of credit. Because the line of credit is connected to your home, the money transferred from your checking and/or savings accounts decreases your mortgage balance, thus reducing the balance in which interest builds.
- as quoted from a banks website that doesn't want to be named
OK, I have so many problems with this.
First and foremost as momma pointed out, forget the calculator and just pay the $3500 to your mortgage and get rid of the interest.
Second (according to some bloggers), it calls for a second loan (home equity line of credit) moving one debt to another. A loan which, like a checking account you can draw against to. Sure a person could only put all extra cash into the account and not draw against it, however how many will.
Third (according to one banks website), The MMA is an online account system that incorporates your checking and savings accounts with an advanced line of credit (ALOC). Through this program, homeowners have the ability to pay off their 30-year mortgage in as little as one-third of the time, without refinancing their existing mortgage loan or increasing minimum monthly payments. If you believe this crap that the MMA people want you to, then I have a bridge in Brooklyn that I would like to sell you.
Thanks to Momma and the Boys on a Budget for the heads up on this one.
****UPDATE****
Dave Ramsey says MMA's are a good idea, but it's not $3,000 to $5,000 good. He said that it forces you to live below your means and pay the extra to your mortgage. But a budget does the same thing, and it's free. While he applauds the fact that it helps people get out of debt, he said you would be better served to just learn to budget your money and do it yourself for free.
The simple fact is, if you get control of your spending and spend less then you make, you can do this without spending the cash for the "special calculator." Which means you will save even more on your mortgage (or any other loan you apply this concept to).
To do this for free simply pay all your discretionary cash towards your mortgage. Pay these funds and your regular mortgage payment every payday. With all the extra funds going towards the loan, along with the more frequent payments you will have the mortgage (or whatever loan) paid off much quicker.
You are correct that a large portion of the benefit of the MMA program is driven by the discretionary income being applied to pay down the mortgage balance. You are also correct that the other key factor is focusing on how you spend your money relative to a set plan or budget. The advantages of using the MMA program are three fold:
ReplyDelete1) Most people do not keep a budget for their personal income and expenses. The desire to retire a long term mortgage in much less time provides the motivation to focus on and track their spending habits, and to make better future decisions. The program easily reflects the benefits or downside of your spending decisions, effectively providing a "mirror" for you to see yourself as you make choices about your finances. The program immediately recalculates the potential effect on your plan to pay off your mortgage early, but provides the flexibility to adjust as your situation changes. You are not a slave to the system, it motivates you, but you set the pace that works for your situation at the time.
2) Making additional principal payments towards your mortgage certainly shortens the life of a loan, but using the MMA system maximizes the ability to use all of your on-hand cash to minimize your interest costs, and allow a larger portion of the payments you are already making to go towards principal. Trying to plan, schedule and track all of your income and expenditures to recreate this increased benefit by hand is difficult even with the best of intentions, and will not be maintained for long by the majority of people.
3) The $3,500 cost of the system is not paid out of your pocket, but is the initial withdrawal from the line of credit. The program examples do take this into account and your significant savings are after this expense. The benefits detailed in item (2) above are multiples of this cost and cannot be matched by simply plunking down the cash towards your 1st mortgage, especially since you probably don't have the cash available to do it. The marketers of the program call this $3,500 an "investment", which may sound self-serving, but you are in fact investing your time and money in a worthwhile effort to get a handle on your financial situation and reach admirable goals.
By now you've surely decided that I work for the company. I DO NOT. I do have my bachelor's degree in Finance and an MBA, and have recently been researching various "early payoff" methods and programs. The math behind the programs are not magic, just complex when seeking the maximum benefit and allowing for flexibility. The key the MMA program provides is a user friendly tool for the average person, which motivates but does not intimidate, is tailored to their specific situation, and is something they will continue to use throughout the process. It's the supportive coach that sets a goal, says "You can do it!" and you want to prove him right. In this case it's called behavioral economics, which basically says that if you SEE YOURSELF making smart financial decisions, you'll be more motivated to do it again, and be able to reach your ultimate goal.
Bob -
ReplyDeleteI have to disagree with you. This is a bad loan product. It can be done for free and paying someone else to do what you can do for free is not sound financial advice.
Of course I think ALL loans are bad products. However, another product many banks do is also a bad product for the consumer, who can do it for free.
That is the practice that many banks have of setting a consumer up on loan payments every payday (instead of monthly) then charging a fee of $4, $5 or more per month. That is basically the same thing as these new MMA's except that product only focuses on reducing the interest and doesn't increase your actual monthly payment (unlike the MMA). However, they both charge a consumer for what they can do for fee.
Secondly, I have a problem with borrowing more money (home equity) for the MMA, especially because it is open ended, but also because I oppose loans. A smart consumer will save their money and pay cash for everything.