Disclosure : This might be slightly longer than usual. But in order to get this posts full potential, you need to read it all.
In a down market, you will see more lenders come out with gimmicks
telling you that they can pay your house down in half the time. They
will use such terms as wealth builder, mortgage accelerator, debt elimination, and money merge account
programs. People advertising these types of programs tell you, "don't
let lenders steal your money". That you will be saving thousands of
dollars in interest. But is there a catch? Let's investigate this some
The number one component that drives the money merge account is discretionary income. This is not the only component, but the most important. As long as the client has enough discretionary income, they can then make this program work for them. Discretionary income can be also known as disposable income.
There are two types of these so-called money merge accounts out on today's market.
- The Australian Mortgage in which Kate Bourland wrote about. This program is sold by CMG mortgage services and is a first lien HELOC. I still don't know what the costs are associated to this, but I would assume it will still come with some of the traditional closing costs because mortgage brokers will be selling this and that would be their only form of income from this program.
- The money merge account by United First Financial. I had the pleasure of sitting with 2 representatives from this company. This program is a HELOC in the 2nd lien position. What's nice about this program is that it will not affect your current mortgage. Especially if you have a lower rate. But this program would cost you $3,500 in order to obtain the software.
The major positive is that this works very well if you have a lot of outstanding debt when it comes to high interest credit cards. Sure, if could work with other things such as car loans and student loans. The bottom line is reducing your debt load and your monthly payments. What I truly dislike about this program is that so many lenders are advertising it as a program that reduces your compound interest. And such advertisements as this : "The average MMA customer will pay their 30-year mortgage off 100% within 8 to 11 years—with little change to their day-to-day spending habits and without increasing their monthly mortgage payments." Sorry, but this statement is extremely misleading and I will explain why.
How these programs work : First off, why are these statements misleading? UFirst uses an example of discretionary income of $1,000 per month. Sure, that sounds like a lot and it will work with any number above zero. But what they are saying is if you keep $1,000 a month extra in your account, that it will pay your mortgage of $200,000 with a 6% rate off in 10.4 years. Wow, that sounds awesome. You can save $161,236 in interest. But didn't they say, "without increasing your monthly payments?" The average American doesn't have more than $1,200 in the checking or savings account.
So, let me play devils advocate, the true money geek that I am. We all know that a 30 yr mortgage takes about 17 to 19 years before you start paying 50% interest and 50% principle. That is such a long time. But you can do the same thing yourself that these programs offer with no added costs. NOTHING... ZERO. The only problem is that it would take discipline. But wait, you would need discipline with the programs mentioned above. Because you are using discretionary income and if you used part of that $1,000 that was left over, it won't work as quickly as promised. If you used that full amount up before the end of the month, you did nothing to your interest savings. You are then back to zero, with a HELOC loan that is an adjustable at worst.
On another note, if you took that $1,000 yourself and applied it monthly to your principal, your mortgage would be paid off in 10.1 years. Wow, that's 3 months sooner and it didn't cost you a thing. But wait, it cost you $3,500 when you did the UFirst program. If you divided this fee by 240 months which is 20 years, that is an extra savings of $14.58 a month that you could apply towards your mortgage. And after doing this, now your mortgage is paid off 1 month sooner now, 10 years even. So if you held onto your mortgage for this length of time and if you used the program mentioned by UFirst, you would still have 4 months to go. That is an additional $8,852 dollars that you would be spending.
Overall, you would be better off taking the extra payments and dumping them into a stock portfolio which would give you a better rate of return. Robert Ashby put together a few great posts in comparing these types of programs with what I just mentioned, which is called Equity Harvesting. Money Merge Accounts Vs Equity Harvesting: Harvesting Wins by Over $1.5M A must read!!!
Conclusion : Money Merge Accounts can be a great tool, don't get me wrong. But in my honest opinion, they will only work for the few out there. And in most cases, it's just great advertising to get you in the door. If you don't qualify for this loan, they might try to get you into another type of loan. As in the case of the UFirst money merge account, keep in mind, it's a HELOC loan. That means that you need to be qualified for this type of loan. And with the mortgage meltdown, these are very hard to be approved for. Secondly, as mentioned above, it would work a lot better if you had other debt than just your mortgage.
Overall, everything that is mentioned here is solely based on my opinion and 15 years of service in the mortgage industry. But a FYI, I also did a lot of research on this, explored different scenarios, and examined different numbers when playing with this program. Hey, I am a money geek, what can I say. I basically want to give sincere and genuine advice and not what makes me money.
Lastly, can anyone else say pay option arms? Again, a good program that was not explained correctly, but could work for you if used properly. Here is a thought to sleep on for now. Aren't many of the foreclosures attached to the pay option arm and that these consumers are now up-side down on their mortgage. Meaning that they owe more than it's worth, especially if you make the least amount of payments, which would be less than the interest only payments. Just words to the wise, speak to a mortgage professional that will give you many options and not just what you want or what they try to get you to buy into.
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Copyright © 2007 by Jeff Belonger