Many of you know that I have talked about these before, and one of my posts even is ranked #2 on this subject. As a proponent of proper mortgage planning, these violate many of the concepts that most Americans don't understand. I will not go through those concepts here, as it will take away from the real intent of this post.
I was reading the Mortgage Professor's website, a well respected mortgage expert who started the Upfront Mortgage Broker concept and mostly looks out for the best interests of the borrower, and I came across his article about these. That is where most of the information I will discuss can be read in greater detail as well as his opinion. While I don't agree with everything Jack Guttentag says, he does a pretty good rundown on the realities of these programs. It is a must read of anyone looking at any type of mortgage acceleration program.
Why is it that everyone wants to believe that there exists a good fairy that can save us from ourselves? This belief, as well as the desire to hold on to the past principles, is what continues to keep Americans from truly becoming financially free. They continue to waste money on lotteries and other high risk "games". And thus, mortgage acceleration schemes abound, some outright fraudulent. Most use misleading advertising to push their product, not unlike those 1% rate advertisements though some are even worse.
One of the most popular is the bi-weekly payment program. Most of you have come to realize that you don't need to pay anyone to do this as you can, with a little discipline, accomplish the same thing on your own. You will also find that doing any type of mortgage acceleration, while OK for some, may in fact be costing you more money over time.
Now, enter in the Money Merge Account type products. CMG, United First Financial (UFF), American Mortgage Educators (AME), and others have started their versions of these programs. They all use a mortgage, a HELOC (Home Equity Line of Credit), as checking account. You deposit your paycheck into the account, then write checks, make charges, or use an ATM to take money out. Effectively, you end up with some "interest rate cancellation", or the equivalent of receiving a savings rate that is equal to your mortgage rate. The two things to ask yourself at this point are...What is the after tax rate on this savings? and Do I really want to pay off money that cheaply or invest it instead?
Using UFFs, which seems to be the most marketed do to its MLM (Multi Level Marketing) scheme, let's go over how it works (simplified, much how they present it). They claim it does not require a refinance, yet you are required to put in place a HELOC (or ALOC as they call it) that has the right features. Now assume you make $5,000 per month, that gets deposited on the first day of the month. Well, the program suggest you take a $5,000 draw on the HELOC on day 1 and it is applied to the main mortgage. Then, the deposit is used to pay off the HELOC, leaving you with a zero balance and no interest charges.
Then, as the month goes, you take out your monthly expenses and the balance slowly rises, but since the HELOC is like a credit card, and is computed on average daily balance instead of monthly like the mortgage, your average daily balance would be $2,500, so you are saving your $5,000 at your mortgage rate while incurring interest at the rate of the HELOC.
Most Americans have mortgages around 6% right now, while the average HELOC is nearly 10%, particularly with these features. So, you save $25 on the main mortgage side, but it costs you $20.83 to receive that benefit. Wow, a monthly savings of $4.17!!! Now, that being said, if you want to use ALL of your savings to pay off your mortgage (a ludicrous idea as it could actually put you in danger of foreclosure), you could receive a larger savings.
Since the program costsa $3,500, if you were to make a one time payment to your mortgage at 6%, you would save $210 annually. The Mortgage Professor even stated that this number is "probably more than most borrowers would save using the MMA."
Since most people do not get paid on the first of the month and rather are paid bi-weekly, the savings amounts are likely to be even lower. The exaggerated claims of being able to pay off your mortgage in 1/3 to 1/2 the time require you to devote all of your savings to pay off your mortgage, leaving you to bypass vacations and other "luxuries", lest you finance them at the HELOC's rate.
All of this comes down to the fact that these programs, are certainly not a Good Fairy by any means. While they may not be Demons for some, many that buy into these programs may find they are in fact worse off.