Debunking the Money Merge Account Scam (Games Lenders Play, Part 8)
Mortgage Accelerators, or Money Merge Accounts, have become the thing that everyone's pushing of late. I have gotten so much junk mail about this from more originators (who don't know who I am) and wholesalers (who should) in the last few days that I'm going to have another whole go at the entire concept. The claim most often advanced is "pay off your mortgage in a fraction of the time!" In fact, typical numbers say they're only going to do a fraction of the good done by biweekly payment programs, which effectively make one extra payment per year. Money merge accounts or Mortgage Accelerators (to use the term I originally learned years ago) have been pushed and over-promised so badly of late that I hope whoever manages to do an elementary search will be able to find a voice of sanity.
These wasteful loans that waste a homeowner's money are fast becoming the current market's negative amortization loan as far as marketing goes. These things are being pushed hard, consumers are being led to expect far greater results from them than they are likely to achieve, with the results being that those consumers who sign up for them are wasting their money. If they're not as bad as negative amortization loans, that's still damning with faint praise if ever there was such a thing. Not as bad as the loan that encouraged people to buy a more expensive property than they could afford, put them more deeply into debt with every passing month, ruined their credit ratings, and caused them to lose the property they over-extended to buy, as well as setting the United States as a whole up for the worst financial crisis we've experienced in the past eighty years. Well, it is kind of a high bar for lenders to get over, and they haven't done it here - but that's not due to concern for consumers.
What goes on with these accounts is complex, and they're not all identical. The basic idea is the same, however. You create a special account of some nature, where you deposit your entire paycheck in the mortgage account, where it lessens the amount of interest you pay on a day-to-day basis. Then you pay your other expenses of living out of the account, gradually increasing the amount back up until the next time you get paid. The idea is that by paying down the balance with your entire paycheck, less interest accumulates and people making the same regular payments will pay their balances down faster with the same balance.
Sounds like a cute idea, right? If it was free, they would be a pure gain for the consumer. Unfortunately, they're not free, and I've never yet seen one that wasn't more costly than it could possibly be worth.
Lenders like these things for a lot of reasons. Most obviously, they're getting pretty much all of a consumer's banking business. Checks come in, go out, clear or don't; all those lovely fees. In the vast majority of all cases, there's the initial cost and interest expense of an associated home equity line of credit. This also raises the bar to make it more difficult for a consumer to refinance away from their loan if someone offers them a better deal. Furthermore, there's usually an explicit charge of about $3500 to set the thing up. I'll show where this money would be better spent on a direct paydown of the mortgage.
Also, the people who sell these things have these beautifully intricate presentations. While people are watching the money whizzing about between one account and another, they're usually not considering whether those figures are reasonable, typical, or even anything like the numbers they personally experience.
Most importantly if consumers are shopping for a new loan, their attention is distracted from the most important part of shopping for a loan - getting the best possible tradeoff between rate and cost, focusing instead on this fascinatingly complex toy that doesn't make nearly the difference most of the people pushing it say it will. Taking the attention of consumers off the question of what rate they are getting, on what type of loan, at what cost, means that they don't have to compete nearly so hard to give you the most competitive rate-cost tradeoff. In plain English, their loans can charge a higher rate of interest. In fact, this difference will cost the typical borrower far more than they could ever hope to save via a money merge account. I'll go over that in this article, as well.
So, first off, let's consider what typical numbers are. Here in San Diego, the median property sale is $558,000. In order to qualify for the loan, consumers need a back end Debt to Income ratio of 45%. Front end will most typically be around 36%, with property tax, insurance, vehicle payments, credit cards, student loans etcetera. I'll be really nice and say 32% - chances are that if it's lower than that, the people would have bought a more expensive property. I'm going to assume 20% down payment or equity, which is, if anything, larger than typical. We'll postulate a rate of 6%, which is probably a hair higher than most folks with conforming loans have - and more favorable to the money merge account - and I'm going to put it all into one loan even though that's theoretically a jumbo loan amount, just to give the money merge/mortgage accelerator every possible benefit of the doubt. After all the smart thing to do is split the loan amount, which leaves roughly $30,000 out of this account in a higher interest rate loan, and so the scenario envisioned is more beneficial to the Money Merge than what happens in the real world.
This gives a loan of $446,400. At 6 percent, the payment would be $2676.40. Assuming 32% front end ratio, that's a gross monthly pay of $8365. I don't have withholding tables, so I'll use the actual tax rate for couples making slightly more than $100,000 per year with about $55,000 taxable, which is $7400, plus about $8700 in Social security taxes, plus state taxes which I will assume to be roughly $2000. This money gets withheld - it never comes to you in the form of a check. Since you don't get it, when your check goes into the money merge, it doesn't help you pay the interest. This leaves $81,900, or $6825 in take home pay. I'm not going to worry about other deductions like health care, or how your pay is structured, which further erode the benefit. I'm just going to assume it hits your account in full on the first day of the month, maximizing benefit, although I'm still going to assume all of the excess goes out every month. If nothing else, for investment accounts. It's pretty silly to have your money paying off a 6% tax deductible debt when you can have it earning about 10% elsewhere! But this isolates the benefit gained from the actual Money Merge, and separates it from any benefit derived from making extra payments, which is another way the people selling these play "hide the salami" with consumers, distracting them from what's really causing the benefit - the extra payment, which almost anyone can do, anytime they choose, for free. I'm even going to assume that you don't have an impound account, so the money you eventually spend for property taxes and homeowner's insurance goes to help the money merge as well.
So you get $6825, less the payment of $2676.40, leaves $4148.60. Over the course of the month, money goes out to pay for all of your expenses. They people who sell money merge accounts urge you to leave paying your monthly bills as late as possible to get the maximum benefit from these accounts, completely ignoring the costs of the occasional late payment this is going to cause, as well as detrimental effects upon your credit when it does happen. In fact, a certain amount of these bills are going to wrap into the next month, meaning that under the conditions we've agreed upon, you write that check to your investment account for this month and pay that bill out of your next month's pay if you're smart. Since you're going to write that particular check ASAP if you're smart, that's going to diminish the effects of the $4148.60. But I'm going to be nice and give you a $1000 "cushion" that you carry into the account from month to month (again, you won't do this if you're smart), while the $4148.60 is going to be paid out evenly over the course of the month, giving you a mean daily amount of $2074.30, plus $1000, or $3074.30 per month of temporary principal reduction. This reduces your interest paid by $10.37 that first month! I'm going to assume this is pure gain, every month, and that it continues to compound. If you do this every month for thirty years, you'll actually pay off that loan a grand total of three months early, and the last payment is reduced to a shade over $400! All of this hooting and hollering and shouting and frustration over three months of paying your mortgage off - in an absolutely optimized, perfectly favorable environment where the Money Merge account didn't cost you a penny in set up fees or monthly cost. And even in this ideal situation, with the maximum reasonable advantage compounding over the course of the entire mortgage, out of $963,000 in payments, the money merge saves you about $10,000 at the very end - just over 1% of total payments, heavily discounted for time value of money thirty years from now. That's not the "pay your mortgage off in twelve years for the same payment!" come on used by the most popular of these! Were I the regulatory authorities, I'd be looking very hard at their advertising!
But most people don't pay their mortgage off in this fashion, and these accounts are not free - or at least I've never heard of one that was. Most people refinance or sell within three years. When they do that, the accounts have to be set up again - which requires new set-up fees. In the example given above, that $10.37 per month compounding for three years is worth $407.92 - and that's if there are no countervailing expenses.
In point of fact, most of these accounts charge a monthly fee that ranges from roughly $1 to whatever they think they can get away with. Plus, there's an upfront cost that ranges from $1995, the cheapest I've seen, up to nearly $6000 depending upon the plan, with most seeming to fall in about the $3500 range. Plus, most of them require you to use a special Home Equity Line Of Credit (HELOC), which costs money in and of itself. The rates on HELOCs are higher than for regular mortgages, forcing you to effectively pay a penalty in interest of having $2000 or $5000 or whatever it is at a higher rate of interest, by usually about 2%. Keep in mind that this is ongoing, and for the entire month. The $2.30 to $8.30 per month this costs directly soaks off a large percentage of the $10.37 putative gain you get. Not to mention whatever the initial costs of the HELOC are. Some are cheap - I've seen others that had thousands of dollars in upfront costs. The HELOC costs, both upfront and monthly, are not relevant to the few plans that don't require HELOCs, but most do.
So with a middle of the line account, you've spend $3500 just to set the money merge (or mortgage accelerator) up, versus $407.92 in benefits over three years, which is longer than most people keep a given loan. Would I do that? Not on your life or mine! Why should I expect one of my clients to do so?
Now, let's consider some alternatives. Remember I told you the money merge account saves you $10.37 per month in optimal conditions, which works out to just about $10,000 saved at the end of thirty years? Well, let's ask ourselves, "What would be my benefit if I just took the $2000 the cheapest one of these costs me and instead used it for direct principal reduction?" In other words, what if you added that $2000 to your regular mortgage payment once? The answer is, for the example above, that you pay off your mortgage four and a half months early, as opposed to about 3.8, saving an additional $1800! Using the upfront costs for the cheapest of these that I'm aware of pays the mortgage off sooner than the accelerator account! After the three years that's all most people keep their mortgage, you're still $1985 and change ahead of the poor stupid schmoe who signed up for the accelerator account! For a middle of the line $3500 set up fee, the difference, mutatis mutandis, is $3780 and growing at the end of three years, to the point where that mortgage is paid off 6.7 months early, as opposed to the mortgage accelerator's 3.8, saving thousands of dollars more than the "accelerator"! This doesn't count the monthly costs, HELOC set up fees, or additional HELOC interest charges that the vast majority of these accounts require, and which do siphon off the benefits as noted above.
Keep in mind that with all of this, I've been building a "best reasonable case" to maximize the money merge's advantages. I've mentioned several assumptions that I was making in the account's favor. If any of them changes, the putative benefits basically vanish entirely, or even go decidedly negative.
Now, let's ask ourselves if getting distracted by a mortgage accelerator caused us to not shop as aggressively, or not pay as much attention to the tradeoff between rate and cost as I should have, and as a result, I end up with a mortgage rate that is a mere 1/8th of a percent higher for the same cost. An eighth of one percent is the smallest rate bump in the "A paper" world, and quite often I see differences of a quarter to half a percent for the same loan between various A paper lenders when I'm shopping a loan. What would that cost me if I could have had 5.875% for the same cost instead, even keeping the benefits of the accelerator?
The answer is $35.77 per month on the payment, but more importantly, $46.50 the first month on the interest, and this adds up to $1641.77 less interest paid over the three years most people keep the mortgage, while the $10.37 per month benefit of the money merge put the 6% loan as having a balance that's actually $20 lower. Not counting fees of the money merge account, or anything else - just pure difference on the actual cost of that loan, in the form of interest you paid that you wouldn't have had to. How does that sound: Even if everything about the money merge was free, you'd be getting a $20 lower balance over three years in exchange for having spent $1600 more on interest. If you offered people $1600 for $20, what proportion do you think would take you up on it? If you offered them $20 for $1600, how many suckers do you think would go for it, even if you personally begged ten million people?
For those of you who may be loan officers - or real estate agents - reading this, can you point to one single putative benefit that you would think worth the cost that lenders charge to sign up for these programs yourself? As I've said, I can't. There is nothing here that justifies the wild ways in which these are being marketed, and the ridiculous promises that are being made about them. In point of fact, I can think of only a few possible reasons to sell these:
- Eyes only for a commission check (probably number one in terms of the overall market)
- You don't understand what's going on, took some marketers word, and haven't done the numbers yourself (hardly a recommendation of your services or professionalism)
- You just don't care about your clients welfare
A year and a half ago, when these started being marketed, I wrote about the broad outlines. Never had the urge to hose a client by selling one, so didn't really investigate any further, although I wrote that the benefits were quite minimal as compared to the costs a few months later. But the ridiculous promises and over-aggressive marketing these have been subjected to in recent weeks have finally motivated me to do a rigorous analysis, and what I see is not "merely" of minimal benefit in even the scenarios most amenable to said benefit, but actually costs more than any putative benefit. I can see precisely zero justification for counseling any client in any situation to pay the money that every one of these I have yet encountered to set it up, as the benefits derived from any of these programs with which I'm familiar never do manage to equal the opportunity costs.
Now before I sign off, the point needs to be made that the psychology the account engenders in the consumer is likely to be beneficial, rewarding themselves psychologically for making what are extra payments on the mortgage, and as far as that goes, the account does accomplish something praiseworthy. But the vast majority of all mortgage borrowers can make extra payments of principal any time they want, for free, and when you consider these accounts strictly on the basis of actual numerical advantage over real alternatives, the costs of the program are literally never recovered.
Caveat Emptor
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It's interesting you find such bundle accounts utterly useless in the States while they work better in Canada, due to two key differences:
Granted, the interest rate on the mortgage portion is at least 0.50% higher than a traditional mortgage. For people who can afford to make the extra mortgage payments, traditional mortgage still generally works out better.
First off, half a percent higher interest rate will cost you much more than any putative savings - even an eighth of a percent will do that.
Second, what are the upfront fees? How long before you're not better off using the upfront fees to just pay the balance down?
Tax deductibility isn't a factor when the basic computations of benefit say it's a crock. Since the idea is to pay your mortgage down, the idea is achieve a lower balance and less deductibility. However, the idea fails on the first point, so the second isn't going to help you.
I found that really interesting, I was wondering how money merge accounts work and how they compare to just making extra payments. Thanks for writing it.
you say: "But the vast majority of all mortgage borrowers can make extra payments of principal any time they want..."
The problem is that "the vast majority of people" don't and won't make extra payments - that's why the MMA helps them to be disciplined - and for them it is worth it.
DM: It doesn't "help" them do a damned thing. If they're living up to the edge of their means and have no extra money, there won't be anything extra applied. If they're not, they still have to decide to live on less money to get significant benefits. I fail to see how wasting anywhere from $2000 to $6000 on something like this, that gives them no additional options, is going to improve anyone's financial discipline. Finally, if you look at the numbers, for most people there are better investments than paying off your mortgage faster.
As a financial planner I'm investigating one of these MMAs. Your critical analysis is helpful. One aspect however is missing. The MMA under scrutiny in the best scenario uses a HELOC, takes detailed input from all debts to be reduced, and then, using math the vendor has not been able to explain to me yet, after a few months of running the budget through their online program, advises the client to pay extra principal lump sums to one debt or another. This creates the facility where the debts and mortgage is accelerated (ie. an additional 4 to 5k, one to three times per year). The "system's intelligence" supposedly had determined that taking this extra payment from the heloc is within the client's demonstrated budget and will not adversely affect them....? It looks good on paper, but where the numbers come from for these periodic additions just doesn't make sense -- have you seen this twist on the MMA concept? It doesn's seem like there'd be that much slush in leveraging short term numbers, even if you have a 30 day grace period to play with....
Frank,
Some of these require HELOCs, some do not. I did the math for the overall case without a HELOC, but that is more favorable to the program than with a HELOC.
Assuming the HELOC is at a higher rate of interest than the main loan, the case with a HELOC is less favorable still for the borrowers (they are paying a higher cost of money for that month's borrowing).
Excellent analysis. I've come to the same conclusion and often butt heads with MMA agents. Adding your article to my list of MMA articles.
Joe
My wife and I have been looking into this. We are debt free except for our mortgage and owe about $72,000 on it. We make $100K+ per year and max our our IRAs and Thrift Savings at work. We are disciplined and think we could pay it off in a few years. If not a MMA, what should we do? Pay a thousand or so extra per month? Thanks.
Absolutely - just pay extra towards the principal of the loan. No special program required. I hate to sound like a Nike commercial, but Just Pay It. Although I'd talk to my financial planner about alternative uses for the money first, were I in your shoes.
I find all of this content quite intresting and it is usefull in helping me to decide how to proceed with my own situation. I have been speaking with a gentelman who is touting the money merge account and his particular product requires the use of a HELOC. He has shown me his records for the money merge acct that he utilizes for his personal primary mortgage. It appears that he has been able to skip more than 90 months of mortgage payments in a fairly short period of time. When I say skip I mean that if you look at the current outstanding balance and compare it to where he would be in an amoritization schedule had he not been using the MMA, he seems to be way ahead. He tried to show me that the program decides when to make extra payments toward principle and how it reduces the principle and thus the interest that is paid. I am not certain where the money comes from for the extra principle payments. I is my understanding that the whole premise is that given the same amount of cash flow, the principle will be paid down at a much quicker rate through reduced interest payments as compared to makeing regular monthly or biweekly payments on a conventional mortgage. I also am led to believe that the principle is reduced at such an increased rate, that the percentage of interest paid on the loan is of little concearn and that I should not get hung up on the rate. would like some additional information about the inteligence of the program and the rationale behind the timing of the extra payments and the proposed origin of the funds required to make the xtra payments. I also am confused about how the agent was able to show me how the MMA was beneficial for him personaly. The information provided by Dan seems to contradict strongly the information that was provided by the agent. It doesn't seem posible that what I was veiwing was accurate. Please shed some light on my concearns.
What's going on is that the person trying to sell you the product is making extra payments of principal. The money merge did not give him the right to do this - he could do it on his own, any time. Nor does the money merge in any way lessen the interest you pay. But even small amounts of additional principal make a huge difference in how quickly you pay a loan off. Making one extra payment per year will cut about 8 years off your loan. Just paying one extra payment once will cut six months off your loan period.
What the salesmen are trying to lead you to believe is that your $3500 (or whatever) will magically transform into a paid off loan more quickly - the illusion of free money. This is demonstrably not true. I have an open challenge to the purveyors of these things to show me the math, and they always rely upon large amounts of additional principal being paid, while pretending the payments will be the same. Also demonstrably not true.
I completely agree that the MMA accounts are worthless but there are some things to consider:
1. Most people don't have equity in their homes and the very few who do are going to have an extremely difficult time getting a HELOC
2. Are these MMA accounts FDIC insured? I would not trust someone with my full paycheck if there was not insurance on the account.
3. Interest is calculated monthly, not daily so the premise of putting money into the account ASAP is misleading. Most mortgages do not calculate the interest based off of daily principal balances, rather a balance at a point in time.
4. Depositing your paycheck each month into the account also makes the assumption that you have total job security and if you do, it's essentially forcing you to live off a line of credit. You are paying down cheap debt and living off of more expensive debt.
In the end, these accounts have bad news written all over them and they are a waste of money.
I understand these comments. However, do you agree that, for a person who is not disciplined enough to commit to these extra payments, AND if you do not use a HELOC for the account (you just use a separate checking account, hence less risk) that it can be a helpful tool to keep people on track and let them know exactly where they stand with the timing of their payoff. Also, since you can incorporate other debts into a program like this (cars, credit cards, etc.) it can do more for you to help pay off these other debts more quickly than a person trying to figure out when and how to make those payments on their own. Do you agree that, if the person does not buy into hocus pocus, but the reality of it being a useful tool to keep them on track, and if they feel that the buy-in amount ($3000 or whatever) would be worth it to be a "coach" then it could in fact be worth it???
Absolutely not. The program will not help someone with no discipline acquire some, any more than it will help someone with no extra money. For it or any quicker payoff program to do any good, the subject must acquire the discipline not to spend every penny they make - the program makes absolutely no difference there. Matter of fact, the HELOC that some require can get a lot of people in trouble. Nor is paying off your mortgage faster likely to be the best use of money. Mortgage accelerators are an expensive gimmick that do absolutely zero good. They are sold by the false illusion of free money, and only by the false illusion of free money.
And I have done an entirely separate article about debt consolidation:
The Lure and the Trap of Debt Consolidation - Payment Versus Cost of Interest
Upshot: If you keep the new loan and don't charge up any additional debt, it's wonderful. But it takes years to show any benefit, and most people don't keep it up that long.
when i first heard about MMA, it made no logical sense to me. thanks for confirming my suspicion. as always, when it sounds to be good to be true, it is. of course if it did work it would be a run away sensation and touted by Ophrah and every other talking head.
anyway, i am thankful that when typing "money merge account" into Google you are the first returned result.
thank you too for pointing out that one extra payment per year leads to a paid off mortgage 8 years earlier... imagine if MMA agents told you that up front... would you bother with anything else?
and one of the most interesting things in your post.... in paragraph #2 "setting the US for one of the worst financial crisis we've experienced in the past eighty years" written in March 2008 or 6 months before most of us had any idea how bad things really were
so i think i'll stick around and read some more.... thanks for drawing me in with the above post
Hi, Sorry not going to register to post, but this article is great. I did look into a MMA account about a year ago and drank the kool-aid of the presentation. Then i saw the 3500 fee and said, no way. I instead wrote a check for 3500 to my mortgage and haven't looked back. Now I just try to make a quarterly prinicipal payment to my mortgage and i do that by scheduling it in my online bank account so that it goes out automatically without me thinking about it. For those that need discipline, that's as simple as it gets. Now the math I haven't done yet is could I be putting that extra money into a bond fund which pays a monthly dividend and whether that is a better tradeoff or not. I'm sure it probably is based on interest rates, but there is something to be said for not having a mortgage. good luck all.
Glad to have found your site on MMA and MCA (sydney financial group version). Ihave been researching the money merge account for about 4 weeks now; and have come to the conclusion it is a waste of time. For one thing, Sydney Financial states that Mortgage Checking Accounts or MCA's have been used in Australia, U.K. and Canada for about 20 years or more. United First Financial has to owners (names forgotten) that stated that they created the MMA a few years ago after having an engineer create the algorthim after a decade of research to help "the poor mistreated and unfortunate Americans's that the financial industry has taken advantage of in the past." LOL.
So, I was excited at first because the presentation made it appear to work and a friend of mine and I have been working the math. Though logical, the risk seems too high. And i believe it would only work if your line-of-credit or HeLoc interest was daily based instead of monthly. I vote a complete waste of time. Follow DAve Ramsey instead.
Thanks for the post and discussion. I wonder what the lack of credit availability is doing to this "business."
I know one thing - we are not upside down in our mortgage (we have approximately 60K in equity), we have no debt other than mortgage, we have very high credit scores, and yet our 35K equity line was recently canceled by B of A (and I am employed at B of A!)
The current situation cannot bode well for any "business" built on the premise that their customers must open a HELOC, right?
It amazes me, also, how people can think that ANY product of an MLM scheme is a good idea or created for the "good" of the people. MLMs always try to lure people in by convincing them that they just want to help people achieve x, y or z (usually financial freedom, "time" freedom, or "don't you and your children deserve the best?").
Yuck. I feel dirty even talking about it.
Thank you for the clarity regarding MMA's. It did sound too good to be true! I plan on paying my mortgage bi-monthly and adding an equity payment whenever possible.
Thank you for this explanation. I have friends who are selling this "product" and while I haven't heard their pitch yet, it sounded a little shady. I wouldn't apply the word "shady" to it after reading this, but definitely unnecessary.
I have only $137 in discretionary funds and the analysis by the MMA Agent shows the MMA software would help me pay my $138,000 30-year mortgage off in 12.1 years without using a HELOC, but using a credit card instead. I run these numbers through Bankrate.com's amortization calculator and it states with an additional $137 principle payment a month, my $138,000 mortgage would be paid down in 21 years. The MMA analysis sheet beats that by 9 years using the same numbers. The agent assures me my credit card would not have a large balance at any point and it would be paid off most months with no interest charged. I can't say yes, because he wants $3500 for the program but can't explain how the MMA software works and is asking me to "trust" it. I can't say no because the difference of 9 years is significant. He is a trusted friend so I no he is not purposefully deceiving. He says it is guaranteed to work or my money back. I have yet to read a negative posting by someone who has actually bought the program, and I would think if someone felt like they were ripped off, they would tell the world how horrible MMA is. Thoughts?
DM: That's because the MMA program is not returning accurate numbers. How in the heck is it going to beat a "no charge" paying the principal down directly? Especially with using a credit card which is going to result in occasional interest charges, late payment fees, etcetera, let alone after a $3500 hit to your pocketbook? There is no "MMA discount" on your mortgage. They are selling the illusion of free money, plain and simple. As for your friend, he's likely an innocent dupe who uncritically believed the nonsense that was spouted.
There is no magic free money. But people who waste the $3500 want to believe they didn't get taken, and so don't monitor their situation as closely and carefully as they should - especially vis a vis where they would be if they just took their $3500 and monthly discretionary money and used it to pay the mortgage down.
JT,
Do you have other debts that you are paying currently? If you do, then the MMA will use the payments for those items as they are paid off to send towards your mortgage. If you want, you could post all the info you gave the agent for the analysis and we could show you how to beat his number on your own, without paying $3,500, or even $1 for that matter.
DM: This comment was so egregiously bad that I felt I had to pre-empt and respond lest someone not read it all to the end, yet I'm still letting this salesman make his case, albeit without free links to aid in his SEO
To the comment itself: So many logical and mathematical fallacies, so little time. First, you spend the whole comment constructing an elaborate Straw Man Argument. It also makes use of False Dichotomy and Red Herring.
It also deliberately ignores the computation of how much good the temporary reduction in principle does - which is about $10.37 per month for a $446,000 mortgage at 6%.
The alleged "good" that the Money Merge (and similar programs) claim come from their scheme in reality comes from paying extra money to their mortgage, which pretty much anyone can do, at any time. No special account needed. But when you do that, you must in all honestly, consider alternative uses for the money and whether those alternate uses are likely to produce superior results. You can't honestly call yourself a financial planner if you fail to do that. You are failing in the first duty of a financial professional: To figure best use of a client's available funds to place them in a position of maximum benefit. And the picture that paints of using extra money says that there are better uses for that money for the vast majority of all people than to use it paying down a low interest tax deductible debt. I have dealt with that issue in these two articles, among many others:
Should You Pay Off Your Mortgage Faster?
Fifteen Year Loans: Are They A Good Idea?
In short, your comment is so fallacious - mathematically fallacious, logically fallacious - and disingenuous in terms of serious financial planning principles that I do not believe it is made in good faith.
The only alternative explanation that fits observed facts is that you are somehow unaware of basic financial planning principles.
END DM - begin original comment
The debate here is awesome and I am grateful for everyone's insight on this topic about the MMA and mortgage acceleration as well as debt consolidation. Obviously everyone here has put time and effort into researching this program as well as I myself has. IF you are a supporter OR not, this does seem to be a "too good to be true" concept for face value doesn't it? The only thing that I cannot debunk about it is a "law of money" or "principal" of money that exists independent of the MMA program. This "principal" is called time value of money and I am sure every person posting here realizes what I mean. This is interesting so, supporter or not, please hear me out.
The TVM(time value of money)existed BEFORE this MMA concept and will exist after the MMA program, if the MMA ever goes away. Obviously, we ALL can agree on that correct? Banks have used the principal of TVM since the beginning of banking conception to leverage money. This concept is VERY dynamic in the sense that the TVM returns you 1 thing: INTEREST. You either pay interest or you earn it, right? So, what banks have done and will do forever is use the flow of money in their bank to EARN interest faster than they pay it. They manipulate HOW they pay interest and not IF they pay it. There is no "magic" creation of money for banks. The only place that "creates" money from nowhere is the Fed Reserve or the "World Banks" that are out there. Everyone else be it banks or consumers borrow it and pay interest on it. So, I do have to say to all the supporters of the MMA that this programs strategy doesn't literally "create" money like I just referred to. I will though get to the "conceptual" creation in a bit... Everyone still with me? Great!
Now everyone here knows that when you go to your bank and they give you a measly little 2% on the dollars you deposit into your savings account they are lending back to you or other clients of the bank at much a higher interest rate than that. Point in case, if you have a mortgage at the same depository bank that your checking or savings account is at they lent you a portion of or all of your money in those accounts back to you at much higher interest rate. Obviously you don't have to believe me all you have to do is take out the statements form all 3 accounts and look at the interest rates. For those who say they didn't use "my" money they got it form some other entity, you are exactly right and the principal is the same. Borrow LOW, lend HIGHER. No matter how much is coming in they will always be ahead of the game. TVM at it's best. This is a universal LAW that cannot be changed until money itself is whipped out of our society. When money does not exist this will not
So, what in the world does this mean in regards to the MMA? For people like JT who are NOT using line of credit and are using a credit card or for those who are using a line of credit, the MMA is using the "principal" of the time value of money. THAT'S IT. The credit card, the line of credit and interest rate on your savings account is the vehicle that facilitates the TVM. For instance, here is how an example of how the TVM works with the MMA strategy:
The BEST line of credit that works with the MMA is one that calculates interest on an AVERAGE DAILY BALANCE. The bank uses the "law of averages" to figure out what type of payment to charge you. Most of these have an interest only payment to them. So, If you had a line of credit that has a total line of $10,000 with a balance of $10,000 at a 12% interest rate your INTEREST ONLY payment is $100. So what happens to the principal if you continue to just make the $100 INTEREST ONLY payment? Your right, nothing, it's only interest.
Now lets say that your monthly income is $5,000 and your monthly expenses are $5000 as well, with $100 of the dollars allotted to your line of credit. Still with me.....good! What if you deposited your paycheck of $5000 into the line of credit just like you are ALREADY doing with it by putting it into your line of credit? Now, remembered, this is something banks have NEVER educated you on. The line of credit that works with the MMA mimics a checking account. They have routing numbers and checking numbers becasue, guess what, they have checkbooks for them! Also, most of them have debit or credit card usage assigned to them, just like your checking account. If they do not have these tied directly to the account they will always have a checking account linked to them so you can move money freely from the line of credit into the checking account and you achieve the same capabilities. this lets the line of credit act like a checking account. The ONLY difference between the checking/savings account that you have right now and these lines of credit is that the interest rate on your checking/savings is given to you and on the line of credit it is charged to you....THAT'S IT people! Remember, you either EARN interest or PAY interest in the TVM. So, back to depositing money in your line of credit....So, you have your $10k balance line of credit with a $100 interest only payment and you now begin to deposit your $5k of income into it. For illustration purposes and simple math you deposit the $5k on day 1 of the month and leave your income in the line for 30 days, until day 30. Then on day 30 you sit down and pay all your bills form it and write checks totaling $5k. What you did here was manipulate the way the bank calculates interest by using the law of averages to YOUR favor and not the bank. When the bank looks at the line of credit the take the balance on day 1 add it to day 2, to day 3, to day 4 and so on until the the get to day 30. they take the total of that number and divide it by 30 to get Average Daily Balance(ADB). So, now the bank says that your ADB is not $10k it's $5k becasue of the LAW OF AVERAGES, something no one here can disprove, ever. Guess what, your new payment isn't $100 its $50. It just made the $100 Interest only payment that you made have $50 in principal reduction that never existed before. You just took the monthly cash flow that you have work FOR you and not for the bank in the traditional checking/savings account.
Now this is just the principal that the program uses when utilizing the line of credit. It is very dynamic so this is why the there isn't a dollar for dollar comparison to just doing taking your extra money left over at the end of the month and paying down your mortgage. With that simple strategy you are only using 1 benefit of your cash flow, the money itself. The MMA uses the FLOW of your money AND the actual dollars itself. So you get the tangible and non-tangible use of it. All in all, what the MMA does is take the amortization table of your first mortgage dollars and strategically moves it to a place where it can manipulate the interest paid to reduce it. All using your own monthly cash flow to work FOR you and NOT for the bank.
So, now you are thinking, I can't get a line of credit and I am just like JT above. Well, lets flip the line of credit concept on its head. Do you remember how interest works? You earn it or pay it right? Well, if you don't have a line of credit to reduce what you pay you have to make more than what you pay right? Good, we are on the same page. So, this concept works with 3 tools: 1, your monthly income 2, your interest rate on your savings account and 3, a credit card.
Before I go any further I first have a question, if you have a balance on your credit card and you pay it off BEFORE or on the day it's due, how much interest do you pay? ZERO, right? The only way you pay interest is if you carry a balance and that is what the credit card companies bank on. So here is the rest of this strategy. If you moved as much of your monthly expenses that you pay off every month anyway like groceries, cell phone, electric, cable, ect., to a credit card and paid it off every month before the bank charged you interest, didn't you get an "free loan" every month? You "floated" the banks money until you needed to pay them off. Well, what if you took all of those dollars that were waiting to pay off the credit card every month and put them into an interest bearing account, let's say the savings account you already have? What happens here is you use the TVM to EARN interest on those dollars. Yes, it may be little but when you do it over and over and over again it adds up.
Here is why....if you make $20 in interest the first month you can apply that to principal pay down of a separate credit card that you have been dying to get rid of. For example purposes only let's say that $20 reduction saves you $5/month in interest payment on the credit card you paid down. Now we enter month 2 and you earn another $20 in interest. The difference this month is that you not only have the $20 in earned interest you also have an extra $5 from the savings form pay down last month. So now you apply a $25 principal reduction on this card that you have been dying to pay. Now for illustration purposes and easy math let's say the $25 reduction saves you an extra $2.50 in savings. So we are all on track, your monthly savings on this credit card you have been dying to pay down is $7.50. Makes sens right?
When you do this over and over and over it really adds up. When you reduce interest, you can earn more of it and you can take your earnings and apply it balances to reduce even more interest that you may have to pay.
Obviously, you don't have to believe me. All you have to do is believe in the TVM and understand the principals on how math works. That's it. This program wasn't invented by U1ST and it really wasn't invented by people in Australia. All they did was take banking and money principals and make them work favorable to people who hold mortgages. I also know that there are a lot of misconceptions about MLM and direct sales and I do understand. Trust me my first job out of college my boss was getting overrides from my sales and I hated it. The owner of the company made even more off of me then my sales manager. Funny thing is our products sucked. Once you start to look at the intelligence that this program gives, who really cares how the people in the company are compensated? the product outweighs any type of company structure that is present.
We are a professional financial services company that utilizes the MMA strategy in out daily practice. We help people build true wealth in their lives and help the concentrate on things that mean more to them than their money. This tool helps them focus on that and stop worrying about money. Something that no matter who you are can agree with me that our country need right now. I would love to have an open discussion with anyone about the MMA that has already posted here or comes and looks at this in the future.
With Much Gratitude to EVERYONE,
Bryan McDonald
Director Debt & Equity Division
Maddox-Group
As always, the sales creatures looking to put money in their pockets are relying upon the illusion of free money to sell this scam.
A friend of mine called a similar program to my attention a few days ago. After hearing what he had to say, an idea formed in my mind, so I started running some numbers through various calculators. Now mind you, I have no intention of paying for one of these MMAs.
I was preparing to refinance my 30 year 5.375% fixed rate loan to something like 4.625%. This would have incurred closing costs. Meanwhile, I was trying to figure out what to do with my emergency (money market)fund of $35K which is making a measley .36% return. And thinking about what to do with another $30K in a CD that matures this year, possibly renewing around 2.25%
So, I started researching HELOCs. My regional bank offered me a 4% HELOC for $160K with absolutely no application fee or closing costs and will waive the first year annual fee of $65. The actual rate is 3.5% (prime plus a quarter point) with a floor of 4%, so if prime rate goes up two 1/4 pt increments the rate remains unchanged.
I am in a positive equity and cash flow position and have been paying an extra $500 a month on my mortgage, plus saving another $1000 a month into my money market account. This is all in addition to putting $16K a year into my 401K and $2K a year into a college fund. My job security is quite good. And I have other semi-liquid investments (stocks, equities, bonds, other longer maturity CDs).
The way I see it, I can put the $35K (MMF) plus $30K(CD)against my mortgage, use the 4% HELOC money to payoff the remainder. Then put my original mortgage payment, the $500 in extra principle and the $1000/mo in savings all toward paying down the HELOC and be mortgage free in 17 months (including the money to pay property taxes and insurance).
Given the current economic environment (lousy fixed rates, low prime rate and uncertain equity markets) I can see no reason to continue paying a 5.375% mortgage while getting practically no return on my savings. What the HELOC does is provide the emergency fund I might require in a pinch. And this can all be accomplished without paying a penny to refinance.
Sure, I could invest even more than the 18K a year, I presently put into the equity markets, but right now I simply do not have the appetite for more risk when I can get a guaranteed return of 5.375% on the cash I use to pay down the mortgage balance and a tax deductible rate of 4% on the remainder as long as I act quickly before rates move up. And who thinks that will happen in the next year or so? Plus, the money I am committing to paying off the 5.375% debt is money I would not commit to risk anyhow. All this for the cost of a $65 annual fee?
So, while these money merge "plans" may not be worth the cost, applied correctly the fundamental concepts behind them can be utilized to dramatic effect.
It's amazing that you have all these people who don't have the program write all this inaccurate information. The program works and it has worked for thousands of people. It's not that hard of a concept. You either give the money to the bank and pay way more for your house, or you save it by not paying so much interest!
DM:
1) What evidence do you have that it works any better than paying your mortgage quicker, by yourself, without the program? The answer is none, because there isn't any
2) Ad hominem is always an invalid argument
3) Insults ditto (although I deleted that part). You want to try argumentum ad insultum, you'll likely discover I'm better at it than you are. Better would be to present evidence it does work - but wait, it doesn't work so you can't do that, can you?
4) You evidently do not understand, or did not read what I wrote. These programs sell themselves based upon the illusion of free money. But to the extent their clients paid off their mortgage early, the same people could have done it by themselves, for the same amount of money, and without forking over thousands to the people selling these scams.
Do you really expect me to believe your real address is "john@yahoo.com"? What precisely is your financial stake here? I could sell these abominations and hose my clients while I made a thousand dollars a whack, but I decline to do that because it's not the right thing to for my clients or anyone else. Advertising these would make a real good foot in the door for other business also. But it doesn't work and it's a waste of client money so I don't do it. That's my financial stake. What's yours?
John,
"It's amazing that you have all these people who don't have the program write all this inaccurate information. The program works and it has worked for thousands of people. It's not that hard of a concept. You either give the money to the bank and pay way more for your house, or you save it by not paying so much interest!"
I've used it. JoeTaxpayer has used it. Others have used it who choose not to post, but have come to the same conclusion. United First Financial's Money Merge Account is inefficient.
If by "the program works" you mean, it gets users to apply their own discretionary income to their mortgages, while incurring unnecessary interest charges, and at an inflated cost to pay off those MLM uplines, well I could agree with that.
I suggest reading JoeTaxpayer's writeup of his use of the MMA v.4.2 and his results. They can be found here:
JoeTaxpayer's analysis
As for Bryan McDonald's post, well any "Director" of a debt & equity division who consistently confuses "principal" and "principle" multiple times is not someone I would trust my money with. It may be a simple spelling error, but I expect more from my financial professionals!
Yep. Got suckered into this program by a good friend and two bottles of expensive wine. As a person who clearly should not be involved with this program, I can honestly say I drank the electric KoolAid.
I've come to realize I should listen to my instincts at ALL times. The thing they gloss over most of all is the monthly fee. Not only that, you're charged interest on top of it. Supposedly, it's factored into your payoff years. When all is said and done, you're paying a lot more than $3500.
After using this program for two months, it hasn't saved me anything. Actually, it hasn't been any different than my scribbled budgets I make for every paycheck.
I was told I could factor in anything, find out when the best time to make a purchase would be, allow the program to choose which credit card to pay off first, etc. Tooling around with it for a while, it takes a lot to get to that information and by the time you figure out where it was and check your action plan, you just forgot where it was to begin with.
And it can be completely altered. How do they know how much money I had for my paycheck? They don't. It's whatever you say it is. If you're not good with money in the first place, you can make your account look like anything. Yes, you're only hurting yourself, but what do they know?
If anyone is considering this program, United First Financial considers you a member for life. You cannot stop this program. You have three days to decide, and no way to try it for yourself. At least I wasn't able to.
The examples they use are not typical examples of normal people. I shoulda known better, and I trusted my friend to not steer me wrong. "I'm on this program now, and it's saved me $XXXX!" Even her training agent said the same thing. "I was laid off, and in debt up to my ears. We've been using it for a year now, and have paid off most of our debt."
This guy was in a million dollar house and that shoulda been another warning sign.
Bottom line is, trust yourself.
I've survived the first round of layoffs at my job. Chances are, I won't survive the next. If I lose my job, I can't afford this monthly payment. I wrote them, since they encourage you to IM chat with them first, and presented this scenario.
They said since I've signed a contract, I'm obligated to pay until the debt is settled. This program is supposed to help you reorganize and put your money towards eliminating your debt. The problem is, your payments are still the same.
They also say that you've purchased this program. In all reality, it's a service. You are paying for access to their server. You don't "own" anything. You are financing a subscription to a service. You are inputting your own information. You are executing your own Action Plan. All they're providing you with is a fancy calculator. There should be a way out of this. There should be more time to experiment with the program. There should be some flexibility. My worse credit card is more flexible than this. But, oh wait, I got three vacations and car repairs out of that credit card. With MMA? I got a password.
Do something better with your money. Only you know yourself and your habits. This program doesn't promote responsibility unless you're open to it, and since nothing is set in stone, you can still be your irresponsible self.
So here I stand... Short a friend, feeling a little betrayed, and most of all mislead.
PT Barnum was right!
sucker2009,
Sorry to hear your experience. I believe there are many more with similar experiences who haven't made their feelings public, so kudos to you for doing so. It really is sad that a company can take your money even when "Independent Agents" make very misleading comments and promises. But since they are "independent", UFF is protected by typical "legalese" mumbo jumbo.
It's true that when you actually get down to it, the MMA is just a expense/income tracking system, which you have to enter in and confirm every detail. There are much cheaper software packages on the market that let you do this. And since you pay $3,500+ for UFF's "system", you start out behind those who use a paper and pencil to determine how much money they have left over in the month to pay additionally to their debts (which doesn't cost a thing).
I would suggest that you file a complaint with the Utah chapter of the Better Business Bureau (utah.bbb.org). I would also suggest filing a "Consumer Complaint" with the FTC (www.ftc.gov)
Good luck.
Dear Dan,
I was sent your analogy of the Money Merge Account program "Debunking the Money Merge Account Scam". I am curious to know if you ever educated yourself on the power of compounding interest, or are you still paying your mortgage the same way? Let me know when you get tired of paying the bank back the way they want you to. It's kind of like, "if you don't vote - you can't complain". You really can't complain about the greed in banking. You are only doing what they want you to - pay as much interest as possible. Good luck with your option.
Becky,
I quite agree that the power of compound interest is awesome. However, I've also educated myself on alternatives and better ways to do things and not wasting money on stuff that doesn't work and doesn't give you any rights or abilities that you don't have without it. I am a mortgage professional whos earned financial planning licenses. None of the mortgage accelerators gives you anything real or beneficial for your money. You obviously have not read the article or did not comprehend it, let alone previous comments.
Dan,
THANK YOU ever so much for writing this information. I was just contacted by a United Financial money merge account representative(very, very hard sell)and before setting up an appointment, I checked to find out exactly what it was and read your article.
I have no debt except a mortgage and car payment and am very disciplined about paying. IRA is maxed every year. If there's extra money left over from my paycheck, I put it into a savings account because I believe to have the mortage tax write off is more impt. than saving on mortgage interest.
However, I COULD pay off more principal every year if I wanted to as I'm extremely disciplined. Would you advise it?
Thanks again, for your wonderful words. You saved me a lot of time and aggravation.
Be well,
Ofgrace
My article Should You Pay Off Your Mortgage Faster? has my thoughts on the matter
I'm amazed this program is still being sold.
Commented here near 2 years ago, and I just saw a couple visits to my site.
In these 2 years, as part of the MMA battle, I wrote a spreadsheet, free for the downloading (no email or signup, just grab it).
Given the recent financial turmoil, one would hope that people have become more skeptical, asking even more questions. To some, Bernie Madoff was too obvious (i.e. a scam) yet those people were in a minority that was ignored until the issue blew up.
Back to me - MMA requires you enter more data than is needed, every cent going in and out. for my spreadsheet, just enter the amount of extra money each month-end that you'll send to the mortgage as extra principal. This is what MMA does. I've proven many times that the HELOC shuffle can't even save enough to pay for the software, so I spare people the effort and high risk a HELOC brings.
Much of the sales pitch with MMA is to make you feel stupid "you can't do this on your own". Nonsense. My 11 yr old said "you know, if there are people that don't know 18% is higher than 9%, they really should get a friend to explain that." Indeed. The sophisticated software of MMA can determine which rate is higher. If you actually have credit card debt, esp multiple cards, you should just go high rate first and get through it, not even think about the mortgage extra payments until then.
I am also an unsatisfied client. My former financial advisor talked me into this, as he had a business relationship with the agent. But neither of them used the product themselves.
The sales presentation is a very hard sell, and they show you all kinds of charts and graphs and make it look like all your financial problems will be solved. Not that I had any financial issues - my house was my only debt. They told me that not everyone qualifies to buy the program, but lucky me, I qualified. And they don't seem to want you to understand how it works. The sales lady said "You get in your car everyday, turn the key and it works. You don't know how it works, but it does." She thought that was cute and repeated it several times.
I was made all kinds of promises and guarantees, but later found out that UFF does not take responsibility for what the agents and sales people tell you. There is no guarantee. After signing the paperwork, you have three days to change your mind, but you won't get your login until after those three days are up. I would not have a problem with this company if they truly offered a satisfaction guarantee. But the truth is -- which they told me when I tried to get a refund -- that after those first three days, there is no refund.
When using the program, I watched my bank account get lower and lower. That was scary, but they kept saying to trust the program, it won't let me overdraw. I was told it CAN'T make a mistake. But when I got a prompt to send the bank more money than I had in my account, which would have me overdrawing by $3000, I immediately stopped using it, and I haven't used it since.
I have also learned that they are good about not having a paper trail to document any issues or promises made to you. All communication is by phone, and the contract does not allow you to take screen shots of the program to prove something went wrong. They keep records of every call made to you, though, and if you don't answer your phone when they call (like if you are working, eating, or whatever) they document that as you being unresponsive. When I called with problems, they just documented that I called, but didn't get specific about why, just that I was "unhappy."
I am glad I quit as early as I did. After seeing how it works, I can easily see that it's not worth a penny. It just tells you to borrow money from your Heloc and send it to the bank.
I wouldn't recommend this to anyone.