Guest post by Joe Taxpayer
As I looked at multiple United First Financial agents’ sites, I found the common thread was the claim that one simply can’t do this on their own, that the shifting of funds from a checking account, to a HELOC, and then to a primary mortgage somehow needed such a level of sophisticated computer analysis that it was beyond the average consumer.
But let’s dig a bit deeper to understand what savings may or may not be possible with the UFF Money Merge Account. In the classic MMA example (i.e. the one appearing on or linked from most agents’ sites) we are looking at a 6% fixed rate mortgage, and $5,000 in net monthly cash flow.
I understand that there’s something to be gained by using money that otherwise sits idle in one’s checking account, perhaps earning 0% interest. MMA and the use of the HELOC “shuffle” claim to provide a return equal to your mortgage rate on that idle cash. Okay, that sounds like a great deal, buthow much is that worth?
It would be reasonable to assume that one’s average daily balance would be about half their income, as they get a paycheck and spend it until the next check comes in. So on $5,000 income, one might run an average balance of $2,500.
MMA software then suggests you borrow another $2500 from your HELOC, and send the entire $5,000 to your mortgage as a principal payment. At the 6% mortgage rate, the $5,000 will save you $25 per month, but even if the HELOC were also 6% (it’s usually at an even higher rate), half of that is lost, so your net gain is only $12.50 per month.
Let’s go back to our mortgage calculator (my Texas Instruments BA30 or any calculator on the net) and see what the cost of the MMA software is: $3,500 borrowed at 6% (since it’s money I’d otherwise send to the mortgage) and paid down over 10.4 years, the same duration the agents claim I will be done with my mortgage. I find the monthly expense on the software cost is $37.77.
Let’s go back to my original math, and stack the deck in MMA’s favor. Say I am paid on the first, and all my expenses are somehow due on the last day of the month. This is the logical extreme, is it not? So MMA will claim it’s responsible for helping me capture a 6% return on my $5,000 idle checking account balance. This will gain me $25 per month. Even in this “best case scenario for UFF” I still save less than the $37.77 expense of MMA.
This simple reason is why one can and should simply make extra prepayments each month or each quarter, for that matter, without any fancy software. The constant reference to the software is simply not needed. It’s a waste of time and energy to do multiple money shuffles that won’t save you enough to even cover the cost of the software itself.
What many fall for is the confusion caused by most consumers’ lack of understanding of the effects of the time value of money.
For instance, along with the first mortgage payment, MMA software might suggest sending $5,000 from your HELOC to the mortgage principal. They will claim you have just “canceled” $23,304 worth of future interest. Indeed you have, but you also have a HELOC loan for that same $5,000, likely at a higher interest rate. So at the outset, you are saving $25 on your mortgage, but paying $33 on the HELOC. You’d be far better off over time to use the money each month that you’d use to pay back the HELOC and just pay it towards the mortgage as it is earned.
On a closing note, keep this in mind – the current prime rate is 5%. Only a year ago, it was 7.75%. MMA salespeople maintain that there’s no risk with this system. I believe the risk is high. There’s a strong likelihood that you get caught with no liquid cash in an emergency account, instead relying on the HELOC, and you then find you need it when rates have gone back up. Even worse, you could find the HELOC frozen when you need to borrow funds for the broken furnace off a high interest credit card. Just something to consider.
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