July 8, 2008

Money merge account - not a good idea.

Recently a friend sent me an email about a "money merge account" from a company named United First Financial. My friends email said the account would help you pay off your 30 year mortgage in 7-10 years simply by using a home equity line of credit (HELOC) and without changing your own spending habits. It seemed too good to be true and I think it is. At best its just a way to shuffle money around a little to save some interest combined with prepaying principal on your mortgage. At worst its a fraudulent scam.

Basically in a nutshell they have you open a HELOC and then use that to fund your mortgage. They then have you deposit your paycheck into the HELOC and then pay your bills by drawing on the HELOC. Net result is you save mortgage interest on the amount of your paycheck over the month less what you draw out for your bills.

Here is an example from the Mortgage Professor site of how it works:

"Assume the borrower’s monthly paycheck is $8,000, and on the first day of the month he does the following: a) Draws $8,000 on his HELOC which is used immediately to reduce his mortgage balance, and b) applies his paycheck of $8,000 to pay down the HELOC. On day 2, therefore, his HELOC balance is zero and his mortgage balance is lower by $8,000.

As the month progresses, he pays his expenses by drawing on the HELOC, and the HELOC balance gradually rises to $8,000. However, the average balance will only be about $4,000. For the month as a whole, therefore, he has saved interest on $8,000 of the mortgage while incurring interest on $4,000 of the HELOC. Assuming both are priced at 6%, he has saved $4,000 x .06/12, or $20. Over a year, that adds to $240. Of course, if the paycheck is $16,000 instead of $8,000, the number will be $480, and if the paycheck is $4,000 the number will be $120."

$20 savings a month is a good thing of course, but you could just put your $8000 into a high yield savings account at 3% and earn $10 on it instead. Furthermore you'd probably have to pay fees and setup costs for your HELOC and there is no guarantee the HELOC rate won't go up considerably in the future.

If you were putting $20 extra a month into your mortgage it would pay off a 30 year mortgage about 1 year quicker.

So how does the money merge account pay off a 30 year mortgage in just 7-10 years?! The money merge account also has you put all your extra savings into the mortgage. Anything you don't spend out of your pay stays in the HELOC. There is no trick to paying more towards your principal and the website my friends email pointed to wasn't that up front about this being the main way the mortgage is paid off quicker.

The worst thing I found about the money merge account is that they want to charge you $3500 up front for it. In my opinion that price seems like a ripoff for something like this.

Instead of paying a company $3500 for what amounts to a money software program, I'd instead just put that $3500 into your mortgage principle. Doing so would probably cut a year off your mortgage.

I'd stay away from this money merge account or similar schemes. If you're interested in paying off your mortgage quicker then I'd recommend simply increasing your monthly payment.

Here are a variety of sources of information I found on the topic:

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