I have been a mortgage broker for over 10 years in South Florida. Over the years, many mortgage acceleration programs have crossed my path, but I have never felt truly passionate about one of these programs until I was introduced to the Money Merge Account from United First Financial. The purpose of this article is to outline the benefits and put to rest the misconceptions about these innovative programs and why I truly believe the Money Merge Account is the best of them.
To start with, we first must understand what exactly is meant by the term 'mortgage acceleration program' and what every one of these program does and does not do.
Mortgage acceleration programs are designed to 'help' or 'assist' in paying down your mortgage's principal balance and save on the total amount of interest you pay on your mortgage. If you borrowed $200,000, then you will be paying back the $200,000, just the amount of interest you pay will be reduced. I usually refer to these programs as the 'diet programs of the financial world?. The reason for this analogy is, just like diet programs, every person is capable of losing weight although some of us need help in achieving this goal. The same can be said about our mortgage. We are all capable in paying off our mortgage faster, but some of us lack the financial obedience and discipline to do so. Mortgage acceleration programs keep us on the path toward our ultimate goal (living mortgage free) and making this task easier and less stressful for us; that is all.
With that being said, I would like to look at the two different types of mortgage acceleration programs available today and the pros and cons of each.
The first type of program is the first position Home Equity Line of Credit or HELOC for short. In this program, a client is asked to refinance their existing first mortgage (which is usually a fixed rate, fully amortized loan), their second mortgage (if they have one) and their credit card debt (if they have any) into a first position HELOC. The reason for this is the payment on a HELOC is interest only, BUT the amount of interest we are charged is based on the daily average balance of the HELOC for the prior month. The client is then asked to transfer the full amount of their paychecks (and whatever other money they make that month) into the HELOC (they should always have a $0 balance in their checking/savings accounts). By doing this, it drives down the principal balance of the HELOC. When they need to pay a bill, they simply can write a check from their HELOC to pay it since all HELOCs act as a checking account as well. In essence, the HELOC becomes the client's checking and savings account.
To put this into prospective, let's look at an example:
A person starts the first of the month with a balance on the HELOC at $100,000. They are paid twice a month on the 1st and the 15th in the amount of $2,500 each pay period and they have monthly living expenses of $4,000 (to make this example simple, we will assume the client pays all their bills on the 30th of the month). Therefore, they started the month with a $100,000 HELOC balance, but their paychecks were applied throughout the month and then their expenses were written from the HELOC, therefore, their end of the month balance is $99,000 (($100,000 - $2,500 - $2,500) + $4,000). If the interest rate on the HELOC was 10%, people would assume that their payment would be $825 at the end of the month (($99,000 * 10%) / 12 = $825). But this is wrong. There true payment would be based on the average daily balance of the account, which is $93,083.33 ($97,500 for the first 14 days, $95,000 for the next 15 days and $99,000 for 1 day divided by 30 days). Therefore, their payment on the HELOC would be $755.69. This is a difference of $49.31.
Based on the information above, lets look at the pros and cons to this program.
The pros to this program should be easy to identify:
1) Every dollar earned and saved is used to help pay down the principal on the HELOC.
2) No extra steps are needed to be taken by the client, just transfer their money from checking/savings into the HELOC.
3) Access to the HELOC is always available to pay expenses.
The first position HELOC is a very simple and effective way for people to use every dollar they earn and save to help pay down the principal balance and save on they amount of interest they pay on their mortgage. However, there are a number of cons with this program which has prevented me from offering this solution to clients. They are as follows:
1) They client never truly knows how many years are left until their mortgage is paid off because a tracking system has not been developed.
2) The interest rate on the HELOC is adjustable and tied to the Prime Rate which is controlledby the Federal Reserve. The Federal Reserve has increased the Prime Rate from 4.00% in July 2003 to 8.25% in July 2007. As the rate of the Prime Rate increases, the length of time to payoff the client's mortgage also increases as well as their payment.
3) There is always the 'drunken sailor effect? (this is what I call it) to consider as well. This basically suggests that since the client always has full access to the HELOC, they can borrow from the HELOC and drive the principal balance up to its original amount. People who have access to money tend to spend it if it is not watched closely.
4) Lenders who offer this program typically charge high fees.
The second type of mortgage acceleration program combines the use of a second position HELOC and computer software to payoff the first mortgage and other debts (this is how the Money Merge Account is setup). In this program, a client obtains a HELOC as a second mortgage on their property. The client is then asked to transfer the full amount of their paychecks (and whatever other money they make that month) into the HELOC (they should always have a $0 balance in their checking/savings accounts). By doing this, it drives down the principal balance of the HELOC. When they need to pay a bill, they simply can write a check from their HELOC to pay it since all HELOCs act as a checking account as well. In essence, the HELOC becomes the client's checking and savings account.
Computer software is then used to monitor how much money is coming in, the frequency in which the client is paid and how much is going out for expenses. Based on these factors, the computer software will tell the client exactly how much (an exact dollar amount down to the penny) and when (an exact date) to borrow from the HELOC and apply it as an additional principal payment to their first mortgage. The computer software will also keep track of how much principal is owed on the first mortgage and HELOC and how much time is left to payoff the mortgages.
Now that we have an overview of how the program works, let's look at the pros and cons to this program.
There are a number of pros to this system which make it very useful to a client. They are:
1) The client does not have to refinance their existing first mortgage (which is usually a fixed rate).
2) The HELOC can be obtained at their local bank and the bank does not charge fees (check with your bank to be sure) to obtain the HELOC.
3) A much smaller HELOC is used.
4) The interest rate on the HELOC does not matter as long as the client does not have an existing HELOC with a balance. If the HELOC is new and doesn't have a balance, the client will payoff their mortgage(s) in the same amount of time regardless of the interest rate.
5) The computer software acts as a 'financial dashboard' clearly showing the client their income, expenses, what they owe on the mortgages and when everything will be paid off.
6) The client has to manually input their expenses into the computer software, thus subconsciously making them realize how much money they are truly spending (helps prevent the 'drunken sailor effect' from happening).
7) The client can clearly see the amount of time added to the payoff of their mortgage with every expense. This is referred to as the True Value of Money. Although some expenses are necessary (food, gas, electric, etc?) many are discretionary and can be cut back on (going out to dinner is a big one). This subconsciously makes the client become more frugal with their money and spend less on unnecessary expenses.
8) Every dollar earned and saved is used to payoff the mortgage(s).
9) Less expensive then the first position HELOC.
10) WILL ALWAYS PAYOFF FASTER THEN THE FIRST POSITION HELOC.
11) The results are Guaranteed.
Although the pro list is long, there are some cons to this program:
1) The client has to manually input their expenses into the computer software; therefore, there is the chance they will not.
2) The program does not move the client's money for them. Additional principal payments to the first mortgage from the HELOC have to made by the client.
3) Clients living in states which will not allow HELOCs (Texas is one of them) are not able to utilize this program.
In this article we examined the two different types of mortgage acceleration programs and listed the pros and cons of each of them. You can clearly see why I have chosen to offer the Money Merge Account to my clients over the first position HELOC. I truly believe this program will help those clients who need assistance in controlling their finances to become mortgage free. At the time of this article, I currently have several clients utilizing the Money Merge Account and all are happy and referring other potential clients to me. It should also be noted that there is not one unhappy client out of the many thousands across the United States who are currently using the Money Merge Account.
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