Friday, January 18, 2008

Money Merge Accounts and Mortgage Accelerators – 7 Points of Contention

I've written about these products before, and have had fairly large responses each time.

Mortgage Accelerator – Paying off Early (3/20/07)

Mortgage Accelerator – Upon Further Review (4/10/07)

Mortgage Accelerator under fire – Australian Securities and Investments Commission taking action against mortgage brokers (8/28/07)

Lately I have received a lot of emails from loan officers who sell these products. Most of them accuse me of not understanding their product. Most of them have not read what I've already written in detail. And all of them offer to let me watch a video or read their company's brochures about the product. That's just not something I'm interested in doing, over and over again.

So, I'm going to re-state my thoughts on this type of mortgage, and let anyone who's interested make comments below.

Here are my 7 points of contention:

#1. It Works. There's no doubt in my mind that if somebody follows the MMA program, and deposits all their excess/discretionary income against their mortgage, they will pay their mortgage off significantly faster.  That has never been an argument from the very first time I posted about this product.

#1A. Bi-Weekly Mortgage Payments. Another mortgage option that's been around for years is the bi-weekly payment system, where borrowers make 26 payments per year, with each one being 50% of a full mortgage payment. The result is equal to making 1 full extra payment per year, which will shave about 6 years off a standard 30 year, fixed rate mortgage. I'm not saying one is better than another; I'm simply saying that if you put more money toward your mortgage, you'll pay it off sooner.

#2. You must go All In. For this program to work REALLY WELL, virtually ALL excess/discretionary income must be used.  This means extra expenses like kids' braces, cars, vacations, investments, or loss of income, will work against the program (meaning your mortgage will NOT be paid off as quickly.)  The more you have extra expenses, or use your money for other things, the longer it will take to pay off your mortgage.

#3. MMA Not Necessary to pay off early. This (points #1 and #2 above) is also true WITHOUT the MMA.  Anyone who puts all their excess/discretionary income against their mortgage will pay it off very quickly.  Anyone who spends their money elsewhere will take longer to pay off their mortgage.

#4. You can't have your cake and eat it, too. One of the most common arguments I hear is that this product gives you flexibility; if you need access to your money you'll have it. That's not fair; You can't argue that a person still has access to their cash on one hand, and that they'll pay off their mortgage faster on the other.  If they use their money for other things, they delay the ultimate payoff of their mortgage.  A standard mortgage with a standard HELOC offers the exact same flexibility.  It might take a lot of planning & discipline, and you won't have software telling you exactly how much each decision affects your overall total, but the same (or very similar) results COULD be achieved without the MMA product.

#4A. Traditional Mortgages offer the same "cake". Put 20% down on your home, and then get a HELOC after you move in.  Pay down your mortgage with every last dollar you can (discretionary income), but then use your HELOC whenever you have extra expenses.  Then use your discretionary income to pay your HELOC back down to zero, and then start paying extra to your mortgage again.  Same concept, same results, but with traditional programs. No extra expenses, no extra software.

#5. False or misleading Advertising. The advertising claims that you will pay off your mortgage in half the time without changing your spending habits or making any extra payments are hogwash.  If someone is not going to change their spending habits at all, then by definition they would currently be putting ALL their excess/discretionary income into their checking account, today, before they started using this program.  Otherwise they will need to make some sort of change.  Show me one person with a $200k mortgage and over $100k in their checking account, and I'll agree that that person will be able to take advantage of this program without changing any of their habits..  The fact is that very few people will achieve the results that are being advertised on the radio or in other media.

#6. No Fixed Rate Mortgages allowed. This program forces people to use an adjustable rate mortgage.  That would have been fine over the last 15 years, while rates were declining &/or stable. But how can you guaranty rates will remain low over the next 15 years?  How well would this program work if rates were sitting at 11% in 2011?  That's why I still love fixed rate mortgages - people can pay down principal without any penalty, but they don't have to.  And the banks take the interest rate risk, not my buyer.  If interest rates go up, and my buyer is sitting in a FRM at 5.75%, the math/analysis actually tips against this MMA program.

The Australian Securities and Exchange Commission agrees with me – not that the program doesn't work, but that the advertising claims are false.

Loan Officers – here's your chance. If I'm wrong, I want to know about it. Please pick these points apart. Let me know what I'm missing. All comments which add value or insightful discussion will be approved. (please let me know which point you're addressing in your comment.) Comments merely stating the program works (we already know that), pointing me to your company's webinar or other promotional material (advertising), or simply stating you offer these services (self promotion), will not be approved.

Borrowers – if you've been considering this type of mortgage product, you should get to learn quite a bit from the comments below. But Buyer Beware – no facts are being checked for accuracy. You should always do your own due diligence before making a major financial decision.

Your looking forward to this discussion Realtor,

Chris Butterworth

[tags] Money Merge Account, mortgage accelerator, mortgage options, fixed rate mortgage, Fletcher Heights [/tags]