Money Merge Accounts Explained, Part 1: The Basics Of Accelerated Mortgage Payoff

Now that I have a mortgage of my own, I finally spent the time to read up on Money Merge Accounts – also known as Mortgage Offset Accounts, Mortgage Acceleration Programs, Equity Accelerators, etc. You may see them sold by various companies like United First Financial or Tardus. All of them offer to make it easy to pay off your 30-year mortgage earlier by 10 or 20 years without changing your spending habits. My goal here is to be educational without being inflammatory and using words like “scam”.

I think the best way to do this is for people to view their own 15-minute sales presentation video, and have me explain afterwards how the numbers really shake out. If you’re short on time, you can drag the little arrow to the middle and pay attention to their walkthrough of the $200,000 accelerated mortgage paydown.

Breaking It Down: Simplified Version

Finished? Okay, here is a simplified version of the situation in the video. Let’s just say you have plain loan with a $200,000 balance being charged 6% simple interest (accrued daily). You can pay the balance down, or borrow more money as you wish. You don’t have any minimum payments for the time being. You earn $5,000 each month, and have $4,000 in expenses. There are two sources of potential savings through this account.

Source #1: Interest Offset
If you simply deposited your entire paycheck into the loan balance, it would reduce the loan balance temporarily to $195,000. As you pay your $4,000 in bills throughout the month, you balance will go back up to $199,000. But your lower balance throughout this time will reduce the amount of interest you’re being charged. This is what they call “interest cancellation” or “interest offset”.

This interest savings will repeat each month. In an ideal situation, it would be like having your loan balance decreased constantly by $4,000. At 6% annual interest, this would be $240 a year, or $20 a month. Actual net savings would most likely be far less if you usually keep your idle cash in an interest-bearing account, but let’s just leave this number to be generous. Again, we are ignoring additional fricton

Source #2: Additional Principal Paydown
But hey, notice that after the first month your loan balance is now only $199,000. This is because you have $1,000 in extra income each month. Let’s assume you wish to keep paying down this loan with it. Besides lowering the amount owed, it also saves you interest this year and all the years after that. That’s $1,000 each month + 6% interest. In one year, you will have paid down the loan by $12,000 and also avoided $387 in interest. That’s a “savings” of $12,387 a year.

My point? Most of the benefit of this program is due to the fact that you are using all of your excess money to pay down your loan, not the interest offsets. This is also confirmed using their own numbers:

Breaking It Down: Using The Provided Example

In the marketing video, by using their special optimizing algorithms and juggling money between their Home Equity Line of Credit and the $200,000 mortgage, they claim to have shortened a 30-year fixed mortgage so that it can be completely paid off in 10.1 years.

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However, this result can be matched almost exactly by simply using this Mortgage Payoff calculator. Using the inputs of a new 30-year mortgage of $200,000 at a rate of 6%. Now let’s put that $1,000 as an additional monthly payment on top of the required $1,199. Again, you’ll see that your mortgage is shortened by 19 years and 10.5 months – the same as having it paid off in… 10.1 years! Virtually all of the mortgage acceleration is explained by paying extra towards your mortgage.

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One of the first things you learn about in investing is the power of having your money earn compound interest. Well, holding a mortgage is like paying compound interest to the banks. A $200,000 mortgage for 30 years at 6% ends up being $431,677 in total payments. On the flip side, paying a seemingly small additional amount of money per month towards your mortgage can shorten your loan drastically. Bookmark the calculator above and simply type in your own remaining mortgage balance. You’ll see that even an extra $50 per month would shave off 3 years from the example 30-year mortgage!

Conclusions So Far
Before even considering these programs, you have to ask yourself if you really do want to pay off your home early. That is a separate argument, and there are several arguments against it.

If you do decide to do this, I hope that I’ve illustrated (as many others have also discovered) that if you strip away all of the marketing distractions, the actual monetary benefit of this program is probably around 1% interest offset and 99% old-fashioned mortgage principal pre-payment. Simply keeping your idle cash in a high-yield bank account, and putting the cash you have left over towards your mortgage principal each month, will yield virtually the same results. All of the optimizing software in the world won’t change this fact by any significant amount.

What this software will also provide is give directions for payment each month, as well as continually update your projected payoff date. Is this worth $3,500? Definitely not for me, but I’ll try to show next why it’s also not worth it for most people. Meanwhile, consider this: Putting $3,500 towards the $200k mortgage – instead of buying this software – would shave over a 1.3 years off the loan length and save over $16,000 in potential interest all by itself.

Additional Resources

Comments

  1. Forget all that. When you have some extra money, just send it in with your regular mortgage payment. Christmas money? Send it in. Birthday money? Send it in. CD matures? Send it in. That way you’re not locked into any “system”. The ultimate flexibility. But watch your statements like a hawk. Make sure that any extra is applied toward the principal only, NOT next month’s princial and interest. GMAC tried that with me. I caught it and they are correcting it.

  2. Thank you for this post Jonathan. You must be inspired. I have family considering these programs. I said don’t do it, it smells funny but never took the time to collect such an insightful collection of reasons not to. I have sent them your post.

    If you are looking for more ideas for topics I highly recommend covering the topic of snowballing debt payoff. Here is a site with a tool that does all the work for you:

    http://www.whatsthecost.com

    Browse there and click the “snowballing” link on the left. I use it to stay on top of paying down the mortgage, car, and student loans early.

    Thanks again!

  3. moneyandpf says:

    I had never heard of these accelerated mortgage payoff programs but good writeup because you are exactly correct. I’m sure these programs do quite well because they flash what consumers want to see (Such as the graph included in your post) without really understanding how its accomplished.

    I’m not sure if prepaying a mortgage (When I get a home) will be the best move for me though. For one you get tax advantages. Two, at that time I’ll probably have kids who I will want to help put through college. Perhaps I’ll send in a little extra though we’ll see.

  4. SayerOfTruth says:

    OK. I’ll say it for you. SCAM. :)

  5. rachel @ master your card says:

    Another thing to be wary off is that often the morgage interest rate is not as favourable with this sort of flexible scheme.

  6. That only makes sense if you do plan to live in the same house for that long…

  7. You’re missing a very important part of the appeal of these accounts. I’d like to start off by saying only people who are responsible with their spending should get an account like this. The benefit is that you do not need to maintain an emergency fund or really any significant cash savings. The loan/account/line-of-credit acts as your buffer if you ever need the cash.
    I agree most of the benefit is coming from the fact that you are making extra payments, but if that money was just going to sit in an account – you’d be earning lower interest, and paying tax on that interest.
    I think the huge benefit of this type of account is exactly what you mentioned – all your free cash goes towards paying your mortgage. But the advantage over the do-it-yourself approach is that you have ready access to cash any time you may need it.

    Having said that, I think this particular product is a scam – the only possible justification for their $3500 is to look at it as loan closing costs. I think some more reputable institutions (Wamu?) offer similar products with better terms.

  8. Matt Good says:

    Nevermind the fact that who knows if the company will even be in business a few years down the line, let alone 30.

  9. Yeah, this always just struck me as an overly-complicated way of prepaying your mortgage. However, you should note that the interest offset savings will be much larger for a larger mortgage. So if you get a $1 million mortgage, the interest offset savings may be significant.

  10. Just pay the principle down. Why go through all the trouble of dealing with something you aren’t positive is going to be around forever. Paying the principle down is the sure fire way to get out from under your house debt.

  11. TechJosh says:

    My understanding of these types of accounts is that instead of paying ~6% APR on the balance of your loan and earning ~4-5% on your liquid assets (a net difference of 1-2%) you basically offset the amount on which you pay 6%. It also means you won’t be paying capital gains tax on interest earned in your liquid accounts. And any interest you do pay on your mortgage is still tax deductible. So basically its almost like earning 1-2% more interest on your money in that your not paying 6% interest on those funds. When you look at it from that paradigm it makes more sense to do it.

    I’m not saying I’d do it but I’m not saying I wouldn’t either. I’ll cross that bridge when I come to it.

  12. I love mortgage calculators, and played with one almost daily for several years to see what the different outcomes would be. As my plans would change, I would put in different amounts. The good thing about doing it yourself is changes in your life can alter your plans about your mortgage. I paid off my mortgage two months ago (8 years early), and I can honestly say that the mortgage calculator played a huge part in that. Since my mortgage interest was accrued monthly, I found that paying my regular payment on the first, then waiting until almost the end of the month to pay the extra principal was most profitable. I left the extra principal money in my high yield savings until I was ready to pay the extra. It lowered my interest paid for the next payment by a great percentage. Also, I had that money for almost the whole month in case I needed it for something else. If your interest is accrued daily, this wouldn’t be the way to go.

    If I had started earlier, when my loan originated, to make any kind of extra payments, the outcome would have been even better, by a long shot. As for the expensive software, the best point made is that you could take that money and pay it on your mortgage.

  13. As long as you don’t pay $3500 for purposely deceptive overhyped software (that’s my nice way of not saying scam) an offset mortgage is a good idea.

    Given the current poor rates on savings accounts an offset mortgage (a HELOC and your regular 1st mortgage works similar to an offset mortgage) makes sense for getting a higher return on your money (maybe depends on your mortgage rate and taxes).

  14. GREAT explanation! I would still go with just paying extra toward the principal. There is no way this would work for someone who has no control over their finances.

  15. It is true, the “mortgage offset” is essentially interest arbitrage. You are avoiding paying 6% interest on the mortgage, which is similar to earning ~6% on your money. Similar but not exactly, due to amortization schedules and HELoC interest rates.

    I try not to get bogged down in the exact math, just want to point out that the offset amount is a pretty small amount.

  16. I haven’t look into it too much, but I believe there are costs associated with opening a HELOC. So, am I wrong in thinking a person is acutally paying for the original mortgage amount, e.g. $200k plus the $1k HELOC fees. Also, don’t many HELOCs have early pre-payment penalties and interest only payment periods? One last thing I want to mention is that I don’t think people should consider a HELOC an emergency found, because many financial institutions are suspending draws against those accounts. If you have put in your monthly paycheck, and the bank says, “We’ve decided that you no longer can make withdrawals against the account.”, where are you going to get the funds to pay your monthly expenses? You have no traditional emergency fund, and the bank now has your paycheck, which it is not giving back. Also, usually it will take at least a month before your employer will change your direct deposit. So, you may be in bad shape for a couple of months before everything is straightened out.

  17. heres some simple math to add to it. im at 4.75% with a 30 year ARM, 4 years in. Yesterday I could have locked a 15 year at no more than 5%… I just have to drop about $5K more towards my principle to get to the magic 20% principle paid to remove the need to deal with PMI.
    Bottom line – if mortgage rates get much lower, interest payments on your mortgage will be so low (im hoping i can lock in at 4.5% come early summer) that with my piddly little mortgage ($130K left when I lock in) this practice is essentially useless. agreed that with a 7 figure mortgage and a 6-8% rate, it is a much different story.
    rural america isnt so bad – fewer zeros to deal with on a balance sheet, in either direction.

  18. These ARE SCAMS if you pay $3500 for them. However for a person that can’t handle the responsibility of doing it themselves, the normal fee of $30 annually wouldn’t be too bad of a cost.

    I have no idea where you are getting the $3500 number, I’ve only ever seen them for $30-$35 annually.

  19. Ken in GA says:

    John Bogle, founder of The Vanguard Group, conveyed an old principle in one of his books — “when presented with mulitple solutions to a problem, the simplest is usually the best” — or something to that effect. The Money Merge system certainly violates that test, especially when compared to just tacking on $25, $50, or $100 to your regular mortgage payment.

    Perhaps a case could be made that it is appropriate for certain homeowners with very large mortgages that they would like to pay down sooner rather than later (although I would never pay $3,500 for it). Even so, I still see certain risks. First, it seems to me that the whole plan is very depedent on one’s ability to maintain their income level and cash flow in order to achieve the required transfers back and forth. An unexpected financial mishap — such as uncovered medical expense, a home repair, or a spouse losing his/her job — could derail the entire plan. This could then snowball into not being able to meet regular mortgage payments and running the risk of forclosure. The bank at this point is not going to cut you any slack for having made earlier prepayments. In fact in just makes easier for them to sell your home on the courthouse steps at a price where they can recover their loss.

  20. the whole money merge stuff actually helped to jump start my personal finance interest. while i never went with one, i ended up learning a lot in the process!

    i applied part of the rules to our already-active, and maxed out, HELOC account. i paid it down w/ our bi-weekly paychecks to avoid as much “average” interest as i could, and then wrote checks off it to pay the bills.

    ***While this saves us a good $50-100 a month, our heloc froze due to the market crises going on, and i no longer have access to all that money.

    so…. whether some people find it good for them or not, i strongly advise reading up and going through this posting thoroughly….esp w/ that “spam” labeling it’s been given over the past cple years. but parts of it just might be GOOD for ya.

  21. Tom Miller says:

    The $3500 is the fee charged by the Money Merge Account company for the use of their “special” software. A friend of mine sent me a link about this and I checked it out. As soon as I heard that the fee was $3500 I decided not to use them, but to just apply extra to the principal each month when I may a payment.

  22. Nice review of the Mortgage Acceleration Programs but one thing to mention is the fact these mortgage accleration programs are lines of credit and they are adjustable interest rates. The only way this would be any benefit to me is if the mortgage was fix
    The goal behind the banks that offer this product is that the interest rate is adjustable like a line of credit and you the consumer have easy access to your money so you are likely and will end up spending the money and your mortgage will be at a higer balance rather than paying it down and your interest rate is a higher adjustable rate . Not worth the 3500 nor any amount of 1% saving for the risk of an adjustable rate of interest

  23. Jonathan – nice blog. Re “offset accounts” in general and NOT this specific product, I do not completely agree with your summary and am interested in your opinion of the following 3 scenarios:

    a) 50 yr old buys a 400k house and uses his 300k savings as down payment taking out a 100k mortgage @ 6%. Two years later, a recession hits with the property values going down. He loses his job and cannot pay the mortgage. He has equity in his house but because he has no job the bank will not lend him money. He cannot sell the house in time because the housing market has crashed. He gets foreclosed with the bank auctioning the house for $150k so getting their money back. This is a scenario SO many people are in today and they are in a lot of pain.

    b) 50yr olds buys a 400k house and uses 80k of his 300k savings as downpayment on a 320k mortgage @ 6%. He invests his 220k in age-appropriate mix (CDs @4%, MMs at 3.5%, Bonds/Stocks at 5%). Two years later, a recession hits with the property values going down. He loses his job but still pays the mortgage from savings. After 18 months he gets a new job and all is good. He did not lose his house but his investments barely kept up with inflation. His 220k did not really increase in value. Even though he got tax relief on his mortgage interest he paid tax on his investment interest.

    c) 50yr old buys a house and uses 80k of his 300k savings as downpayment on a 320k mortgage @ 6%. He puts the other 220k in an offset account (effectively earning 6% – he only pays interest on 100k of the loan because the other 220k is offset). Two years later, a recession hits with the property values going down. He loses his job but still pays the mortgage from the offset account. He did not lose his house and his effective 6% return beat inflation.

    From what I read a lot of advisors might have recommended option b in the past but in todays market I am sure option c using an offset account is potentially better (especially for older people nearer retirement who need safer lower-interest investments).

    Caveats: You should not pay $3500 fee for this service and the offset account should NOT be a HELOC – it is a separate savings account linked to your mortgage account containing your money that the bank must not be able to prevent you from accessing.

  24. scenario a) doesn’t happen. Houses with 75% equity do not reach forclosure someone will buy it at a heavily discounted price. Sure he can loose the house and loose some money but a $400K house does not sell for $150K. Prices haven’t dropped that much.

    options b) and c) are about the same, but I don’t see an offset mortgage being at the same rate in the as a traditional mortgage in the real world. Also offset mortgages are usually variable rate not fixed.

  25. JimmyDaGeek says:

    Do Not Use MMA to pay off your mortgage. Aside from their $3500 fee which you will not make back, their algorithm does not use “interest cancellation” optimally, according to their published example, making it even more expensive than doing it yourself.

    It can be easily shown that the best thing to do is to INVEST your spare cash for the long term. Why? Because you always have the option of getting at your money. When your balance becomes large enough, you can pay off your mortgage, if you want to. Otherwise, you have to *borrow* against your equity and pay interest.

    The next best thing to do is to use a good interest-bearing checking/savings account combination and use the interest to pay down your mortgage, as well as your spare cash.

    If you want to have a HELOC, keep it around for an emergency situation, not as a checking account or piggy bank.

    If you want a copy of my spreadsheet, ping me bgsweeps-at-yahoo-dot-com. Please put spreadsheet in the subject.

  26. what actually kind of account that you speak of that is the separate savings account linked to your mortgage.
    Also the $3500 software is a scam to get your money-usually MLM, there are other software programs that cost less that I found. My thing is I am skeptical about giving anyone money and they don’t know my situation.

  27. Anonymous says:

    I LOVE this site. Here’s a question.

    Let’s say hypotehtically that I got an inheritance. I have a chance to pay down my mortgage now by 50k. It’s a standard fixed rate 30 year mortgage with a 250k principle and 25 years left. Is there any advantage to making a big payment now versus several smaller payments over time over the next few years, assuming the total extra payments will be the same? Specifically, will I reduce the overall cost of the mortgage by taking one route versus the other?

    Thanks.

  28. Anonymous, optimal would be to put as much of that 50k into tax defered retirment accounts as you can. Second would be to put all 50k into a regular taxable account for 25 years, over that long a period you are sure to beat out a low rate fixed mortage. Third would be to dump all 50k into the mortgage right away.

    Why would you think making “several smaller payments over time over the next few years” would reduce the overall cost on a fix rate mortage faster than paying the 50k all at once?

  29. What about the Home Ownership Accelerator offered by CMG? In 5 yrs, we want to see if we should get into it. Read the mortgage professor’s article on it http://finance.yahoo.com/print/expert/article/mortgage/54625. I have been trying to see if anyone out there has one of these and see if they like it…

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