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.
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.
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.
- UFF Plan: Another Good Fairy of Rapid Payoff – Mortgage Professor
- Money Merge Account FAQ – FatWallet Forums
- Money Merge Accounts: Good Fairy or Demon? – ActiveRain
- Clark Howard Radio Show on Money Merge Accounts
- Don’t Be Tricked By Financial VooDoo – Integra Mortgages
- Money Merge Accounts: the Good, the Bad, and the Ugly
- Money Merge Accounts: Good Deal For Home Borrowers? – Simple Dollar
- Is a Money Merge Account a Good Way to Pay Off Your Mortgage? – Get Rich Slowly