Pros and Cons of Money Merge Accounts
What is a Money Merge Account?
Maybe you have heard about this whole Money Merge account thing or United First Financial and wondered what it is. I did too. I first found out about these programs a little less than two years ago and did some quick investigating, but didn’t do enough research to fully understand the Money Merge thing.
Disclaimer: I do not currently have a Money Merge Account. All the information included here about them is from interviews, research, building Excel spreadsheets, and my own calculations - not my own personal experience using them. I say this because there very well could be some pieces to the puzzle that I am missing, if you see any please share them in the comments.
Also, right off the bat, this product is not designed to be a quick fix to pay off your mortgage and it should only be used by people who are very disciplined with their finances. Honest MMA companies and sellers of the products have said that themselves. If your life is a financial mess, you need to get it cleaned up before considering a Money Merge Account.
So what is it anyway?
In researching this, I found a couple of good explanations of what a Money Merge account actually is. TheSimpleDollar defines it as:
A “money merge account” is a special home equity line of credit placed on your home. Every time you receive a paycheck, the whole thing goes straight towards first paying off any balance in your money merge account, then the entire remainder of your check goes towards paying the interest, then the principal of your home loan. Let’s say you had a mortgage with $1,500 payments and you set up a money merge account. Each month, you received $3,500 in paychecks, but only spent $1,200 (and sometimes less). That means that automatically $2,300 (and sometimes more) goes towards that mortgage each month - an extra $800 towards principal every single month. This means a 30 year mortgage would be paid off in 13 years and two months.
GetRichSlowly defines it as:
- The homeowner sets up a home-equity line of credit (HELOC), borrowing against the value of his property.
- Some large sum is withdrawn from the HELOC and used to pay down the primary mortgage.
- The homeowner does not deposit his paychecks, etc. into a traditional savings account, but applies them to pay down the HELOC.
- From time-to-time, another large chunk of money is taken out of the HELOC and applied to the primary mortgage.
- In case of emergency, the homeowner takes more money out of the HELOC.
- Though the HELOC will likely have a higher interest rate than the primary mortgage, it’s actually cheaper to maintain because of the way the interest is calculated.
MMA Pros
- Pay your home off in less than half the time (for most people)
MMA Cons
- You probably won’t know for sure what kind of results you are going to get with the program until it is up and running.
- You will need to open another line of credit.
- You have to have to be bringing in more money than what is going out each month in order for it to help much.
- You have to very closely track your payments!
- It will can become very difficult to budget since everything is coming out of the same bucket. And if you you begin spending more than you would otherwise because of that lack of a budget, you quickly nullify the potential gains possible.
Interview with an MMA company
I recently had an interview with the owner of Smart Equity. He agreed to give me some of his time to answer questions that I had about the Smart Equity MMA program and Money Merge Accounts in general. After talking to him, I felt like I got a better understanding of what was actually happening with the system.
The Money Merge Account system
For me, I think I figured out (someone please correct me if I am wrong) a good way to think about it…
Let’s say you had a $100,000 mortgage for 30 years (@ 7%). You would be paying 7% interest on that $100,000. What if you could transfer $10,000 of it into a loan that didn’t charge interest? You would then have a $90,000 balance on your mortgage being charged the 7% and $10,000 that you still had to pay for, but that was at 0%. I think this is what is essentially happening in the Money Merge programs. Once the $10,000 was paid off, you would then move another $10,000 to a loan with no interest. Then you would be down to less than $80,000. If you continue this cycle, it would be paid off very quickly.
From what I understand, this is a very generalized example of what is going on with a Money Merge account. The MMA software does the number crunching for you and always keep you at the most optimal point to pay down the mortgage the quickest. While the software would definitely make this an easier and probably safer process, you could still get great results doing it yourself.
For example, Using the details from the example above…
- 30 year $100,000 mortgage at 7%
If you paid $10,000 at the beginning of the year with your credit card that had 12 months of 0% you would have to pay $833.33 each month to have it paid off in a year. This assumes that you have an extra $833.33 every month over and above your normal expenses. If you repeated this process each year (according to my calculations) you would have the house paid off in about 7.5 years. In those 7.5 years you would have paid $29,912.69 in interest charges. This would have been a savings of $109,596.21 in interest charges if you did this method rather than just paying your payment each month for 30 years.
You can see an example of some calculations I made below…
I will be the first to admit that a $100,000 mortgage or having $833.33 to pay extra each month may not be realistic for most. It is just to illustrate the point and I picked simple numbers to make the example clear.
You need to have extra cash for the Money Merge to work well
What I see from all this is that, just like any mortgage pre-payment plan, the speed with which the mortgage is paid off is directly related to the amount extra you have to put towards it. If you only have $50 a month extra to throw towards your mortgage, sure the MMA software will help a little bit and may even pay for itself over time, but you are not going to be able to pay off your 30 year loan in 11 years. In the example we had above paying principal only on the mortgage would take 12.5 years and that is assuming the whole $100,000 was at 0%, which the Money Merge can not do. It takes it in chunks so that you have large chunks that are getting lower interest rates, but it can’t take the whole mortgage.
A local news broadcast about MMAs
http://www.youtube.com/watch?v=90PgchHluM4
Dave Ramsey’s take on money merge accounts
http://www.youtube.com/watch?v=viuUY47wLjs
My final thoughts on Money Merge Accounts
Doing the research, building spreadsheets and running the numbers has led me to one conclusion. It is worth your while to pay extra towards your mortgage. Regardless of whether or not you use the MMA software, it is worth trying to pay some extra principal on your mortgage on a regular basis - it greatly shortens the time you will be paying on the loan.
From what I can tell, the Money Merge software will amplify the process and will help you stay on track, but if you don’t have extra money to pay towards your mortgage, don’t waste your time.
Also, I will say it again, because it bears repeating: you need to have your finances in order before even considering something like an MMA. If you ever pay bills late, if you can’t balance your checkbook, if you don’t know exactly what is going on with your finances, I do not recommend Money Merge Accounts. If that is you right now, I would suggest trying to pay extra towards your mortgage each month and if you can do that successfully for a while, then it may be worth considering.
If you are interested in starting an MMA, I recommend the guys from Smart Equity. They were very helpful and gave me hours of their time - phone calls, emails, research just to help me understand the product. At $695 their MMA is the cheapest one I have found out there (compared to the $3500 UFF product) and customer support is included.
This article was included in the Carnival of Personal Finance
So, those are my thoughts on Money Merge Accounts. I would love to hear from people who are currently using them or who have more information about them in the comments below!
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Filed under Christian Financial Help, Make Money Now
Comments on Pros and Cons of Money Merge Accounts »
After the last round of discussion, I have a question for you. What do see as the benefit of MMA vs prepaying along with one’s monthly payment?
Joe
Joe,
assuming you are talking about the prepaying I mentioned in the example with the $10,000 each year, I think the benefit would be having a system in place to help us stick with it and maximize the benefits. I think there is also considerably less risk over the credit card idea…
I tried to point out that if you did that prepaying thing I mentioned, your results would be very similar to what the MMA could get you…
I am trying to understand the value you attribute to these programs. If it’s simply a sophisticated reminder to pre-pay principal, or if you find any value to all of the HELOC shifting of funds, which as I understand it, is where all of the transactions are. I am referring to MMA only, haven’t looked at the smartequity system.
Joe
most of the value comes from paying extra towards your mortgage. If you don’t have extra money to put towards your mortgage, it will be a waste of time.
using the HELOC to shift the funds amplifies the process by basically charging a whole lot less interest on a large chunk of money and systematically repeating that process.
But, from what I see, the majority of the benefit comes from paying extra towards your mortgage.
bob and joe
Thanks so much for your previous posts.
Here’s the kicker, I think. If you look at the smart equity page, UFF, etc… they do pay down much faster than if you just add your extra cash flow to your note.
If I go to an amort schedule and type in 250k at 6% for 30 years with an extra 1k per month it pays off in 11y 8 mo.
With Smart Equity it pays off in 9y 1mo.
It looks like these programs have much more value than just a reminder or a “discipline tool”.
If I can save 3 years for 695 dollars, or for that matter 3500 in software cost I will gladly stroke that check.
What are your thoughts?
Hokie,
I definitely agree - they do speed the process up more than if you are just paying extra towards the note, the thing I wanted to make people aware of was that you NEED to have extra $$ to pay each month towards the mortgage or it probably wouldn’t be worth the time/energy…
Hokie - in the classic example, linked to from agents’ sites, the $200K mortgage is paid in 10.4 (i read that as 10 yrs 5 months) The $1000 prepayments as on my spreadsheet pays the $200K off in 10 years 2 months. The extra 3 months it takes MMA accounts for the $3500 fee. 10+ years of moving money in and out of the HELOC every pay period and virtually nothing gained. Not sure what other numbers you’ve seen, I’ve only analyzed MMA. If smart equity promises more, send a valid link, and I’ll be happy to look and comment.
Joe
Joe
What makes your spreadsheets different than an amortization table?
Two things -
Nothing, and that’s the point. One needs no software, no sophisticated algorithms, just prepaying the principal.
And two, it offers an immediate view of what a prepayment’s impact will have on total interest paid. A standard amortization table isn’t too friendly to additional principal payments. Mine allows a monthly extra payment thrown in, and you can enter what you will. And I offer it for no more than most amortization tables off the net, i.e. zero, which is what it’s worth. I don’t obfuscate the facts by claiming that if you use the sheet and pay $1000 extra principal a month that I’m entitled to a cut of that savings, it was your money paying down your mortgage after all.
Hokie - if you think you can’t do it on your own, or that you’ll get a savings greater than the cost of whatever plan you which to buy, by all means, go for it. I can’t tell any longer if you are truly asking for help, playing devil’s advocate (ironic, given the monikor of this blog), or an agent who is trying to draw out us ‘nay sayers’.
Joe
Joe
I am not a sales person for any of these companies. I am trying to find the truth.
Before you start to ASSUME, we all know what that does, let me give you a little back ground. I am 31 and to this point I have never had any credit card debt and currently have no debt except for my house. I am also in the top 3% of earners. My financial discipline level is very high. I invest every month 15-25% of my income as I have done since I was 23. I am a commission based sales person(surgical device) hence the variance in my monthly income.
In the past I have had little interest in accelerating the pay off of my house. But recently I have realized that my house is a liability and the accountants are just flat wrong when they tell me I get a great tax break. Me pay 1 dollar to get 30-40 cents back, no thanks!
I was extremely skeptical of these programs but the bottom line is that what UFF is willing to put into a contract is nearly 5 years ahead of what amortization schedules tell me I can do with what I am willing to put against my note on a monthly basis. UFF can do it in 9 years and the traditional pay down takes nearly 14…. I spoke with Smart Equity which Bob has spoken of a week ago and they are coming in close to the 9 year pay off as well. Since it seems like everyone agrees these are not a scam HOW DO THEY DO IT SO MUCH FASTER????
I am not trying to “draw” out anyone. I am just very interested as 5 years is approximately 100k savings for my family.
I assumed nothing, I offered a multiple choice and you answered me. No harm, no foul.
I keep referencing my sheet vs the agent’s site and presentation. Their numbers are at:
http://www.discovermoneymerge.com/images/template/page2.png
and as I stated, my numbers are better, given the same rate and available extra money. More than that, I don’t know what I can tell you except they simply don’t do it faster, they insist you ‘can’t’ do it alone. If you simply send the extra payments in each month with your mortgage, you will be ahead. Emailing me for a copy of the sheet can’t hurt either.
Consider this - if you don’t understand how it works maybe you should have it explained to you. If they can’t, well isn’t that a sign something is wrong?
Joe
Joe
On Friday Bob agreed that the MMA, Smart Equity, Equity Genie etc… does speed up the process faster than just applying your discretionary income to your note. I have been looking at these programs for 2 months now and it just seems that there is a savings in time and money by using them.
I would like to take a look at your spread sheets. Do I need to go to our website and email you from their?
Yes. You can click on my name, above and drop a comment to me, doesn’t matter where from. You put your email in the comment email field and I’ll send it. I usually turn these around quickly.
Not sure what numbers Bob saw. As i said, even the agents sites only show what they show.
Joe
Is it possible that if an individual has more cash flowing in and out of their(higher income) account the “float” could make up some time ?
I posted this someplace, I forget where. In the classic example (I refer to that to compare apples to apples, as an engineer I learned to isolate variables to see what impact there is by changing just one) there is $5000 monthly flow. MMA magic (you know, the ’sophisticated algorithms’) claims to find extra money by taking advantage of the idle cash sitting in one’s checking account. Let’s assume that on $5000, there’s an average balance in checking of $3000, is that fair? Now, if we can somehow get 6% on that balance, that would be $180/yr, right? This is what they do in the MMA system, by sending the whole $5000 to the mortgage and borrowing off HELOC to make up the difference until you can pay it down. But $3500 over the 10.4 years in the example will take payments of $37.77/month to pay off, or $453/yr. If you have higher flow, say $10K/month, you might extract $360/yr, still not enough to even pay for the program. And if your flow is $15K/mo, you are making $250K/yr, you really want to waste all the time it takes to save a few hundred dollars a year? You make $125/hr at this rate, and taking an hour per month of juggling money makes no sense if you are saving so little.
Joe