Speeding through your mortgage

Now that many of you have crunched the numbers for accelerating your mortgage payoff, I think you are ready for a quick lesson on speeding through your mortgage. Now, I am not saying you should speed through your mortgage but there is a program available that helps you pay off your mortgage very quickly (approximately 10 years) so let’s see how it works.

I thought it would be fun to review the MMA (Money Merge Account) program from United First Financial (UFirst). The company has a website with content that includes the MMA Intro 101 video (note: this video has been removed from the UFirst website) and an FAQ section (note: the FAQ section has been updated from an earlier version).

Very briefly, the UFirst program involves obtaining an ALOC (advanced line of credit aka HELOC or home equity line of credit) and running all your financial transactions (checking, savings) through the ALOC. That is, you write checks from the ALOC account and designate that account for the direct deposit of your paycheck. You record all of your transactions in the MMA software and then the MMA does its calculations and tells you what actions to take in regard to the timing of payments.

So, let’s consider the following question and answer on UFirst’s FAQ:

Q. Why can’t I make extra principal payments to my primary mortgage and achieve the same results? A. Simply put, the mathematics behind MMA present a sophisticated process that has a substantial financial benefit over increasing your monthly payments…

Here are the assumptions for the Jones (the couple in the video illustration), who have developed a budget with their UFirst agent and discovered that they have $1,000 per month in discretionary income (typically defined as money left over after essentials such as housing, food, and transportation):

  • Primary mortgage of $200,000
  • 30-year fixed rate mortgage
  • 6% interest rate
  • Monthly mortgage payment of $1,199.10
  • Extra monthly payment on principal of $1,000
  • Program cost of $3,500.00

According the video (approximately 20 minutes in), the Jones’s can pay off their mortgage loan in 10.417 years.

However, if you speed through your mortgage Julie’s way (apply the MMA program fees to the principal payment in the first month and then apply the $1,000 to the principal every month), you can pay off the loan balance in 9.917 years.

Check out the attached amortization schedule (enhanced based on recommendations from reader Jim).

Edited December 27, 2008 to reflect changes in UFirst website.

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Guest's picture

This is an interesting article, but a bit too specific for me... If you are like me, then you may perfer something a bit simpler to understand and interpret. Try this article (and then come right back to www.wisebread.com:

http://www.onemillionbucks.net/search/label/Taxes

Thanks

Guest's picture
Guest

This would make sense in a stable economy. During DEFLATION, it's better to stretch your mortgage out as far as possible, using the money in a wiser way.

Guest's picture
James E Watson

It seems that very few folks really understand these programs, or can figure out an alternative method, so here's my uber-simple idea.

1. Use the $3,500 fee to buy a one year CD. Each year, roll the principle into a new CD and use the interest to pay down the principal on your mortgage.

2. Use a regular money market account, or high yield savings account with a linked checking account for regular day to day income and expenses. Use the interest to pay down the principal on your mortgage.

Guest's picture
Meg

I am a banker, and I can tell you that these products are NOT well regarded in the industry and are almost to the level of being scams. First of all they are not forthcoming about the costs. They do not include the closing costs associate with the HELOC, which can be substantial (you have to get your home appraised, get title insurance, usually they charge an application fee, and all the other closing costs associated with owning a home). These vary depending on your state of course. And that's on TOP of the $3500 charge which is just for the "software," basically a fee for setting it all up.

In addition, they are basically just moving all your money around from your paycheck to the savings to the line of credit to the mortgage to confuse you into thinking this is something "sophisticated" that you can't do on your own. Even if it worked, it would only work IF you spend much less than you make. It's just like putting all your bills on a credit card and paying it off in full every month. The reality is that most people will end up carrying a balance.

Why do you think a bank would help you do this if it really simply helped you pay off your mortgage faster?? They are getting thousands of dollars in fees from you to set this "program" up plus interest on the line of credit balances plus interest on your mortgage. It's also a slick way to get you to move ALL your business to them - the mortgage, savings, lines of credit, checking, etc.

In addition there is all the downside to locking this kind of thing in. What if you don't WANT to use every dollar of discretionary income to pay down your mortgage in one, three, or 10 years? What if something happens down the line or you realize you're not getting ahead because it's harder to track your money when it's on a line of credit and the balance is only growing?

Julie Rains's picture

I just updated this old post. Thanks for your comments Meg -- just in case anyone was wondering, I was reviewing the product per a reader request, not endorsing it. Specifically, I was illustrating what I consider to be a simpler and less risky alternative to the program that does not involve an ALOC or HELOC. The video with the assumptions provided by the program seller is no longer available on its website (the reason for my update).

Guest's picture
Guest

Sorry, this is just a bad deal, and a horrible attempt at hiding the fact that you were either paid to make this post, or you have an affiliate relationship. These things are as shady as can be.

If you want to pay your mortgage off more quickly, you need to send more money. If you want to minimize your interest... refi at a lower rate.

Also, don't do the biweekly mortgage stuff. It works, but you can do it yourself for free, and accrue your own interest. Have half of your mortgage direct deposited into a money market account each pay period (if biweekly), and then have it auto paid with a little extra from your anticipated interest. I do that with my big three payments (mortgage, car, student loan), and it gets me a little extra interest. Then, at the end of the year, I also get an extra payment for each, and my pay period to pay period cash flow is more even.

Julie Rains's picture

It is helpful to read (and understand) the entire post. Julie's way (with the spreadsheet tool) shows how to pay off the mortgage without the "program" -- specifically by applying the money you would have paid for the program and the discretionary income to the principal amount. Period.

I thought it was interesting the company removed its video so that readers could no longer see the direct comparison. I have no relationship of any kind with this or similar companies, and certainly would have disclosed that as you will find disclosures on other posts.

The main point of the post was that you don't need this program to get results.

Guest's picture
Guest

Spent a good 2-3 hours reading this and another of Julie's post. Great info and thanks for sharing your ideas Julie.

I enjoyed reading Tri's posts and JimDaGeek's too.

I'm overwhelmed with this wealth of info, but here are my points:

1. It appears sensible to reduce as much of your principal balance as you can afford, if your interest rate is higher than if you can invest that money (opportunity cost).
2. The thing with these accelerated payoff programs or Julie's DIY program or investment is, how many people actually will stay in their home for the next 30 years? or even 15 years? Probably not many.
3. How does the program work with a recessionary economy and where home values are less than the loan balance?
4. No one can say anything is certain anymore. I think you do what you think is best with the info you have. Many Baby Boomers are helpless financially as they see their entire life savings wiped up to 40% in just one year! Diversity of plans is a good idea when it comes to wealth building and debt elimination.
5. Time horizon is important either with investment or accelerated payoff. Someone about to retire and has a huge mortgage vs a recent grad with a new home & career will not utilize the same strategies because their goals are different.

Julie Rains's picture

Thanks for your points -- all valid ones. These are many variables to financial health including investments, debt, cash, etc. and these factors all play a role in mortgage payoff; a crystal ball would be useful but as mentioned so is diversification. As far as holding time on a house, readers seem to say that people don't stay in their homes very long now but the media is starting to say that mobility may lessen rather than accelerate in this economy. As for me, I was in my first house, 1 year; second house, 6 months (2 relocations in a short time period); and third house, nearly 16 years and counting.

Guest's picture

I would like to propose a different perspective on this discussion. After reading this post for an hour, I can tell I may want to go back and read the rest in more detail. I am biased since I sell the Money Merge Account.

I think the product is wrong for most of the people on this thread. They apparently are happy to deal with budgets, spreadsheets, and calculation each and every month over and over again.

I propose that the Money Merge Account is for a different customer, like my wife and I. We have other things to do that get in the way of planning our next three months over and over again. My income fluctuates so I would have to adjust the calculations each month to reflect changes to income and timing differences. The spreadsheet method would just take too long and too much time for some people to stick with it. The Money Merge Account dynamically adjusts to changes whereas a spreadsheet will need more manual asjustments.

Lets use the iPhone as a perspective enhancment. When the iPhone came out people could have said "I already have a cell phone and a PDA, why would I need an iPhone?" or maybe they still make lists on post it notes and were like "Why do I need a smarter phone that takes notes, I just need to make phone calls?" When they came out people that bought them were excited to get multiple devices into one device that was easy to use. Having a phone, camera, PDA, and internet device all in one was valuable to people--if it worked well. Now with the iPhone application business booming people a learning all sorts of new things that the iPhone can do for them or that they can play with. I'm not talking about turning your phone into a lightsaber from Starwars but finding nearby restaurants or looking up star maps at night. Things that for the right person provide significant value.

All of this hinges on two questions of "does it work? and Is it easy to use?" you see the customer for MMA is more interested in will it work for me and will it be easy to use. Many people on this thread apparently think what they were doing was working and since they were doing it that is was easy. What is easier than continuing to do what you already do?

Now put yourself in my shoes, I did not understand all the algorythms that go into mortgage amoritization, interest cancellation, time value of money, statistical choice permutations, opportunity costs evaluation, and marginal analysis. But what United First Financial proved to me was that the MMA was easy to use and would work. I don't understand how the iPhone makes calls or how to program my own iPhone application nor do I claim to teach people how the MMA works so they can do it themselves. I just want to help people get the result- a faster mortage or debt pay off. I don't claim that it is the "best" choice when considering investments. I think it will continue to do exactly what they promise for people that want that result in a way that changes their life very little. So is it best for people? that depends on your situation and your goals. Is it a great tool for people? yes.

Guest's picture
JimmyDaGeek

Your iPhone example is spurious because you don't need spreadsheets or calculators to pay off your mortgage. Like you don't need a computer to run a budget. Just take the extra cash in your checking account each month and send it to your bank along with your mortgage payment. You will need a HELOC as a backup if you run short, but that gets paid off before you send any extra money to the bank.

That's it. Sure, you can use spreadsheets to play what-if, or spend $3500 on MMA to play what-if. That $3500 will cost you over $16,000 in extra interest and 16 months on a 30-year, 6% mortgage.

Julie Rains's picture

Thank you for being a reasonable person, unlke other -- MMA evangelists -- I do understand that some people like the tools that they can use. I'll mention that you don't have to do the calculations over and over, you can do it once or twice (see the impact of a $100 per month if you'd like for example) and then make the changes in budgeting, end of story. I would find calcs tedious to make if I didn't like spreadsheets but I find it fun to do.