If you have not yet done so, please read part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8, and part 9 of this series first, then read on.
I received a number of emails after part 5 where I mentioned the HELOC use, but didn’t explain what MMAs claims are regarding this process. So let’s review the claims of the MMA agents.
While an honest agent will acknowledge that the prepayment of principal mostly comes from the paychecks of the home owner, many have managed to exaggerate the saving due to HELOC use and suggest that one can’t do this on their own. In the classic example, the client has $5000 worth of income, and $4000 in expenses. You’d imagine that during the course of an average month the client will see that their (0%) average monthly balance is as much as $3000, even though they may end the month with little sitting in checking. So what MMA claims to do is to borrow the difference ($2000) from the HELOC, depositing $5000 toward mortgage principal, and borrowing back from the HELOC as expenses arise. In theory, if the HELOC rate were the same at the interest rate on one’s mortgage, this strategy would create a rate of return on that average $3000 equal to the rate on the mortgage. But as I reviewed in my part 5 in this series, even if we assume the entire month’s income is available the whole month, the best we’d see from the HELOC use is $5000 x 6%, or about $300 per year. If we fall back to the $3000 average balance, the savings is just $180/yr. Not bad, right? But when we take the cost of MMA ($3500) and pay it off over the 10.4 year example, we find the annual expense to be $453/yr. For MMA to just break even would require an average checking balance (which for some odd reason is earning 0%) of $7,550. This would imply a monthly net income closer to $10,000 at a minimum. Nowhere else are these numbers discussed or disclosed. The latest version of MMA (V4) does take the claims to a higher level. The new software assumes another month’s float from the client using a credit card to charge every expense for the month, and use that float to pay toward the mortgage. Don’t fall for that either.
The agents promoting MMA manage to combine their own lack of understanding with a series of outrageous claims and take advantage of the average Joe not understanding how compound interest works. So far, in this series I have shown you the maximum amount you can possibly ring out of your ‘idle’ cash, and have shown how it’s a tiny fraction (a thousand dollars, if that much, vs the $164,000 in interest one can save) of the savings simply created by prepaying your mortgage with that same $1000/mo free cash flow.
Joe
Related JoeTaxpayer Posts- Money Merge Account Analysis Pt 3
- Money Merge Account Analysis Pt 22
- Adding Insult to Foreclosure
- Money Merge Account Analysis Pt 7
- Money Merge Innumeracy
