(My Money Merge Analysis Compilation, a PDF containing all of my MMA posts has been updated to be current to post 32).
In the spirit of the exaggerated claims made by the proponents of the money merge account, this is a fictional story. I could easily claim it to be true, a sad tale written to me by an MMA client, but that isn’t my style. With that disclaimer in place, please read on.
MMA agents have for years claimed that a large portion of the saving is due to the HELOC Shuffle. In fact one popular agent’s site states “Because much of the savings of this program come from homeowners repositioning the unused money that they normally do not spend and leave sitting in their standard checking or savings account, little to no lifestyle changes are needed.” (For this post I’m ignoring how anyone can claim that no change in lifestyle is experienced by one who is prompted to sent all their discretionary money to their mortgage. ‘Discretion’ implies choice. If that choice is pulled from me, it’s no longer discretionary money.) So, the premise we are left with is that MMA utilizes the shifting of money between paycheck, HELOC, and bills due to capture some savings.
From a cleverly titled article “When a HELOC freezes over” (among others), I find that more and more banks are reneging on their HELOCs, not extending any further credit. Now for my story:
An MMA client (we’ll call him ‘Steve’) signs up for the program. The classic example almost followed with one minor exception. He has a $200,000 6% mortgage, but instead of $1000 per month discretionary income, he’s closer to just $500. As honest agents warn, you must have some extra funds for this program to work, and $500 should have a nice impact on a mortgage that only had a $1199 monthly payment due. (and the agent rightly projects a 15 yr payoff, saving him $129K in interest). The first thing Steve does after signing up is to log in and see that the $20,000 sitting in his 2% saving account will knock not just 10% of the time off his mortgage, but a full 6 years 9 months, saving him $77K in interest! Wow! He sends this sum from the HELOC to his mortgage, and pays the HELOC back the same day from savings (don’t ask me why – this is just how MMA wants you to do it, so you think the software created all the savings.) He then brags to his friends how he’s beat the system and found the next best thing to the holy grail. He adopts phases such as ‘become our own bank’ and starts to tell his coworkers about “factorial math.”
Then, within the same month, his HELOC is frozen, his furnace needs replacing ($10K) and his son needs braces ($5K). He now has just one place to go, his credit card. Now, at 20% interest, it will take Steve 3.5 years to pay back these expenses. 3.5 years of not being able to pay one cent extra towards his mortgage. With the economy in such dire straights, his raises don’t even keep up with inflation, and his older daughter is looking for the car she was promised when she got her license. From having $23,500 in the bank, Steve now has a snowballing level of high interest debt and no way to tap his own home equity. Is he supposed to sleep better knowing he only has 23 years left on his mortgage?
To add insult to injury, by the time he finds a bank liquid enough to consider offering Steve a new HELOC, his credit score (FICO) has dropped 150 points for the fact that his available credit percent utilized has shot up dramatically, as he’s floating balances greater than 50% of available credit.
As I stated in my introduction, this is fiction. But no greater a fiction than the rosy scenario agents paint of someone who has 20% of their net income available to throw at their mortgage, and leads a life that contains no obstacles for a full decade. Do such people exist? I’m sure some do, but they are not common, and the example most agents offer is quite unrealistic.