Another Early Payoff Scheme...

"Hello Greg:

This is something a family member involved with. (The Money Merge Account -- MMA.)
http://www.u1stfinancial.net/ReplicatedDefault.aspx
Do you think this is a sound approach to pay off a mortgage quickly, considering the cost of $3000 - $3500?

-- Andre"

If you are unfamiliar with a Money Merge Account, it's an attempt to dress-up rapid mortgage payoff

"homeowners across the nation are paying off their
mortgages in as little as 1/2 to 1/3 the time"

in effort-less clothes.

You may encounter it under other names such as... Mortgage Checking Account, Flexible Mortgage Account, and One Account Mortgage.

The idea is to use a mortgage account as a checking account to reduce interest cost and pay off principal.

Here's a simplified explanation...

Instead of depositing your paycheck into a regular checking account, it's deposited into your Mortgage Checking Account. This reduces the principal balance.Typically, interest on the balances of Mortgage Checking Accounts accrues daily, so this reduction starts saving interest cost immediately.

For example, suppose you owe $200,000 on your mortgage and your monthy paycheck is $5,000. Depositing your paycheck into this account reduces your principal balance to $195,000 and interest accrues on $195K, not $200K.

What happens when you need to spend money, for instance, to pay bills?

When you write a check, withdraw cash, bill-pay, etc., funds are drawn from this account. This causes your principal balance to RISE. Continuing our example, let's say your monthly expenses, including your regular mortgage payment, are $4,500. Then, your mortgage
balance would rise to $199,500, leaving $500 to reduce the principal balance. I've ignored the principal reduction resulting from your regular mortgage payment for simplicity.

Because your principal balance was less than $200K for the month, you've saved interest cost. And, because you didn't spend your entire $5,000 paycheck, the remaining cash pays off part of your principal balance.

Your next paycheck will be deposited against a $199,500 balance, and the cycle starts again.

The "effort-less" part is that you don't do anything more than pay your bills and your mortgage vanishes in "1/2 to 1/3rd the time."

If you don't have one of these Mortgage Checking Accounts, there is another way to reduce your principal balance by $500, it requires some effort but it will save you $3,000 to $3,500...

Write a check.

This and other fancy mortgage payoff schemes -- the bi-weekly plan is another example -- are intriguing because they have some mathematical credibility and seem to be "pain-free." This is often enough to entice the debt-strapped consumer to part with $3,000 to $3,500 to pay someone else to write a check.

My problem with this is that this is high-class money for a plebian result. At best, it saves only 15 to 20 years on your 30-year mortgage... and ONLY your mortgage. What about your other mountain of debt -- credit cards, car loans, student loans, medical bills, and home equity loans?

So, my answer to Andre's question is, "No." This is not a sound approach to paying off your mortgage quickly.

It just confuses the average persons debt-freedom goal, which I hope is to be completely debt-free as fast as their income will allow. And 1-3 years is all it takes to pay off your other mountain of debt. Tack on an extra 3-4 years to pay off the mortgage and you'll quickly find yourself in that high-class realm of the financially free.

-------------------
Greg Moore is the Creator of the Wealth Building System
'DebtIntoWealth -- Lessons from My Journey to Debt Freedom'

   "My husband is due to retire from the Navy in just two
    years at a young 42 years old, and right around then,
    using your system, we'll be completely debt free, which
    means  we could literally never have to work another day,
    if we choose."    -- Andrea Davis, South Korea

You CAN get out of debt and break the addiction. Click now:
http://www.debtintowealth.com/stretcher.html

 It does sound like a good tool for some families- those with little debt, a highly structured budget, a good emergency fund-

I know it doesn't make sense for us as we live too much paycheck to paycheck and have expensive credit card debt.

Tracy 

latenightleader:

It does sound like a good tool for some families- those with little debt, a highly structured budget, a good emergency fund-

HI Tracy,

Well... I'm not so sure. A family with the financial characteristics you describe quite likely didn't get that way by paying an intermediary $3,000 to $3,500 to write principal payoff checks. With the skills they have, this is something they can do themselves.

Greg

I am thinking  $800 a month house note comes out to $9,600 spent annually. I am thinking not having that expense at all is better than a portion of that being tax deductible.

WhosWho:

After all, it does help you on your income taxes to have a mortgage

It still helps on income tax, but it doesn't help your bottom line. Why pay all the interest in the first place? That's all you're able to write off on your income tax, and it doesn't come off the tax you owe, just off your income. I'd rather keep the money and pay taxes on it than have to give it to someone else.  

I can't say that I understand taxes completely, I just know what I deal with. This past year my husband's work deductions was $22,000 (or was that 24,000, argh). People automatically think that must have been a fantastic refund but all this did was drop our liability or what was owed in for taxes. So with that kind of deduction and child tax credit, we got $4,000 in our refund.

It's not worth it to say "oh let's go ahead and buy that because it's tax deductible" and I suspect I wouldn't find us ahead with the deduction on a house either. It just helps out a little.

I'm with you, Brandy.  All that a tax deduction does for you is to give you a refund of the tax-deductable item TIMES YOUR TAX BRACET PERCENTAGE.  For exAmple, if you bought $10K of deductible items, & if you are in the 30% tax bracket, you just get a refund of $3K.  You ha ve to absorb the rest of hte price, ie, $7K!  My arithmetic may be wrong (I'm terrible at it), but the idea is I believe correct.

 I think as a former semi-retired lender, this product would sell- with some overly optimistic projections and the appeal of taking the work out of paying down your bottom line- anyway, the money spent is a very high percentage commission, pushing up your actual APR or interest paid- would be fun to see the disclosure statements for this product.

I would love to pay my house down faster, but I also have a hard time believing I'll be in a house for long- although we've been in this house 9 years, it's my 5th house.

Tracy 

Deborahmichelle:

For exAmple, if you bought $10K of deductible items, & if you are in the 30% tax bracket, you just get a refund of $3K.

This would be true in a rational mathematical world. Unfortunately, we're dealing with the world of taxation. Rationality is scarce.

For U.S. taxpayers, this example overlooks the Standard Deduction -- the amount the government provides to all taxpayers -- to reduce their income and thereby reduce taxes. For 2006, the Standard Deduction for a Married Couple filing Jointly was $10,300. The benefit of the mortgage interest deduction is the amount in excess of the standard deduction. In this example, $10K of deductible mortgage interest is LESS than the Standard Deduction.

Translation: The mortgage interest deduction provided $0.00 value.

The value only comes for deductions over $10,300. So, $15,000 of deduction minus $10,300 = $4,700 of income reducing value. At the 30% tax bracket this amounts to a tax savings of $1,410.

I believe paying $15,000 of interest to get $1,410 of tax savings is irrational. But, if this kind of math appeals, you can get the same result by donating $15,000 to your favorite tax-deductible charity.

-------------------
Greg Moore is the Creator of the Wealth Building System
'DebtIntoWealth -- Lessons from My Journey to Debt Freedom'

   "My husband is due to retire from the Navy in just two
    years at a young 42 years old, and right around then,
    using your system, we'll be completely debt free, which
    means  we could literally never have to work another day,
    if we choose."    -- Andrea Davis, South Korea

You CAN get out of debt and break the addiction. Click now:
http://www.debtintowealth.com/stretcher.html