Dear Dr. Don,
A friend just told me about United First Financial's Money Merge Account. When I looked at it, it seemed deceptive and only good for undisciplined people with disposable income doing nothing. Is it a good program?
-- Bob Befuddlement
Dear Bob,
I'm not a fan and agree with your assessment of the program. You'd be much better off taking the estimated $3,500 the firm charges you for access to their software and make an additional principal payment instead.
The key to the software is in how it has you allocate the flow of funds in your household budget. You use a home equity line of credit to manage the flow of funds. The basic model is to transfer your monthly income into the HELOC and then pay all your bills, including your mortgage payment (along with periodic additional principal payments to that first mortgage) from the HELOC.
I sat through the video and I understand the software and the financial structure. But I just don't see how the Money Merge Account system -- which really isn't an account, but a software package -- provides an advantage over making additional principal payments on your own.
The example on the Web site doesn't show that if you have an extra $1,000 in discretionary income each month, applying that money toward your first mortgage can reduce the life of a $200,000, 6 percent mortgage to just a little over 10 years.
Apply the $3,500 estimated cost of the software as an additional lump sum payment and you've paid off the mortgage in less than 10 years. That compares favorably to the payoff in the scenario presented in the video for the Money Merge Account system.
You can use the amortization feature of Bankrate's Mortgage payment calculator to figure out the particulars for your situation.
Keep in mind that it doesn't always make sense to prepay your mortgage. My rule of thumb is that prepayment is justified when the expected after-tax return on your investments is less than the effective (after-tax) interest rate on your mortgage.
Conservative investors are more likely to decide to prepay their mortgage than investors willing to accept some volatility in investment returns.