If you have not yet done so, please read part 1 & part 2 of this series first, then read on.
The classic Money Merge Account example suggests a $200,000 mortgage at 6% (normal payment = $1199.10), a monthly income of $5000, net, and $4000 monthly expenses including the mortgage payment. So there’s $1000 discretionary income each month.
In the simplest explanation, one takes $5000 from their HELOC at the very beginning of the cycle, and sends it to their mortgage as an additional principal prepayment. At that moment, the software congratulates you for having ‘canceled’ $23304.42 worth of interest on your mortgage. But during the course of the month, you borrow back $4000 to live on from your HELOC, and pay a higher interest rate (their examples use 8%) than the mortgage. Since you live on $4000 each month, you use the extra $1000 to pay down the HELOC, until the software tells you the right time to borrow more from the HELOC and send it to the mortgage. In one agent’s example, after a year of this process, one owes $185,486.95 between their mortgage and HELOC balances. But wait, when I run a simple spreadsheet, no HELOC, just paying the extra $1000 each month along with the mortgage payment, I show a year end balance of $185,208.41. I seem to be ahead by $278.54 even without taking the $3500 program fee into account. Hmmm.
Seems that MMA, with all its ‘sophisticated algorithms’ just creates more work for the user than the simple rule “send your extra money as a prepayment of principal.” Funny, one agent offers this as an example of how easy the MMA program is; “Your (sic) at the store and you see a great deal on steaks. Can should (sic) you buy them or will that mess up your budget. No big deal. Email or call the software from your mobile phone and it will text you back what you have in left in your budget for food and you can determine based upon what you have at home if you can afford it.”
Wait a second. I net $5000/mo. After paying all my normal bills and saving for retirement, I still have $1000/mo, and yet I’m emailing software to tell me whether I can afford to buy steaks on sale? Hello? What’s wrong with this picture?
Next week – do the example number make any sense?
Joe