There are MLM's for everything now

"U First Money Management Account"

There is a new MLM selling a program called the United First Financial "Money Management Account" peddled by "u first financial", that will help anyone pay down their mortgage and get it over years before it is supposed to be paid off.

I guess after seeing so many scams come and go, I am a bit skeptical and cynical to say the least.  I decided to dig into this one a little deeper.  

Mortgage interest calculations may seem a bit daunting for the mathematically challenged but the principal behind them is really quite simple.   You basically are charged interest on the outstanding balance of a loan.     If your loan principal is $100,000 and your rate is 6%, then your monthly interest payment will be $100,000x 0.06/12 = $500 for that month.  Any amount paid over the $500 will go to reduce principal for the next month.   If you paid a total of $900 then $400 goes to reduce the principal.   The new loan balance is now $99,400.   The next month's interest portion will be 99,600x.06/12 = $498.   Paying an extra $400 now will save you $2 every month for the life of the loan in interest.  Reducing your interest and principal with this method will result in the loan being paid off sooner than planned.  It is that simple.   

At the beginning of a mortgage the loan balance is large, so the majority of your payments are for interest.   As your principal is brought down, the amount paid to interest becomes less and less, and the amount paid towards principal becomes more and more.   So the lower the principal balance is, the lower your interest payments will be.   That is pretty straight forward, right?   So how do you lower your total interest payments and shorten the life of the loan.....accelerate payments and pay more than you are supposed to pay so that your principal balance is lower.     Simple, right?  

The total interest paid over the course of the loan is simply dependant upon the how long, and how much you had borrowed.   The lower the outstanding balance on the loan is, the lower the total interest you will pay.   It is that simple.  If you do not accelerate payments, or reduce the interest rate, you will not reduce the life of the loan.      Nothing else but applying more money to the loan payments will reduce the duration of your mortgage, for a given interest rate.  Here is a mortgage calculator if you want to play with numbers.  If you do not have more discretionary income to apply to your loan, then no fancy software will get around the realities of the interest calculation.  

I did a little googling on the web for "Money Merge Account ufirst scam" and got numerous hits to Blogs and websites.  I found out that for $3,500 you could get access to an internet based software that will tell you when and how much to prepay your mortgage and how to optimize your monthly cash flows through a home equity line of credit (HELOC).  With the money merge account, you direct all of your financial transactions in and out of a HELOC. 

The Money Merge Account basically employs three strategies.     The first and most powerful strategy is using extra discretionary income to prepay the mortgage.    The second strategy is the use of interest arbitrage when the situation allows it.  The third strategy allows you to make your idle funds work for you instead of sitting in a non interest bearing account.  Here is a spreadsheet I created to play with some numbers to simulate the MMA system.. 

Prepaying your Mortgage
This part of the strategy has the greatest effect on reducing your mortgage, and you do not need a $3,500 software package to do this.  Anyone can prepay a mortgage, and if you are in the situation to prepay a mortgage, then a 15 year mortgage might have been a better option than a 30 year mortgage.   15 Year mortgages typically carry a lower interest rate.    Paying off an extra $400 per month on a $100,000 6% mortgage will reduce your interest payments in the first year by $134.22.    The combination of the prepayments ($4,800) and the interest saved ($134.22) reduces your loan balance at the end of the first year by $4,934.

Interest Arbitrage between the HELOC and the mortgage
The Money Merge scheme also can take advantage of the difference between short term and long term interest rates.   Most everyone knows that a variable rate mortgage will usually have lower interest rates than a fixed mortgage, when compared at the same time.     However, as many have found out the hard way, when interest rates rise, then the variable rate can rise above what one could have locked into a fixed rate mortgage in the past.  Most HELOC's have variable interest rates. Assume your HELOC variable interest rate is 5%, and your mortgage is at 6%.   As long as the HELOC stays at 5%, it would make sense to borrow as much as you can from your HELOC at 5%, to prepay your 6% mortgage.   This way you scalp 1% on the money you borrow.     If you borrowed $20,000 from your HELOC and prepaid your mortgage with that, you would save  $200  in interest for one year.    Eventually you must pay off the HELOC, especially when the interest rates rise, so you must be able to prepay your mortgage before this strategy can be employed.     If you are carrying a large balance on your HELOC, and the variable rates rise above your mortgage rate, then the scheme can actually cost you more money until you can work the balance off the HELOC.   As the HELOC rate approaches your mortgage rate, the benefits from this strategy become smaller and the risks of paying more in interest costs rise with rising interest rates. 

As of Feb 23, 2008 the typical HELOC rate was 5.77%, the 30 year mortgage was 6.37%.  Assuming the HELOC rate stays stable for one year, a $30,000 draw would save you $180 interest in a year.  $180 = $30,000 x (0.0637 - 0,0577).  This $180 would be equivalent to reducing your loan balance by $180.   Compare the $180, with the $4,934 from above and you will understand that the "bang for the buck" comes from the prepayments. 

If your fixed mortgage rate is lower than the HELOC rate, then there is no opportunity for interest rate arbitrage.

Putting to work idle funds
Most people have non-interest bearing checking accounts so when your paycheck hits the money sits idle and is not working for you.   If you pay bills at the end of the month, and your paycheck hits at the beginning of the month, you might carry a large balance all month and not earn a penny of interest, when on the other hand your mortgage is billing interest day by day on the principal.   The use of the HELOC could be advantageous when you are expecting a discretionary incoming cash flow that could be used to pad down the mortgage, but that cash flow will not arrive in time to make the monthly cut off for the mortgage interest calculation.  

Assume your mortgage interest calculation occurs on the 1st of the month and you expect to receive $500 on the tenth of the month.   If you could get the $500 sooner, you could pad down the mortgage before the interest calculation.   So here you would draw down the HELOC by $500 and pay $500 extra on the mortgage on the first of the month.   When the $500 does arrive it goes to the HELOC to offset the $500 you drew out 10 days ago.  Here, the theory is that paying say 8% on $500 for say 10 days ($1.12), beats paying interest on $500 for 30 days at 6% ($2.46).   In this case, using the more complicated HELOC method you only saved $1.34 in interest, or $2.46 if the HELOC rate was 6%.    Letting the $500 sit idle for the next 20 days has an opportunity cost of just $1.64 at 6%.  However, if you had an interest bearing checking account at say 3%, the opportunity cost drops to $0.82.   If you have a simple interest mortgage, the $500 could be put to work on the mortgage as soon as you received it. 

I have never had a HELOC but a website said they carry annual fees between $50 and $100 per year.   There might be other costs involved with obtaining the HELOC as well.   If the swings in your discretionary cash flows are not that large, then I do not see much value in trying to scalp a little interest for a month using a HELOC.     Why pay $50-$100 a year in fees for something that might save you only a few dollars a month?   If you do not have financial discipline, then the extra line of credit might even get you in worse financial trouble!

Some people might have a CD or savings accounts that pay little interest.  The MMA software might direct the user to apply that money to the mortgage and basically invest in their own debt.  The mortgage interest is costing them more than they earn.   No one got rich paying interest at a higher rate than they earned on their investments.  So for some this is a good option. 

So let me summarize what the "MMA" system actually does.

1.   It directs people to prepay their mortgages when there is sufficient discretionary positive cash flow to do so.  This brings the bulk of the mortgage reduction benefits, and you do not need a special program to do this. 

2.  If rates are favorable, the MMA will borrow cheaper from the HELOC and prepay the more expensive mortgage to save interest costs.  The benefits from this are a fraction of what prepaying brings. 

3.  Gives people a visual tool (a whip?) to be financially responsible

4.   Costs you $3,500.

Try out my spreadsheet and see what the MMA program can do for you or what it might cost you.

My opinion is that the program is a lot of hype and could work for those who have large monthly cash flows, that is flushing $10,000+ a month in and out of their checking accounts.    Otherwise it is geared to take advantage of those who are financially ignorant.  Using my Excel spreadsheet   you might find that using the program costs you more than just prepaying your mortgage.  The salesmen fail to tell you the majority of the "tens of thousands" in interest savings comes from you just prepaying your mortgage and not  from fancy money management using the HELOC as a checking account.   After I got an analysis from one of them, I found out their assumptions to prepayments are far mor aggressive than what they tell you.  The greatest possible benefit this program is that it is a tool to become financially responsible for the financially illiterate and irresponsible.   If you listen to Bob Brinker, or Clark Howard  you should be able to develop the motivation and financial literacy to mange your own finances without plunking down $3,500 for some overpriced software.   Dave Ramsey slams the program on national radio .  Kiplinger's also recommends against paying $3,500 for the program.  

Prepaying a mortgage is nothing new, and I have recommended that to all my friends who did not know where to invest spare money they had.   By preparing your mortgage you are earning a higher interest rate then you could earn in a bank account.  It is basically a risk free investment since you are paying off your own debt.  The HELOC potion is just a fine optimization and only works when your HELOC rate is lower than your mortgage rate.   The annual cost of the HELOC would barely even be recovered by the interest saved by using the "scalping" scheme.   That is hardly worth paying the HELOC fees and the $3,500 software cost to drive the complicated payment system.   Most likely the HELOC scheme will not even generate enough savings to pay the interest on the $3,500 software cost, let alone to amortize it!  (6% x 3,500 = $210/year).  You would have to have a $30,000 HELOC with at least a interest rate 0.7% lower than your mortgage to make the strategy breakeven on interest on the software alone.   This does not include paying off the $3,500!!

I wrote the site visitor to cut to the chase and give me the MLM aspect of the program.    In the end $2,500 of the $3,500 price gets paid out as commissions to the MLM network.   Get that, 71% of your money goes to MLM commissions!  Now I know the motivation behind the plan.  You can get the majority of the benefits of the program for free by just directing as much cash as possible to overpaying your monthly mortgage payment. 

The majority of the benefit from the MMA plan comes from just prepaying your mortgage.    A fraction of the benefit comes from the hype surrounding the complicated and hard to visualize savings derived from the HELOC.  Why pay $3,500 for this?  Anybody can prepay their mortgage, and you don't need to pay somebody $3,500 to tell you to do this!

Here is Scott's cost free plan to paying off your mortgage early and saving tens of thousands in interest over the life of the loan.

1. Take the $3,500 you would spend on the software and apply it to your mortgage now.    This alone will save $16,602 @6% over 30 years and knock several payments off your mortgage. 
2. Calculate your monthly budget and apply as much discretionary cash flow to your mortgage as you can.
3. If you have savings in a bank CD or savings account, take that out and apply it to your mortgage, after deciding how much you need for emergencies or setting up a line of credit for emergencies. 

Here are Scott's tips for simple overall money management:

1. Acquire financial intelligence.
2. Make a budget and stick to it. 
3. Pay down your highest interest rate debt first.   It makes no sense to carry credit card debt at 18% yet pay off a mortgage early at 6%.   Never carry a balance on a credit card!
4. Pay down non tax deductible interest first.
5. Don't speculate in the stock market, if you have other debts. 
6. When negotiating for a car, negotiate first a cash price.   If you have to finance, only do that later so the financing issues do not complicate the price negotiation.   Never negotiate a car price on monthly payment!   You will get screwed if you do.  Best advice is buy the car cash and never finance it.    If you can't pay cash, you can't afford it.  If you can buy your first car cash, you should never need to borrow for a car again.
7. If you are in debt, buy only what you need, not what you want.   Have financial discipline!
8. If you have investments with minimal risk and out perform the rate on your mortgage then there is no need to pay off a mortgage early.   The money should be left in the higher yielding investments if the after tax return is greater than the after tax cost of the mortgage interest.

The first disadvantage I see is if the HELOC carries a higher rate of interest than your fixed mortgage.   It makes no sense to borrow for any length of time on the HELOC at say 8% to pay down a fixed mortgage say at 6%.    Nobody got rich borrowing at 8% to payoff debt at 6%.   The use of the HELOC only makes sense to optimize "inter-month" cash flows.    This feature however  adds a layer of complexity that might require the use of the expensive software, but in the end cannot pay for itself in interest savings.

Link to additonal pages on ths topic.  Feedback from a distributor.  The Fatwallet Forum on the MMA.

Other blogs:  Frisco On-line  Scam.com