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Money Merge Accounts??? March 19, 2008

Posted by shaferfinancial in Uncategorized.
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I will make this concise.  Most mortgage originators have been approached to sell these products.  There are several out there, but they all work approximately the same way.  You refinance your mortgage into a home equity line of credit.  This line of credit has a variable rate usually tied to prime or LIBOR.  These lines of credits have the capability of acting like a checking account with your income coming in and bills paid going out.  Because there is always some money in the account this is used to pay down your line of credit.  There are costs involved.  For some, they sell you a $3,500 software that manages your equity line efficiently.  There are some costs to the refinance.  Home equity lines have a higher rate of interest than 1st mortgages.  Over time the spread usually is 1.5%.

Look at your checking accounts average daily balance.  That will give you a good idea of the savings.  Multiply this by the interest rate on a HELOC (Let’s say 7% even though you can  get one lower today because of low short term interest rates).  So if your average daily balance is $500 multiplied by 7% you would reduce your mortgage by $35 a month.  Now, the proponents of this would argue that your savings will be greater because of the software.  I won’t get into that, but suffice it to say even if it could increase the savings 10% that is only an additional $3.50/month.

Now let’s look at the costs.  One company charges $3,500 for the software.  Then there are costs for the refinance.  Let’s say that is only $1,500.  Finally, there is that pesky extra 1.5% on the loan.  A $200,000 loan that means aproximatley $3,000 for the first year.  $8,000 in expenses and more continuing as that extra 1.5% remains for the life of the loan.

There is no way that this program can save you anywhere near $8,000.  There is no way this program is  better than just making an extra payment a year, or sending that $3,500 to your mortgage.

This is the proverbial sheep in wolves clothes.  If you want to pre-pay your mortgage, then just do it.  You don’t need $3,500 software or a high interest rate HELOC to accomplish it.  If you don’t have the discipline to do this, fine.  But, don’t waste your money on this product.



1. BawldGuy Talking - March 20, 2008

Finally — words of wisdom and common sense on this subject.

2. shaferfinancial - March 20, 2008

Unfortunately, for the consumers, I suspect it is good hunting grounds for the money merge folks since home equity lines have such a low interest rate with prime and LIBOR being so low.
This is one of the reasons I have put so much effort into the Shafer Wealth Academy (www.shaferwealthacademy.com). There is a dire need for financial education divorced from folks selling financial products. That is one of the reasons I love your business model. You really are educating folks about investing in RE as they become clients, not simply trying to get them to buy investment real estate in SoCal, which as you point out is crazy at this time.

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