There is a scheme going around Colorado Springs which in my opinion is to be avoided. It is called Money Merge Account or MMA. MMA is a multi-level marketed $3500 software program that facilitates paying off your home mortgage early.
Multi-level marketed means you buy the product and join the seller's "team." The seller makes a commission on your purchase and so does the seller's team leader and the team leader above that etc., etc. You are encouraged to set up your own team whose members set up their teams etc., etc. Then you make a commission on all the sales made by your team. In sum, it is not consumer friendly. Imagine all those people who make a commission when you put down your $3500. Sort of makes you wonder, price vs. value.
When we buy a home, we take out a mortgage for a reason - we can't come up with the cash to pay for the whole thing at once. Because we are able to spread the repayment of the loan over 30 years, our monthly payments are reasonable (well, sometimes reasonable). There are financial advantages in having a mortgage - interest is deductible and we are able to leverage our investment to name a few. There are advantages in having a reasonable house payment - we can afford to set up an emergency fund, we can invest for our retirement, and we have money to buy groceries on a regular basis.
The idea behind MMA is to have a mortgage and a line of credit. The first thing you do, according to the sales presentation, is borrow $3500 for the software and go into debt through your line of credit. Then you use the line of credit like a checking account; you put your paycheck in and pay bills. The money left over after you pay all the bills, your discretionary income, then goes to pay off mortgage principal. In the sales example, you have borrowed $200,000 at 6% and have a monthly payment of principal and interest approximating $1200. Then you take your discretionary income, $1000 a month, and pay down your principal balance. And ta da, in 11 or 12 years, you have paid off your mortgage.
As a Money Coach, I have several problems with paying off a mortgage early. There is no cash flow advantage in paying down a mortgage until after the property is sold or until the mortgage is paid off. The average family moves after seven years so it would be a long time before you see a benefit. Cash flow is more of a priority for most people. If you pay off your mortgage early at the rate of $1000 a month, you effectively have increased your principal and interest payment from $1200 a month to $2200 a month. Now, why would you want to do that? Most of the money made on homes comes from appreciation. An example: 34 years ago I purchased a house for $46,000 with a $37,000 mortgage. Today that home is worth almost $800,000. I started with a $350 house payment (which was half my take home then) and ended 30 years later with a $350 house payment. Did I need to pay down the mortgage early? No!
The primary question is should I pay off my mortgage early? In some cases the answer is yes. In most cases, the answer is no.
I also am concerned with using a variable interest home equity line of credit as a checkbook. If you use all your discretionary income to pay off the mortgage, where is the money going to come if I have an emergency or lose my job? The MMA salesman says "take it from your line of credit." I smell financial disaster for many families if this is the mindset for family finances.
I admit it was never clear to me where the value comes from the $3500 MMA software. "It tells you when to put extra money against the principal." The MMA people proudly said the software did not move money, nor did it pay bills, it just lists income and outgo. Well, for $3500 I would expect it to move money, pay bills and do the laundry. $35 for Quicken or Microsoft Money would provide you with the capability to list money in and money out.
Recommendation: Examine both the pros and cons when deciding whether to pay down your mortgage early. And if you decide to pay it down, think long and hard about price vs. value for a software program to help you.
The Money Coach is Bill Stanley, a Registered Investment Advisor and 2001 graduate of the College of Financial Planning. Bill works with young families, mature families, and families that do not have much money - yet.
Bill can provide advice on whether you should pay off your mortgage, and he can show you where to find free software to "tell you when to put extra money against the principal." Bill's price is 98% less than the MMA software, and you don't have to try to form your own sales team. MoneyCoachBill@yahoo.com.