The UFF Plan: Another Good Fairy of Rapid Payoff
October 2, 2006, January 17, 2007 Postscript, Revised May 7, 2007
"United First Financial is offering a program that will eliminate your mortgage in 1/3 to 1/2 the time…They are asking $3500 for the program. Comments?"
It never ceases to amaze me how widespread and deep-seated is the belief that somewhere out there must be a good fairy who will solve all our financial problems. This belief sustains lotteries, which help keep poor people poor, and a host of schemes directed at homeowners that promise to pay down their mortgage loans quicker and easier.
Accelerated Mortgage Repayment Schemes Abound
Some of these schemes are outright frauds, such as the one peddled by Success Trust and Holding that I warned readers against last year. It took until August of this year before the SEC took action against them, by which time they had relieved more than 500 homeowners of several million dollars.
At the opposite end of the spectrum are schemes that discipline borrowers to make extra payments, of which the most important are biweekly programs. So long as borrowers understand that they don’t need a biweekly program to make extra payments, and that what they are purchasing is only a convenient way to discipline themselves to make the extra payments, these programs are fine.
Within the last two years, a third type of early-payoff scheme has appeared with a new twist. This scheme provides borrowers with both a disciplined way to make extra payments and a way to reduce their bank deposit, with the interest savings on the smaller bank deposit also applied to the mortgage balance.
Last year I described the CMG plan, which allows the borrower to use a mortgage taken from CMG as if it were a checking account. The borrower earns the mortgage rate rather than the deposit rate on the amount that he would otherwise have held in his deposit account. The difference is applied to the mortgage. See The CMG Plan: Your Mortgage as a Checking Account.
The United First Financial plan, called the Money merge Account or MMA, is a variant that does not require that you take a mortgage from them. The MMA assumes you already have a first mortgage, and it guides you on opening a second mortgage in the form of a home equity line of credit (HELOC), which plays a central role in the scheme. Here is an example which I have over-simplified to reveal exactly where the savings come from and how much they are likely to be.
Assume the borrower’s monthly paycheck is $8,000, and on the first day of the month he does the following: a) Draws $8,000 on his HELOC which is used immediately to reduce his mortgage balance, and b) applies his paycheck of $8,000 to pay down the HELOC. On day 2, therefore, his HELOC balance is zero and his mortgage balance is lower by $8,000.
As the month progresses, he pays his expenses by drawing on the HELOC, and the HELOC balance gradually rises to $8,000. However, the average balance will only be about $4,000. For the month as a whole, therefore, he has saved interest on $8,000 of the mortgage while incurring interest on $4,000 of the HELOC. Assuming both are priced at 6%, he has saved $4,000 x .06/12, or $20. Over a year, that adds to $240. Of course, if the paycheck is $16,000 instead of $8,000, the number will be $480, and if the paycheck is $4,000 the number will be $120.
For several reasons, these calculations over-state the savings. The HELOC as a second lien will almost always have a higher rate than the first mortgage. Further, it will take some days for the borrower’s paycheck to be credited to his HELOC. Finally, and most important of all, the date when the mortgage is credited for the extra payment depends on the policies of the lender servicing the mortgage. In some cases, a payment will be credited to the balance at the end of the preceding month, which works to the borrower’s advantage, but in other cases, credit is not given until the end of the current month, which would reduce and perhaps eliminate any savings.
Note that a one-time payment of $3500 on a 6% mortgage would save $210 of interest a year. This is probably more than most borrowers would save using the MMA.
Of course, if you spend less than your paycheck and apply the balance to your mortgage, it is a different story. The claims by UFF that you can pay off your mortgage in 1/3 or 1/2 the time, depend on your doing exactly that.
For some borrowers, a program that disciplines them to save more of their income may be worth paying for – but not worth $3500! You can buy a pamphlet called Let Your Mortgage Make Your Rich, which also makes exaggerated claims, but it lays out the essentials you need to develop this type of program. I negotiated a discounted price of $43.50 with the authors if you order it at www.letriches.com/wharton. I have no financial interest in it.
Postscript
A ton of mail has come in on this article, some from people selling the MMA on commission, and some from borrowers who want to believe. Questions have been raised about my back-of-the-envelope calculation of the benefits, and I have to concede that my figures are rough. It is possible that I understated the magnitude of the benefit. However, I cannot get anyone from UFF to give me a copy of the program so I can test it more rigorously, and I am not going to pay $3500 for it.
Based on everything I know, I have considerable confidence in my main conclusion, which is that the bulk of the reduction in interest payments comes from the borrower's savings rather than from the program mechanism. The borrower who allocates 10% of income every month to principal reduction is going to reduce interest payments and shorten the life of the mortgage, and no special program is needed to do this.
Neither the MMA nor any of its siblings provide the means for separating the contribution of the program to interest saving from the contribution made by the income the borrower allocates to principal reduction. The reason they don't is that they want to pretend that it is the program that generates the entire benefit.
"United First Financial is offering a program that will eliminate your mortgage in 1/3 to 1/2 the time…They are asking $3500 for the program. Comments?"
It never ceases to amaze me how widespread and deep-seated is the belief that somewhere out there must be a good fairy who will solve all our financial problems. This belief sustains lotteries, which help keep poor people poor, and a host of schemes directed at homeowners that promise to pay down their mortgage loans quicker and easier.
Accelerated Mortgage Repayment Schemes Abound
Some of these schemes are outright frauds, such as the one peddled by Success Trust and Holding that I warned readers against last year. It took until August of this year before the SEC took action against them, by which time they had relieved more than 500 homeowners of several million dollars.
At the opposite end of the spectrum are schemes that discipline borrowers to make extra payments, of which the most important are biweekly programs. So long as borrowers understand that they don’t need a biweekly program to make extra payments, and that what they are purchasing is only a convenient way to discipline themselves to make the extra payments, these programs are fine.
Using Bank Deposits in Accelerated Mortgage Repayment Schemes
Within the last two years, a third type of early-payoff scheme has appeared with a new twist. This scheme provides borrowers with both a disciplined way to make extra payments and a way to reduce their bank deposit, with the interest savings on the smaller bank deposit also applied to the mortgage balance.
Last year I described the CMG plan, which allows the borrower to use a mortgage taken from CMG as if it were a checking account. The borrower earns the mortgage rate rather than the deposit rate on the amount that he would otherwise have held in his deposit account. The difference is applied to the mortgage. See The CMG Plan: Your Mortgage as a Checking Account.
United First Financial: the Money Merge Account (MMA)
The United First Financial plan, called the Money merge Account or MMA, is a variant that does not require that you take a mortgage from them. The MMA assumes you already have a first mortgage, and it guides you on opening a second mortgage in the form of a home equity line of credit (HELOC), which plays a central role in the scheme. Here is an example which I have over-simplified to reveal exactly where the savings come from and how much they are likely to be.
Assume the borrower’s monthly paycheck is $8,000, and on the first day of the month he does the following: a) Draws $8,000 on his HELOC which is used immediately to reduce his mortgage balance, and b) applies his paycheck of $8,000 to pay down the HELOC. On day 2, therefore, his HELOC balance is zero and his mortgage balance is lower by $8,000.
As the month progresses, he pays his expenses by drawing on the HELOC, and the HELOC balance gradually rises to $8,000. However, the average balance will only be about $4,000. For the month as a whole, therefore, he has saved interest on $8,000 of the mortgage while incurring interest on $4,000 of the HELOC. Assuming both are priced at 6%, he has saved $4,000 x .06/12, or $20. Over a year, that adds to $240. Of course, if the paycheck is $16,000 instead of $8,000, the number will be $480, and if the paycheck is $4,000 the number will be $120.
For several reasons, these calculations over-state the savings. The HELOC as a second lien will almost always have a higher rate than the first mortgage. Further, it will take some days for the borrower’s paycheck to be credited to his HELOC. Finally, and most important of all, the date when the mortgage is credited for the extra payment depends on the policies of the lender servicing the mortgage. In some cases, a payment will be credited to the balance at the end of the preceding month, which works to the borrower’s advantage, but in other cases, credit is not given until the end of the current month, which would reduce and perhaps eliminate any savings.
Note that a one-time payment of $3500 on a 6% mortgage would save $210 of interest a year. This is probably more than most borrowers would save using the MMA.
Of course, if you spend less than your paycheck and apply the balance to your mortgage, it is a different story. The claims by UFF that you can pay off your mortgage in 1/3 or 1/2 the time, depend on your doing exactly that.
A Cheaper Alternative
For some borrowers, a program that disciplines them to save more of their income may be worth paying for – but not worth $3500! You can buy a pamphlet called Let Your Mortgage Make Your Rich, which also makes exaggerated claims, but it lays out the essentials you need to develop this type of program. I negotiated a discounted price of $43.50 with the authors if you order it at www.letriches.com/wharton. I have no financial interest in it.
Postscript
A ton of mail has come in on this article, some from people selling the MMA on commission, and some from borrowers who want to believe. Questions have been raised about my back-of-the-envelope calculation of the benefits, and I have to concede that my figures are rough. It is possible that I understated the magnitude of the benefit. However, I cannot get anyone from UFF to give me a copy of the program so I can test it more rigorously, and I am not going to pay $3500 for it.
Based on everything I know, I have considerable confidence in my main conclusion, which is that the bulk of the reduction in interest payments comes from the borrower's savings rather than from the program mechanism. The borrower who allocates 10% of income every month to principal reduction is going to reduce interest payments and shorten the life of the mortgage, and no special program is needed to do this.
Neither the MMA nor any of its siblings provide the means for separating the contribution of the program to interest saving from the contribution made by the income the borrower allocates to principal reduction. The reason they don't is that they want to pretend that it is the program that generates the entire benefit.