There is a BIG difference between rate and cost. I totally understand the 10% rate on the index funds and the 5 or 6% rate on a mortgage and the spread. The point is that if you start saving today for the index funds, you have to save for a long long time before the amount you earn surpasses the cost of the mortgage. Some people don’t have that kind of time! That is why index funds aren’t always going to work for everyone.
All that the MMA program is doing is saying, “hey, instead of sitting with equity in your mortgage or earning modest gains in your investments, look what happens when we can leverage that equity and apply it directly to principal on your mortgage. It cancels huge amounts of interest RIGHT AWAY with out some of the risks that certain investment accounts have. This is an immediate thing that happens. A penny saved is a penny earned. That is interest and years of payments that will NEVER have to be paid EVER to the mortgage company because of your leveraged prepayment. Now, I know your saying OK but now I have to pay that 5000 (or what ever the amount is) back at a higher rate than my mortgage interest rate was. Well, again, there is a BIG difference between rate and cost. Remember, you owed the money anyway, your just trading the interest that you will pay on your mortgage for the interest that you will pay on the HELOC. Most of the payment on your mortgage is interest. Now you have a chance to flip that equation to your favor.
Even if you didn’t factor in your income to offset the amount that is owed on the HELOC, there is absolutely no way that 5k on a 9% HELOC is ever going to COST you the same in interest as what it just saved as a prepayment on your mortgage. That is why this program works the way it does. If you simply applied your $100 of discretionary income toward your mortgage like some people suggest, you would NEVER be able to get the same results that the MMA is going to give you because of the way it leverages that HELOC. Open up a simple mortgage amortization table and see what happens when you apply 500 and 5000 to the mortgage. Even if it took you a year to pay it off (which is not how the MMA works), just think of every payment that you will now make to your mortgage and how much more will be applied to the principal by prepaying a larger amount. You can NEVER catch up to the MMA person if you did this on your own because of the compounding effect alone)
Even if you only had $25 or $50 a month to throw at your mortgage, you would come out years ahead of the person that was going to do this on his/her own. Where does this program come up with discretionary income if you don’t have any? Simple, I think that you all missed it. Even if you have $0 in discretionary income it comes up with it two different ways:
1. By using the HELOC as your primary checking account you not only have the ability to reduce the amount of interest that you pay on the HELOC but the extra money that you don’t spend in the month automatically gets applied to the balance, thus reducing the loan amount, interest charge, and accelerating the payoff. This makes better use of your money as opposed to just sitting there in a checking or savings account earning little. Do you apply the extra $1.50 or $5.00 that is sitting in your checking account to principal on your loans at the end of the month? I doubt it.
If you didn’t apply your income toward the HELOC, the program still would work but it is obviously to your advantage to use the HELOC like a checking account. The MMA analysis is based off the worst case if you didn’t catch it. That is why they have the money back guarantee.
2. Many people consolidate some of their debts that they already have into the HELOC when they start. If their payment on a credit card was $150, then the MMA program uses this same amount to be applied to the payoff of the HELOC each and every month. When the HELOC gets paid down, the $150 automatically gets applied to the payoff of the mortgage because now the Software will tell the client when and how much to transfer from their HELOC. Again, it is based off that clients specific spending habits and is optimized/customized to give them the greatest performance and savings possible (math engines not some simple spreadsheet). If they never get their HELOC amount down then obviously they never see any advantage but as long as they allocate the same amount as they have been doing in the past, that won’t be an issue. Also, the software always lets the client know where they stand. That is why they say to clients that they don’t have to change their spending habits to make this work. They always had that payment before and now they will still have that payment.
You could call it trickery if you want but look at it this way, say a person has $10,000 in credit card debt and they make their minimum monthly payment of $300. It will take that person over 18 years to pay it off. Over $250 a month is going to go toward interest alone (depending on interest rate)! Now, put that same amount on the HELOC and offset the balance with your income. Not only is the interest rate less on the HELOC then the Credit Card, but it is also tax deductible. Instead of paying interest on the entire $10,000, the client is only responsible for the AVG Daily Balance. This is almost always a lot less than the COST of the debt that they were paying on because of the way amortized loans work to the banks advantage (longer the term, the more in interest they make) The HELOC is not amortized! Not only are they paying less interest but more of their $300 is being applied to principal. Now this same loan can be paid off in about 2 -3 years (not factoring in any extra amount they left in the HELOC on a monthly basis – remember them saying that their clients are ahead of schedule? Now you know why.). Now that same $300 is going to automatically be applied to their mortgage with the leveraging of the MMA software. Normally they would have to pay that Credit card payment for 16 additional years, now they can have that CC and their mortgage paid off without changing a thing in their finances in a lot less time. Add additional debts like school loans and auto loans, and the mortgage payoff accelerates even faster because now it has that money to work with as well. This is all controlled by the end user and can be changed at any time!
The client can always spend their money as they want but this is clearly not a scam, it simply uses the money that the client has and leverages it to their advantage.
If you need that EXTRA cash down the road you can always take it back from the line of credit but again, If I applied 500 to my mortgage, how much interest and time would it save me? (go back to the amortization table) Now by borrowing the 500 back from the line of credit if it is really needed, how much will it cost in interest? Very little when compared to the interest saved on the mortgage. (This is why you have to look at COST and not necessarily RATE) That is the purpose of the software! It constantly monitors each and every persons income, expenses, and rates INDIVIDUALLY and tells them precisely when and how much to transfer from the HELOC to the mortgage to give that person the MAXIMUM savings with the least amount of cost, even if they only have a few dollars extra a month! (Makes the most of your money instead of the Bank making the most of your money) To me this just makes great financial cents (misspelled intentionally).
Sorry this post was so long but it is simply math that makes this work. Not myth or SCAM. Yes, I think that $3500 is a lot but if it can save me thousands and years over what I can try to do on my own, then it is worth it to me. Why not cancel at least a huge bulk of that interest before you start throwing everything into index funds. At least that is what I plan on doing. Again, look at cost as well as rate. They both need to be looked at in the equation. This can be debated forever with everyone having great and valid points. These are personal choices, and that needs to be considered as well. It’s not who is right and who is wrong. I’m sure that some people thought that IRA’s were a scam years ago too! Look at the logic of the MMA principal. Its there but I just don’t think some of you understood it. Don’t get caught up in the little details. Those are all factored into the software, You’ll never figure it out. Let it do its job and all you have to do is the same things you’ve always done (With a little more knowledge as to what impact your spending habits have on your future, hopefully!).