Money Merge Account, Equity Acceleration – What’s the Deal?

By Kim S. Curtis, Partner, CMP, Life Agent
Mortgage One Lending

There are two schools of thought when it comes to mortgages. There are those who use the equity in their homes to build a tax-favorable retirement nest egg and those who want to just pay off the mortgage as fast as possible.

So what is MMA or Equity Acceleration and how does it work?
Equity Acceleration or Early Mortgage Payoff is very simple and is based on the theory of always using all of your available cash to pay down the maximum amount of debt. Interest on a home mortgage is charged daily. A home mortgage payment pays for last month's interest expense. If you can find a way to pay down interest earlier and more often, you would save money in interest charged every year. Clients earn nothing or very little when carrying a balance in a personal checking account (and if there is income from a checking account it is taxable each year). A home equity line of credit (HELOC) is a credit line obtained using the home's equity as security. If the line is not accessed no interest is charged.

MMA or Equity Acceleration works in conjunction with a HELOC
An example is the best way to explain how this works. Assume a borrower sets up a $50,000 HELOC utilizing the equity in his home with a rate of 7.25%.

Let’s also assume the following:

Monthly income (after taxes): $10,000

First mortgage balance: $600,000

First payment: Nov. 1, 2007

Payment at 6.25 percent, 30 year term: $3,694.30

All other payments: $2000   

Misc. monthly expenditures: $500 

Total monthly outlay: $6,194.30

To implement the program, the client will draw from the HELOC $10,000 and pay it directly towards the first mortgage. By paying $10,000 down on the first mortgage, the client immediately reduced the principal of the first mortgage (and the interest paid on the loan over the long term) and thus shortens the term of their primary mortgage.

The total debt on the home is still the same as the day the HELOC is accessed ($590,000 from the primary mortgage and $10,000 from the HELOC that was applied to pay down the first mortgage).

Using the HELOC as a checking account
With the program, the client uses the HELOC as their checking account; which is really what makes the plan work. Remember, having a balance in a checking account is basically worthless (earns no or little interest). With the program the client will have their paycheck directly deposited into the HELOC.  Therefore, the client will pay all bills out of the HELOC and make all deposits into the HELOC just as they would with a traditional checking account.

The goal is to always be paying down maximum debt with maximum dollars. One reason this works is because of the fact that money that is normally not productive in a checking account is put to work by always paying down the balance on the HELOC (every day of the year).

Every single unused penny will automatically be used to pay down the HELOC to zero (once or multiple times a year). For our example, when the HELOC reaches zero, the client would access it again for another $10,000 and apply that to pay down the primary mortgage. When you see how the numbers work, it will truly amaze you.

In less than two months, without changing any spending habits, and without using extra money, the client just paid off the $10,000 balance on their line of credit.

The numbers
This concept will work for anyone who has the discipline to use it and who typically carry a balance in their checking accounts. An additional benefit is when those unavoidable unexpected expenses show up you can access your HELOC.  Of course that will change the numbers but the program will pick up from that point forward.

The “magic” is that a borrower is always using their money in its best use, and having money sitting in a checking account earning very little or no interest (which is taxable each year) is not the best use.

So, at this pace the home owner has budgeted for seven mortgage reductions a year of $10,000. The entire HELOC will be paid down six times a year. After applying $70,000 per year to the primary mortgage, the new calculated payoff date of the first mortgage is 5/1/2015. That's 22 years early and a total savings of $573,940.16!!!

***Caution***
Multi Level Marketing has gotten a hold of this concept and they are recruiting mortgage brokers by the hoards to sell their software for $3500!  That seems like a lot of money for something you can do on your own.  However, if spending $3500 gets you to follow the program for the life of the loan then that may be money well spent.