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CAN A MONEY MERGE ACCOUNT SLASH MORTGAGES?
G. Edward Griffin responds to the skeptics
Updated 2009 April 17
A program as innovative as the MMA is bound to be met with initial skepticism. I, myself, had doubts when I first heard about it. It was only after considerable study that the inner workings of the program became clear to me; so I knew that, when I gave my endorsement, I would be challenged. Indeed I was, and here are some of the letters that came in. Because they express questions and doubts that are fairly common, I decided to publish them here, along with my replies. I hope you will find this exchange helpful.
I JUST DON'T UNDERSTAND IT AND CAN'T EXPLAIN IT
Hello Mr. Griffin.
I was most interested in the MMA and, although it was not clear to me how it worked, I was reassured by the fact that you had recommended it. When I received my report and saw how much money I could save in interest payments, I went to my bank and obtained an equity line of credit. I was all set to go when I ran into a friend who is a real estate agent and, when I told her what I was planning, she almost went through the roof. She was shocked that anyone would suggest I pay all my bills through a line of credit as though it were a checking account. She said I would end up deeper in debt and that the program was a fraud. She said the best way to do an accelerated mortgage is simply to send whatever extra money I can afford to the bank each month and forget the line of-credit and the computer software. When I tried to explain how the program worked, I just couldn’t do it. She said that if I don’t understand something and can’t explain it, I shouldn’t do it. Now I am in a quandary. What should I do?
Gladys Teasdale.
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This was my reply:
Hello Gladys.
You are not alone. The benefit of using a line-of-credit as a checking account is the most difficult part of the MMA to understand. Your friend’s advice is solid. It would be better if everyone refrained from financial commitments they don’t understand. So I shall accept this as a personal challenge to see if I can shed some light on the matter and clear away the mystery. To do so, I will need to bore you with a short course on two often overlooked elements of debt.
1. WHEN IT IS GOOD TO GO INTO DEBT
I am a strong advocate of getting out of debt as soon as possible and staying out as long as possible. There is, however, an exception to that rule. It is wise to go into debt if – and this is an important if –the borrowed money can be invested at a rate of earned interest that is higher than the rate of paid interest, and if the investment carries minimal risk. In other words, it would be wise to borrow at 9% if the money will earn 18% and not be subject to high risk. That is the rationale behind business loans. It is anticipated that the business can borrow money to create products or offer services that will earn more than enough to pay the interest. This also is the rationale behind the purchase of a home – or any other asset – that is expected to appreciate in value faster than the rate of interest on the loan.
The MMA is a classic example of borrowing to make money. It borrows money from a line-of-credit, usually an home-equity line-of-credit (HELOC) at one cost and uses it to pay down a mortgage at a much higher cost. Notice, I did not say rate, I said cost. That is because the rate of the HELOC usually will be higher than the rate of the mortgage, but the cost will be the other way around, because the rate of the HELOC will be charged for a very short period of time (usually less than three months) whereas the rate of the mortgage typically will be charged hundreds of months. That leads to the next factor:
2. THE TERM OF A LOAN IS AS IMPORTANT AS THE RATE
The second thing to understand is the importance of the length of a loan compared to the rate of a loan. We have been sensitized to the value of a fraction of a percentage point in interest rates but rarely think about the impact upon net worth caused by how long the loan is spread out. Too often, borrowers look only at monthly payments to see if they can afford them without realizing that low payments and even low interest rates often are coupled with a gargantuan interest obligation when accumulated and compounded over many years.
The MMA software is programmed to squeeze out every micro-advantage of shortening the term of the mortgage. This goes far beyond just sending extra monthly payments to reduce your principle. That, in itself, is an excellent plan, but it falls short of what MMA can do because of two factors:
(a) While your money is accumulating in a checking or savings account waiting to be sent, it is not working for you. At best, it may earn a pittance of interest that falls short of inflation, which means it actually is losing value and, on top of that, you have to pay income taxes on the pittance; and …
(b) When you finally do send in your extra payment for principle, the mortgage company will apply it only once each month. Even if you send it in early (to be sure of meeting the deadline) it will be applied only at the first of the following month. That means the money you save for mortgage acceleration sits idle for several weeks each month, not benefiting you in any way and not helping to reduce your mortgage during that time. Two or three weeks may not seem like much, but when this same pattern is repeated every month for 20 or 30 years, the loss to you can be substantial.
We are dealing here with a process similar to arbitrage, which is what they call it when investors and traders earn a small profit on a large number of transactions. The profit per transaction is not impressive but, when all added together, they represent high reward for low risk. The MMA monitors your monthly cash flows and gives you perfectly timed prompts telling you when to send in your mortgage-acceleration payment and exactly how much. We would be hard pressed to figure that out on our own.
WHY USE THE HELOC AS A CHECKING ACCOUNT?
This still doesn’t explain why we need to use the HELOC as a checking account. To answer that, we come, at last, to the heart of the program. We use the HELOC as a checking account because that is how we put our previously idle money to work. That is how we greatly improve the traditional method of saving-up and sending-in.
First off, please explain to your real estate friend that she would be correct in her concern over people taking out a line of credit for day-to-day expenses if it were used also for consumer debt. That would be unconscionable, because it could entice them to go deeper into debt. But that is not what the MMA is about. While it is possible for MMA clients to use this credit for consumer debt, we strongly caution them not to do so. The role of the MMA is to facilitate mortgage acceleration. Period. The HELOC should be used only for expenses that are fully budgeted by the client’s income stream, and that is one of the functions of the software. This program is for getting out of debt, not going into it.
HERE IS HOW IT WORKS
You take the cash you now have in your checking and savings accounts (money that is not working for you), hold back what you need for emergencies, and send the balance to the mortgage company for payment against principle. Then you draw against your HELOC and send in an additional amount approximately equal to your monthly income. That first step is a big launch into the program and typically results in a jaw-dropping reduction in interest owed. This, of course, leaves you with no (idle) money sitting around waiting to be spent (except what you have in reserve to cover emergencies); so, to pay bills and make purchases, you use the HELOC. You now put all of your income into the HELOC as quickly as possible to hammer down the short-term interest. Typically, it takes three or four months for your streaming income to bring down the amount owed to zero. At that point, the software will advise you to, once again, draw against your HELOC and send another payment to your mortgage company. This process is repeated until your mortgage is paid off, which comes much, MUCH sooner than without the MMA. It's not magic. It's just the constant exchange of small amounts of short-term interest for large amounts of long-term interest. And it works.
Remember, the HELOC is credit, not cash, which is to say, it is the bank’s money, not yours. It is a loan. The numbers in the ledger are the opposite of numbers in a cash-based account. They indicate, not what you have but what you owe. So, the more you spend from your HELOC, the more you owe. That’s the bad news, but the good news is that you also put your income into the HELOC, which means that the amount you owe is reduced with each deposit. Furthermore, it is reduced on the date of the deposit, not on the first of the following month. Because of that, your paychecks go to work for you immediately rather than sitting idly for several weeks.
HELOCs are open-ended accounts, which means they charge interest on the average balance during the month. That’s an important fact. If we get paid only once per month and deposit at the end of the month, the average balance will be approximately one-half the total balance owed to the account. However, if we deposit weekly, each deposit knocks down the balance and, at the end of the month, the average will be less. The program works well with single monthly deposits but it works even better with bi-monthly or weekly deposits, because that reduces average balances and interest charges.
MORTGAGE HYPER ACCELERATION
Borrowing money to pay routine expenses has a price, but it is small potatoes compared to the much larger amount of interest we are able to cancel by putting our formally idle money to work for us. Remember, when we borrow $1000 and use it to eliminate mortgage interest on $1000 over 20 or 30 years, we are eliminating a phenomenal amount of interest, and to do this, the bank will typically charge us about $35 for the short term. Yes, we could accomplish the same thing by waiting a few months until we earned and saved an extra $1000, but the cost of doing that in terms of interest we do not cancel for several months is far greater than $35. That, in a nutshell, is why we use the HELOC as a checking account. If the traditional method of save-up and send-in is called mortgage acceleration, then the MMA should be called mortgage hyper acceleration.
I hope this explanation is useful and does not deepen the mystery. Please let me know if anything is not clear, and I will have another try at it.
(Gladys now has an MMA account.)
WOULDN'T IT BE BETTER TO PUT OUR EXTRA MONEY INTO A 401K OR A SAVINGS ACCOUNT?
Jennifer, who is the wife of a new agent for the MMA program, writes:
Does it make sense to throw any/all additional money that one receives at the HELOC balance to bring it down? So, for example, my bonus payment, which is substantial, could bring our balance down to zero together with my next paycheck, but I wanted to take some of that money and put it in Emma’s investment account. I could also take some and put it towards the 401(k) since we have very little in retirement savings, and I could blow $500 on myself.
I have a small problem with the concept of putting it all towards the HELOC and then using the HELOC money to fund Emma’s account or the 401(k), that doesn’t seem right to me. I have an even bigger problem with taking $500 from the HELOC and blowing it on myself – and would probably end up not buying anything for myself. However, I worked hard and that bonus is a reward!
So am I missing the mark here? Perhaps I am failing to take that final step in changing my mindset?
Jennifer |
This was my reply:
Hello Jennifer.
Yes, putting all available money into a HELOC seems counter-intuitive at first, but not when we consider all aspects. The key to understanding is that, even though money borrowed from a HELOC has a price tag in the form of interest, that price is much less than the hidden price one must pay for NOT using all available cash to pre-pay mortgage interest. In the investment profession, that is called “cost of opportunity,” which is not very descriptive, because it should be called “cost of LOST opportunity.” In other words, it is easy to see that it will cost us $20,000, including interest, to purchase a car on a five-year contract, but seldom do we think that the car really costs $28,000 when we include the $8,000 that we could have earned in interest had we invested $20,000 for the same period instead of purchasing the car.
When the numbers are run over the long term, we are far better off financially to take an immediate savings of, say, $2000 in reduced long-term mortgage interest at a cost of only $85 short-term HELOC interest. Putting extra cash into other investments is better than spending it, of course, but the return on those investments generally is far less that the reduction in interest payments made through the HELOC; not even close.
The problem is that we are not used to considering the invisible cost of lost opportunity and, therefore, focus solely on the visible cost of the HELOC. It takes a little thought and practice to acquire that skill and mind set but, without it, it is extremely difficult to escape the debt trap.
I hope this clarifies the issue a little.
THE MMA IS JUST A BEEFED UP EXCELL SPREADSHEET
Shortly after we first announced the MMA, I received a note from a gentleman who expressed the opinion that the same results could easily be replicated by simply using an Excel spreadsheet. He wrote:
Hi Mr. Griffin!
I'm a big fan of yours and the "Creature" too. However, I am a little concerned as to why you are endorsing MMA. I listened to the Video. And it appears the only thing I'm getting is an Excel spreadsheet with formulas already plugged into certain cells. Am I missing something?
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This was my reply:
Yes, I think you are missing the fact that it has taken years to perfect the algorithms that are built into the program that tracks the comparative interest balances between the HELOC and the mortgage and then produces action points on specific dates to make payments and maximize the net gain. A fraction of a percentage here and another fraction there can add up to very large savings over time, which is the genius of this program. I am not aware of anyone else who has done that. Programmers with whom I have spoken have no idea how to approach it. In fact, one of them has signed up in the project himself. If this could be done with an Excel spreadsheet, he would have jumped at the chance. If you find that you are able to duplicate this program with Excel, please let me know and I will pass along the information.
Thanks for writing.
My previous explanation was not adequate. The same gentleman replied:
Thanks for the reply Ed.
I believe your assessment to be mainly true. However, the part that UFF has not been able to address (at least with me) is providing evidence that the HELOC is able to more than pay for the up front fee. Consider that the $3,500 equates to $10,000 or more in savings over the term of the loan when applied to principal at the inception.
The UFF presentation spends a great deal of time focusing on floating money via a HELOC, but the amortization schedule that UFF has you sign as part of the contract doesn't actually even consider the savings afforded by floating the money. Consequently UFF doesn't provide any quantitative proof in their guarantee that the system can beat simply applying all of one's discretionary income without MMA. Maximizing float is the entire selling point for the program and its not even factored into the contract or money back guarantee!
I'm certain there is a way to give a range of savings as a result of float without giving away the algorithm involved in optimizing money movement.
My assumption is the best that someone can do is successfully float an amount equal to their total net income each month in perpetuity. This number is very quantifiable and with results not very impressive for lower income individuals.
Thanks again!
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This was my reply:
The reason interest float is not included in the amortization schedule is that it would vary depending on when and how often paychecks are deposited into the account. That means the projections are extremely conservative because they don’t include the float at all, a fact that you were astute enough to recognize. It would be possible to quote a range of additional savings based on interest float, but the company has chosen at this time not to complicate matters with that, since it already is somewhat confusing for many people without also requiring them to understand how the float works. Only a few, such as you, are motivated to study and master this feature. For the rest, it probably would be an obstacle to understanding. Because of this, final results almost always exceed projections, and it is policy of the company to keep it that way. All of the users with whom I have spoken report exceeding their projections.
This policy is highly ethical but also good marketing strategy because it creates happy end-users who are eager to tell their friends. The MMA has been available in the United States for less than two years; but already many new customers are referrals from existing clients. This evening at dinner I sat next to one of the company’s agents from Louisiana, and he told me that over 80 percent of his new clients now come through recommendations of existing clients. Obviously, the strategy of conservative projections is wise.
After attending the United First Financial Annual Convention, with two days of intensive exposure to the MMA program and the company’s management, I have no doubt that the MMA, even for low income families, will more than pay for the initial investment.
In summary, the benefits of the MMA are:
1. It does exactly what it promises (or better) in terms of reducing mortgage debt.
2. It provides an easy track to follow without having to be proficient in financial models and Excel spreadsheets;
3. It provides a method of tracking current expenditures and visualizing the profound effect they have on long-term net worth, thus providing a stimulus for thrift;
4. It costs nothing, because the saving realized from the interest float in the HELOC more than covers the initial investment.
5. Ninety-five percent of those who know about mortgage acceleration do not take advantage of it in spite of their ability to do so. MMA is a stimulus to make a commitment to the process instead of just knowing about it.
If you have any further questions, please do not hesitate to let me know.
(The following week, this gentleman purchased an MMA.)
WHY SHOULD I PAY A HEFTY PRICE FOR THIS SOFTWARE WHEN I CAN TRACK PAYMENTS WITH AN ACCOUNTING PROGRAM LIKE QUICKEN?
This is a common question. Here is my answer:
The MMA software is not the source of action in this program. The real action is derived from using routine cash flow more effectively in connection with a bank line-of-credit. If we knew nothing about the technicalities and didn’t use the software at all, it would be possible to do very well simply by putting our income into a HELOC, paying our expenditures out of it, and sending $5000 to $10,000 to pay down the mortgage every time the HELOC balance declines to near zero. That's all there is to it.
The software is a tool for monitoring progress and determining the most strategic transfer amounts and timing based on each individual’s personal finances. It is a means of tracking money in, money out, and making a dynamic, day-to-day prediction of when the mortgage finally will be paid off. It also shows the true cost of any proposed expenditure, including the hidden cost of not making mortgage prepayments with that same money. That feature makes the MMA a powerful budgeting tool. There is no accounting program of which I am aware that can come even close to it.
One can get along without these monitoring and predictive features, but they provide encouragement and insight to stick with the program. Without this constant feedback, most people would soon loose sight of their goal. Watching the "miles-to-destination" counter moving downward with each passing week is a powerful motivator. So we must not consider the MMA strictly as a machine to save money. It also is a psychological tool, and the machine will not work as well without it.
Theoretically, a progress report could be created by a bookkeeping program like Quicken to at least track cash flow. Even though this would lack the predictive and budgeting features of the MMA, it still would be possible to run calculations to determine the best time for mortgage prepayments. The truth, however, is that not one person in a thousand will actually do that. For that one-tenth of one percent who understand the process and who will discipline themselves to the task, I would recommend that they go it alone and forget the MMA, because they will save the cost of the software. For the rest of mankind, however, the only way they are going to benefit is to use professionally engineered software and follow the prompts. By doing so, they also will avail themselves of a trained staff of technicians who are available seven days a week for telephone assistance to answer conceptual questions, walk them through the complexities of the process, and provide advice on how to solve special problems that inevitably arise along the way.
Some people are concerned that substantial sales commissions are included in the price of this software. They are glad to have been introduced to a program that will save tens or hundreds of thousands of dollars; but, now that they have the information, they feel that the people who brought it to them are overly compensated. My response is that, yes, they are well compensated but they earn every bit of it. Without a well-paid, motivated sales force, this program simply would not exist, except for those who are astute with numbers, who will seek out the information on their own, and who are self-disciplined to initiate and stick with the program – which is to say that very few people would benefit. Those who are beating the bushes to introduce this concept to the rest of us are an essential part of the process. Their compensation is well earned.
IT'S SIMPLER JUST TO PREPAY SOME PRINCIPAL EACH MONTH
Another skeptic wrote: "The simplest way to reduce interest is to pay the next months principle with each payment. You save the interest for that month forever and cut the years about in half."
My reply:
You are right about that being the simplest way. However, it is not the best way. Using the unique power of the MMA can beat that approach significantly. There’s nothing that can match it. You owe it to yourself to request a free report and check out the numbers.
IT'S BETTER TO INVEST THAN TO PAY OFF THE MORTGAGE
On the day following the day we first announced the MMA, we received the following response. My reply is embedded within the text.
I am rather surprised at your endorsement of the MMA program. It is basically a bi-weekly plan on steroids whereby the poor home owner transfers more money, more quickly into “dead” equity thus increasing his risk, lowering the banks risk and transferring potential wealth away.
REPLY: Your concept of “dead” equity is common among investment brokers who would rather have home owners let them invest their money into something else. In some cases, that may be wise, provided the alternate investment can deliver a sufficiently high yield to make up for continuing mortgage interest payments plus tax liability on profits from the investment plus the broker’s commissions plus the risk inherent in the investment itself. It has been my experience that, for all but the most savvy investors, elimination of mortgage interest is the best first step toward financial security.
Yes, one does save interest but loses a fortune in tax deductions and lost opportunity costs. Also, they put themselves in a high-risk, illiquid position with no control. And finally, they allow the banks to have full control of their equity while it lies dormant suffering the ravages of inflation.
REPLY: Increasing one’s net worth by eliminating debt carries zero risk. All other investment strategies carry risk. True, there is an inflation factor, but home equity generally keeps up with that, while many other investments fall behind. Even those that show long-term gains in terms of dollars, when adjusted for inflation, turn out to be modest performers. Residential real estate may have its ups and downs (related to tampering of interest rates by the Federal Reserve); but, in the long run, it has a good track record for keeping up with inflation.
There is nothing illiquid about owning one’s home free and clear. If an emergency should arise or even an investment opportunity-of-a-lifetime, there is nothing easier than to reverse direction and obtain a home-equity loan. Any home owner with equity can be rolling in cash within an hour. That’s liquidity.
Regarding banks having control of equity, just the opposite is true. When a mortgage is paid off, the equity lies entirely in the hands of the home owner, not the banks.
It sounds good and feels good, but it is mathematically and historically incorrect and quite contrary to what you write about. Read my report at www.IWantMyOwnBank.com, “Stop Sitting on Your Assets” by Marian Snow, “The Ten Truths of Wealth Creation” by John E. Girouard, “Unintended Consequences” by Leonard A. Renier, “Becoming Your Own Banker” by Nelson Nash or “Missed Fortune 101” by Doug Andrew.
We believe in the adage, “Do as bankers do, not as they say.”
REPLY: Banks perform many legitimate and valuable services; but in the category of loans, I believe they operate in an unethical manner, especially in terms of expanding the money supply against unsecured loans, charging interest on money created out of nothing, and facilitating that hidden tax called inflation. I could never recommend that we “do as bankers do” without serious qualifications.
The MMA, MAP and similar programs are the banks new “accelerator traps” to collect your money even faster, leverage it and loan it out for their benefit.
REPLY: To the contrary, when we repay mortgage debt, the money literally goes out of existence, which means the banks cannot leverage it and loan it again. The only way they can do that is for someone else to take out a new loan. Loans are the trap. Accelerated payments are the escape.
We teach people how to do it for themselves and use the bank and tax deductions to their own benefit.
I have passed your book on to many people. Please keep up the good work.
REPLY: Thanks for that, Kent. I deeply appreciate your support.
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USING A LINE-OF-CREDIT FOR ROUTINE EXPENSES IS RISKY
Here is a particularly insightful caution that I believe should be read and understood by everyone who is considering an MMA.
Mr. Griffin,
While this program does help save interest by playing the interest calculation game with the bank, it also causes borrowers to increase their debt risk by leaving them totally dependent on a line of credit to pay living expenses. This is risky. If the bank decided to close the line of credit due to the borrower’s job loss or other inability to show income to make debt payments, it would leave the borrower with no money to even buy groceries that week. ... This program could easily be abused to cause homeowners to default on their mortgage, just as the Universal Default clause is used by credit cards. I would never advise someone to do this on the basis of the increased financial risk that is completely unnecessary. ... Over a ten-year period people are almost guaranteed to have at least one financial crisis. I’d be cautious about recommending this to anyone.
Sincerely,
Jim
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This was my reply:
Thank you, Jim, for your excellent analysis.
The substance of your concern is that mortgage holders may find themselves with an insufficient monetary reserve for inevitable cash drains that every family faces from time to time and that this could lead to missed payments and, ultimately, to forclosure on their mortgages. However, if we face a financial emergency and have a line-of-credit, we can transfer funds out of it into our checking accounts and then write checks to cover our minimum payments. We can do this to cover our primary mortgage payments as well. We have the security of being able to access our equity quickly in the event of a financial emergency. Without a line-of-credit, we may not be able to find the money to continue payments except by refinancing. Thererfore, a line-of-credit actually works as a safety net for periods of financial hardship.
With the MMA, we don't really lose the safety of having cash on hand. As long as we have access to money for emergencies, it makes little difference whether it comes from cash reserves or home equity. If we keep a large cash cushion in savings accounts, that money is idle in the sense that it cannot be used to reduce interest payments on our loans. A reduction of interest expense is the same as an increase in income. Not using cash reserves to reduce interest expense is the same as reducing income, which means this action has a price tag. If we use our cash reserve to increase home equity and then take some of it back for emergencies, we must, of course, pay interest. There is a cost either way. In most cases, however, the cost of keeping a large storehouse of cash in savings accounts for emergencies is substantially greater than building a storehouse of home equity to cover those same emergencies.
Having said that, I still do not recommend that mortgage holders put all of their cash reserves into the MMA. I believe it is prudent to hold back a reasonable cash fund in the form of currency and bullion coins. I prefer these over checkbook and savings account balances because of the possibility that, in the event of national crisis, the electronic transfer of funds could be disabled for a prolonged period of time. In that scenario, cash, silver, and gold, would be very useful.
What constitutes a "reasonable" cash fund? That will depend on the mindset of each individual. It also depends on whether or not the family has a well-stocked emergency food-storage pantry. At a minimum, I believe we should keep a two-month supply of food and enough cash to cover two months of other expenses. A six or nine-month reserve would not be unreasonable.
Related to this issue of not having enough cash reserve to cover emergencies is the possibility that people will take out an MMA and be tempted by the available credit to go deeper into debt for automobiles, vacations, and other consumer delights. The MMA is a powerful tool. Like all power tools, it is dangerous in the hands of children and those with impaired judgement. I do NOT recommend MMA for anyone who lacks sufficient self-control to avoid using it for consumerism. However, for adults who can control their impulses and want to get out of debt, I highly recommend it.
I CAN PRE-PAY MY MORTGAGE WITHOUT AN MMA
The following letter is a reminder that one does not have to use an MMA to pre-pay the capital balance on one's mortgage. In most cases the mortgage contract allows pre-payments without penalty, and anyone with a little extra cash at the end of the month can take advantage of it.
Jason writes:
At 1 1/2 years into my mortgage, I switched to by-weekly payments and added an extra $50 every two weeks and knocked a full 13 years off from my mortgage. It was very simple, effective, and automatic (the payments are preauthorized). My car payment is almost fully amortized, then I will be adding an extra $200 every two weeks, which will shorten it even more significantly. Perhaps as an alternative to the MMA, this system could also be suggested. Thank you for your time.
Jason Bradley
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This was my reply:
Hello Jason.
Yes, the simple method works very well for those with the available cash and the self discipline to follow through. The MMA, however, goes even beyond the effectiveness of the simple cash-forward method because it leverages money from the bank in the form of an equity line of credit. This is one of those rare cases where borrowing money actually makes money. The bottom line is that the payoff will be even greater and faster through MMA. Equally important is the fact that the MMA will generate huge savings even without having to find an extra $50 or $100 per month to send to the mortgage company. It requires no change whatsoever in our spending patterns. The extra money can be generated entirely by the interest float in the line-of-credit. Nevertheless, what you are doing is excellent. Congratulations.
CAN A PERSON DO THE SAME THING WITHOUT AN MMA?
This question was raised by a client who was so impressed by the program that he signed up to become an agent. Then, he ran into a friend who was a software developer who caused him to have second thoughts. He wrote:
The programmer created a model spreadsheet showing how the discretionary income, when applied to the principal on monthly basis, pays off the mortgage just as fast if not faster then with MMA. I am confused at this point. Am I missing something?
Thank You for your help,
Sebastian
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This was my reply:
Hello Sebastian.
It is difficult to compare spreadsheets with so many built-in assumptions, but I see no theoretical reason for the two approaches to vary at all, assuming the assumptions are the same for both. As you know, the MMA software does not do anything magical. All it does is prompt the client to take action at the proper times, keep a running record of progress, and show how much it really costs to spend discretionary income for consumption as opposed to putting it toward one’s mortgage. I am convinced that a person can do just as well without the MMA, but I am equally convinced that not one person in ten thousand will actually adhere to the plan without the software performing this function. It’s human nature to let a resolve slip into the cracks with the passage of time. I know many people who are gaining on their mortgage using the MMA but I have never met a single person who has done the same thing without it – even though many will tell you they know how to do it. So the answer to this issue is not to be found in spreadsheets. It is found in human nature and the probabilities of ultimate success.
TOO OLD FOR AN MMA?
A lady from Winston, Oregon, wrote: "I have thought a lot about MMA and have decided if I was 10 years younger I would certainly do MMA, but I am not sure how much longer I will be able to work and I don't want to risk stopping in the process."
This was my reply:
The MMA is a wealth-creation tool that works at any age. In fact, the older we become and the closer we get to the end of our careers, the more valuable the MMA becomes. At that stage of life, it is more important than ever to have a nest egg to draw upon when income drops. There is nothing in the world of investments that can match the ability of the MMA to create that nest egg.
In terms of personal wealth, there is no difference between putting $10,000 into our savings account and cutting $10,000 off our mortgage. In either case, net worth is increased by $10,000. The only difference is that our savings is in the form of home equity instead of cash, but we can convert equity into cash at any time. If we need some of that money, we simply write a check from our line-of-credit account. By building home equity, we expand our wealth at a much faster rate than if we save cash and continue to make exorbitant mortgage payments. In other words, the MMA is a highly effective tool for creating a nest egg late in life. It makes money for us – literally.
Your financial analysis shows that the MMA will pay you more than $108,000, tax free, and release you from mortgage payments 14 years, 7 months sooner than otherwise. That’s impressive. It would be bizarre to walk away from that. You could stop working 14 and a-half years earlier and not have to worry about earning money for mortgage payments, and you would own your home free and clear. If you decided to continue working, you would have over $1200 per month (what you now pay for two mortgages) to put into investments, which would further expand your net worth. All of these options are open to you through the MMA. For the typical home owner, there is nothing out there that even comes close to providing so many financial benefits. Not to take advantage of it would be a sad waste of opportunity to create financial independence, especially for someone approaching retirement age.
By the way, if you should be forced to stop working prior to paying off your mortgage, the MMA would continue to make money for you, but at a slower pace. There is no minimum payment or any other financial overhead, except that your income must be sufficient to cover mortgage payments – but that requirement would exist even without the MMA. The software tracks cash flow in real time and adjusts accordingly. Lower income slows down the process but does not stop it. There is no reason for not being able to continue the MMA after retirement.
I hope you find my analysis useful in reaching your decision. If you would like to discuss this further, please feel free to call me. Meanwhile, I wish you success in acquiring your home and creating financial independence.
THE ISSUE OF TAX DEDUCTIONS
Some people are concerned that, if they pay off their mortgages, they will lose their tax deductions on the interest they pay. That’s true, but it’s a no-brainer to realize that it is far better to give up a tax deduction in exchange for not having to pay interest in the first place. Tax deductions are worth only the amount of our tax bracket, whereas not having to pay interest is worth the inverse of that. For example, if our tax bracket is 33%, then our deductions are worth 33 cents per dollar of interest paid. The other 67% is out of our pockets. However, if we have no interest payments at all, there is nothing out of our pockets. Therefore, tax deductions will save us 33%, but not paying interest will save 67%. Getting rid of interest payments is twice as valuable as a tax deduction.
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