A reader recently sent an email asking about a program United First Financial runs called a Money Merge Account and whether it was legitimate. United First Financial promises that the program, which costs $3500, would have you pay off the mortgage in one-third to one-half the time it normally would take. Knowing nothing about money merge accounts and knowing a little bit more about simple math, I smelled a fat $3500 scam brewing. The only scenario in which I could see $3500 cutting your mortgage in half is if you had a $7000 mortgage. But, setting my mental scam alerts aside, I did some more research about the plan.

Apparently it’s a fancy name for an accelerated mortgage repayment scheme. The first step in the money merge account is to take out a second mortgage on your home, a home equity line of credit. Then, what you do pay your entire paycheck towards the first mortgage and withdraw money from the HELOC to cover your expenses. You save a little money because the interest on a HELOC is calculated based on average daily balance rather than the final monthly balance. This lets you pay off more of the mortgage at the beginning of the month and then be charged less interest on the HELOC. (this assumes the same interest rate, which is a big flaw)

However, the plan also has a lot of other assumptions and flaws.

1. It assumes that your HELOC interest rate will be the same as your first mortgage interest rate - very unlikely. The bigger the HELOC rate, the less you save on that difference.
2. It assumes a single monthly paycheck so it’s a plan that loses some of its power if you are paid irregularly or every two weeks.
3. One big flaw is that there is never discussion of HELOC fees. I’ve never opened a HELOC but I imagine it’s not free.
4. This plan requires that you don’t save at all for anything else. Since your entire paycheck goes towards the mortgage and you withdraw expenses, it penalizes you drawing on the HELOC for non-essentials. Why pay $100 towards a 6-7% mortgage and then borrow $100 from a 10% HELOC?
5. Finally, as if all those weren’t enough, you have to pay $3,500 for a program to help you do this!?

In researching this article I researched a lot of sites and they were nearly unanimous in their opinion that these types of programs are not worth the money (not surprisingly). They’re not scams in the sense that you pay your $3500 and they disappear into the night but it’s something you can do yourself.

This begs the question, should you use it to force discipline? I could justify paying $100 to enforce discipline because it can save you quite a bit in the long run, if you can overcome the failings, but $3500 is ridiculous. If you have $3500 and you want to pay off your mortgage sooner, send a $3500 check to your mortgage company. (if you want a legitimate and easy way to pay off a mortgage faster, consider making mortgage payments every two weeks)

I have a friend who is thinking about buying a boat and he’s going to have to get himself a loan. That got me thinking about the different rates for various loans. Basically, my conclusion was that the collateral you put down dictates the general range your interest rate will be. Within that range, the better the credit score and shorter the payment period, the lower the rate you can expect. For the lender, it’s all about risk mitigation. A home is better than a car, so the rate will be lower. A 750 FICO score is better than a 650 FICO score, so the rate will be lower. At my particular credit union, there are loans for almost anything these days too like for a computer, a vacation, an RV, and motorcycles. I want to see how they all compare.

With homes there are different types of home loans (extension of credit in which the home is collateral) - typical mortgage, home equity line of credit (HELOCs), and home equity loans. There is the idea of a “home improvement loan” but most places just treat them as a HELOC (and you draw from that line of credit as your loan). According to Bankrate, this is what you would expect to pay as an interest rate:

How about cars? You’d used to expect the rates on cars to be much higher than on homes but auto loans are pretty low right now. Basically you split them up into two types: new and used. Obviously the new cars are better than a used car’s rates since the car is typically worth more, but in both cases the car is still used.

Boats? They’re simple interest loans with no prepayment with rates that can go anywhere from 5.99% to 20%. These loans are also much harder to get. An option lots of people do is just take advantage of a lower HELOC interest rate and withdraw funds from there to pay for a boat.

What about all those random loans I was talking about before ? Here are some sample rates from my credit union, as of 3/17/05:

Home loans = cheap rates; Boat/Computer/Vacation loans = not so cheap rates. Finally, an option I didn’t even consider until I read some articles about loans, you can put it on your credit card! Buy a boat on plastic (that isn’t 0% for life) and you’ll be paying for it the rest of your life.

It looks like the best idea would be to buy a home (duh!), wait until you’ve built up some equity, and then use a HELOC to purchase that boat. Then again, remember the old adage, a boat is simply a hole you pour your money into!