There has been a lot of talk over the last year or so about various mortgage acceleration programs, in fact, I have talked about them since last February (2007) myself. Fueled by United First Financial’s Money Merge Account marketing through an MLM style set up, the latest fad or craze has grown dramatically, leaving one to question whether or not it truly is the best thing out there.
Personally, I have fielded hundreds of emails from the first day I posted about these products. Most were from homeowners wondering if it was the right fit for them. Every “hate” mail I received was from a UFF agent, except a few from other mortgage acceleration advocates, even though I never said the product didn’t work.Why? Because I said they were not the best solution, and they aren’t for most people. The laws of money work against them. And that is even more true today.
You see, every dollar you spend towards your mortgage is a dollar you didn’t invest. That means that while you are dumping money into your mortgage, you miss opportunities to make more money elsewhere, and there are plenty of opportunities, even in today’s environment.
Add to the fact that once your mortgage is paid off, you have nothing left. If you had been investing instead, and we’ll just say your rate of return equaled your mortgage for simplicity sake, you would still be able to pay off your mortgage at the same time, but may not want to. If you had started with a $200,000 mortgage, at the mortgage payoff point you would have nothing in investments, whereas if you had invested, you would have $200,000 working for you already. In fact, using the same rate of return, even if you were to dump all of your mortgage payment in at this time, you wouldn’t be able to catch up.
Now, as for liquidity (immediate cash accessible), you have very little, if any, using the mortgage acceleration programs, and the bank can even choose to freeze withdrawals, rendering your entire plan useless. Just read the paper and you can see this happening, even on those with plenty of equity.
Investing can provide more liquidity, which can be used to get you through a financial crisis. Just ask your self this question, which would you rather have, $100,000 in your home or $100,000 cash? Ask anyone getting laid off or facing another type of financial crisis and you will know what their answer is.
What about the flexibility you have by not paying off your mortgage as fast as possible? You have control of your money, not the bank, leaving you the ability to seize opportunities. If your money is locked in your home, you have to “qualify” to get it back out, and you can bet that is getting harder to do these days.
I could go on and on about why mortgage acceleration programs, no matter which ones you use, are not the best options out there. That being said, they are good for some. Who? Those who have very little understanding of how money works, don’t want to learn, and simply remain focused solely on having their mortgage paid off.