Sun Pony Ranch

Diary of novice (clueless) ranch owners

Friday, July 10, 2009

Robbing Peter to pay Paul

Dave and I met a gentleman a few weeks ago at a fair we held a booth at. He was representing a super fantastic Debt Reduction Program, helping you to pay down your debt much quicker, thereby eliminating a lot of interest that you otherwise would have paid.

I said - but how can you pay down your (mortgage) faster without either refinancing (not an option for us) or paying more principle (also, quite a long shot for us). He said this program does not require either, however of course it was a -- "I can't just tell you now, but lets do a free evaluation of your financial situation." The program he's representing is United First Financial's Money Merge Account program.

I have to admit, he intrigued me. We have a whopper of a mortgage on the ranch so it goes to figure we have a lot of opportunity to save interest paid. He swore up and down that no extra dollars had to come out of my pocketbook to make this work. So we agreed to the analysis.

He started off with a set of videos explaining the program. It's based on using all available funds now to pay down higher interest loans, when you won't otherwise need the funds until next month or next week. So - float a loan to yourself for 30 days on an interest free credit card - pay your mortgage, and then next month use the funds you saved to pay back that short term loan. It was convincing enough of a scheme that we went forward.

Unfortunately, we have a very complicated financial setup - what with the businesses and our personal finances and Ginger's personal finances all intimately intertwined. So part of the challenge was just trying to figure out what pieces to include in the analysis and which to exclude. Since Ginger wasn't in on the deal, we of course left hers out of it. And I wanted to leave our personals out too - but that proved impossible to some extent, largely of which is because we subsidize the business with funds every month still.

He came back to us a week or so later with some truly fantastic claims. The program had calculated that using their system, we could payoff ALL OUR DEBTS, (Ranch mortgage, our Condo mortgage, 2 significant private loans and a small private loan) in a mere 11.2 more years, instead of the 25 years we have left on the mortgage. Saving -- are you ready for this?? $447,281 in interest. Yeowza - sounds great! All for no more dollars out of my pocket each month.

Of course there was the quietly interjected "as long as the analysis data we have is correct"... At which point I had to stop and say - there is no way we adequately modeled our financial situation in the 45 minutes we did that. For instance, we lumped my entire private salary into the pot -- and in no way am I donating all of that to pay the business expenses. And that's just the tip of the ice berg.

I insisted that I would also have to get my hands on the system and play with it in order to understand what it does. Actually I had commented earlier that it felt like it would double my accounting work -- for how could the system predict how much $ I had that was available to use for debt payment if it didn't know exactly all my income and outgoing each month? So I asked: Can I import data into your system from my bookkeeping system? "Sure you can, let me show you." And he proceeded to demo how one goes into the system a few times a month and updating lump sum values for the system to base it's calculations upon. Okay... good to know it doesn't need all the detail, but can I import that data instead of hand entering them? He admitted he had no idea what I was asking.

So we left it that we would need to do a lot more work on the model before I was willing to believe any numbers that his program calculated to me, and he went off to check to see how I could get some hands on time with the system.

In the meanwhile -- I've done some research. Interesting to note that by far the most hits when you google Money Merge Accounts - you get links talking about United First Federal and whether they are a scam or not. Generally the reports seem to lean towards they aren't actually a scam, but rather that what their system does is not rocket science at all and something anyone could do themselves.

Ohh, really? That sounds like a challenge to me. :-D


I got a spiffy new and cool Home Mortgage Calculator Template from Excel (yes, they've been around forever, but this one is all spiffy pretty and such.) And for grins I decided to figure out what would be required to pay off just the ranch mortgage in 11.2 more years -- the time in which "the program" promised I could actually pay off ALL my debt. Well, wouldn't you know it -- you can do it, for a mere $2800 in extra payments every month.

*scratches head* If I had $2800 extra every month, wouldn't I have noticed that? And regardless of how many fancy games you play borrowing funds from here and there -- I really don't see it possible to come up with that sort of gains, with no more $ coming out of my pocket.

So then I played with other scenarios of what I might actually be able to afford in terms of extra payments. Fascinating results: (to a data analysis geek like me)

Extra PaymentTotal Extra $Interest SavedSaved to Extra Pay Ratio
$3,500 Lump$3,500$15,042430%
$200 a month$56,600$87,329154%
$2400 every Aug$57,600$91,329159%
$10,000 Lump$10,000$42,037420%

So it is clear that to get the greatest bang for the buck, you want to pay more extra payments early in the mortgage. In order to do that, I wondered, DOES it make sense to borrow from my HELOC temporarily?

Using the $10,000 example above, I looked at drawing down $10K from my HELOC - which currently is at 5.62% (My mortgage is 6.5%) Assuming I could pay back the HELOC at $1000/month for 10 months, I would spend a total of $266 in interest -- while saving an eventual $42,037 in interest. WOW.

Of course this also assumes the interest on my HELOC doesn't change drastically during that time -- but even if it doubled to 10% interest on the first day of my loan, it is still just $484 worth of interest. And if I could only swing $500 a month payback? Worst case was still less than $1000 interest. To save $40 Grand.

But, as long as I was assuming I could have that extra $1000 a month to pay back the HELOC, wouldn't it be easier to just pay the extra $1000 to my mortgage?

Extra PaymentTotal Extra $Interest SavedSaved to Extra Pay Ratio
$1000 for 10 months$10,000$40,828408%

Doing that yields a slightly less interest savings of $40,828 -- but has the advantage of not requiring ANY additional interest, AND no Loan Statement hanging over our heads forcing us to pay the extra amount if we have a tight month.

So in the end, I really can't be convinced that it makes sense to borrow money to payback other borrowed money (especially in our case where the interest rates are so nearly equal). Ultimately you can only pay down loans faster by paying more money to them - and the added hassle of additional loans to track isn't enough of an advantage to make it worth it in my opinion. And I DEFINITELY don't need to pay someone else $3,500 to tell me how interest works.

However -- I do have to say I'm thankful to the Gentleman above for making me look into these numbers. It really does seem to be too good to ignore.


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