Do The Math

How does a money merge account work? I've heard that bi-weekly mortgages and paying extra each month can reduce the term and interest paid on a mortgage loan. How is the MMA mortgage different?

Everyone is aware if what financiers call the "time-value" of money, even if the term is not widely used. The term refers to the interest that an investment earns over time, like the interest earned on money deposited in a savings account.

In traditional mortgages, only the lender is able to take advantage of the time-value of money. In an MMA, borrowers are also able to take advantage of the time-value of money.

When you make a deposit to your MMA, it generates an interest offset on your primary mortgage. The deposits register as a decrease to your mortgage balance, and adjust up and down through the month as you deposit and withdraw funds. Like an interest earning deposit that earns interest on the average balance, deposits to an MAA result in an average balance to offset the mortgage balance.

The effect of this is that the interest that accrues against the principal is reduced by the average deposit at month's end, allowing a larger portion of the next month's payment to apply against the principal balance. Additionally, any money that you don't spend, your actual balance, remains against the balance of your mortgage loan in successive months in addition to the deposits made each month.

Each month in which your expenses are not greater than your deposits continues to add, incombination with your average balance, to the offset against the mortgage principal, further reducing interest charges until that money is needed.

Anyone shopping for low interest fixed rate mortgage loans with the intention to refinance their current adjustable rate home mortgage loan should consider that even the lowest cost fixed rate mortgage loan cannot begin to provide the advantages realized through an MMA.

The Microsoft Excel Do The Math Spreadsheet demonstrates how an MAA works. Note that the math is sound, and can be checked for accuracy. The spreadsheet is however for demonstration purposes, and is not intended for personal use. The spreadsheet is in a compressed Zip disk, which also contains a README.html document. Please take the time to review the README.html before you test drive the spreadsheet.

For your convenience, a Financing Costs Worksheet and Expenses Checklist are also available for download. The files are in PDF format, and require Adobe Reader or other PDF software.