United First Financial Money Merge Account And Your Checking/Savings Account

I received some calls and emails from the Money Merge Account Analysis I did this week for some clients. Many of these clients had some money in their checking and savings accounts and I included this money in the Money Merge Account Analysis. Basically, the Money Merge Account Analysis assumes the money in your checking and savings account will be used to pay down the mortgage, but many people had a hard time with this.

The main objection people had with this is they wanted to keep the money in their checking and savings account separate in case of an emergency. When people tell me this, I assume they really don’t understand how exactly the Home Equity Line of Credit they will get to utilize the Money Merge Account will solve this concern for them. So, here how the Home Equity Line of Credit will help them sleep better at night and not worry about using the money in their checking and savings account for the Money Merge Account.

A Home Equity Line of Credit (HELOC) basically works in the same manner as a credit card and checking account combined. First let’s look at the credit card scenario:

When you get a credit card from a company, they tell you what your credit limit is and your interest rate. If you credit limit is $10,000, this means you can borrower up to $10,000 on the credit card. You only get charged interest on what you truly borrower on the credit card, so, if you credit limit is $10,000, but you only borrower $2,000, then you will only get charged interest on the $2,000 you borrowed.

This is the same for a HELOC. If you open a HELOC for $100,000 (this is the same as your credit limit), but only borrower $2,000, then you will only be charged interest on the $2,000 you borrowed. Makes sense, doesn’t it.

Next let’s look at the HELOC as a checking account.

When ever you need money, you can access your HELOC just like you would your checking account. So, when a bill is due, you can write a check from your HELOC to pay it.

Now let’s look at the following scenario and see if you follow why it is better to put your money sitting in your checking and savings account into your HELOC.

Let’s say you have HELOC for $100,000 at 8.00% and you have a balance of $10,000 on it. You also have $10,000 sitting in your savings account and it is earning you 2.00%.

The payment on your HELOC would be $66.67 a month ((10,000 * 8%) / 12) or $800 for the year. The earnings on your savings account would be $16.67 a month ((10,000 * 2%) / 12) or $200 for the year. Therefore, by keeping your money separate, it is costing you $50.00 a month ($66.67 - $16.67) or $600 a year.

Now, wouldn’t it be better to payoff the $10,000 on your HELOC with the $10,000 in your savings and save yourself $600 a year in payments? If you ever needed the $10,000 for whatever reason, you could easily write a check for the HELOC to your saving account and get the money back. Do you agree?

After I am done explaining this to people, they understand my reasoning. You are not in any way losing your money, just putting it to better use.

I understand that many of us have a subconscious dilemma that we think we would be broke if our checking and savings account had a $0 balance, but once you understand the concept, you will be able to sleep just fine at night.