U.S. Lenders Introduce Mortgage Accelerator Loans

A different type of mortgage, known as the “mortgage accelerator” loan, is gaining a presence in the United States. It utilizes home equity borrowing and the borrower’s paycheck to shorten the time until a home mortgage is paid off, potentially saving tens of thousands in interest expense.

Not to be confused with a bi-weekly mortgage that shortens a home loan by paying an extra mortgage payment once a year, a mortgage accelerator loan program is based on an approach common in Australia and the U.K., where borrowers deposit their paychecks into an account that applies every cent against the mortgage loan balance on a monthly basis.

In the U.S., the two firms offering these mortgages are Macquarie Mortgages USA, where it is called the Macquarie Asset Manager, and CMG Financial Services, whose offering is called the Home Ownership Accelerator.

The premise is that borrowers finance a new property or refinance existing property using a home equity line of credit (HELOC) Borrowers then directly deposit their paychecks into the HELOC. Monthly costs, other than mortgage payments, are funded by draws against the line of credit, whether that is by using bill pay, check writing, ATM withdrawals or a credit card tied to the line of credit.

Even if you don’t wind up making additional principal payments in a month, you still capture some interest savings because your average balance is less than it would have been with a conventional loan.

• Let’s say your mortgage payment on a conventional fixed-rate mortgage is $2,000 and your monthly net income is $5,000.
• With the mortgage accelerator, even if you spend the $3,000 difference, your average mortgage balance for the month is $1,500 less than it was with the conventional mortgage.
• That’s because the entire $5,000 is deposited in the loan account and you made draws of $3,000 for living expenses spread over the month.
• At a 7.75 percent home loan rate, that saves you about $10 in interest expense that month.

While $10 here and $10 there certainly will add up over time, and both loan programs have annual fees of $30-60, the accelerator part of the mortgage lies in having all your net pay going against the home mortgage loan and an assumption that you don’t spend as much as you make.

All borrowers already have that money available with a conventional mortgage, too — and without the cost of home mortgage refinancing. A borrower would simply need the financial discipline to use all that money as an additional principal payment.

For the undisciplined, the mortgage accelerator program makes additional principal payments automatically. That’s the real hook to this program — unless you spend the money by drawing against the line of credit, your paycheck goes toward paying off the house.

Where a mortgage accelerator loan program gives the homeowner flexibility is having a line of credit available if a need for emergency cash arises.

Make additional principal payments on a conventional 30-year fixed-rate mortgage and you can’t borrow that money without taking out a home equity line of credit or home equity loan.

With the mortgage accelerator program you already have the line in place. That gives homeowners confidence that they can be aggressive in repaying the home loans and money will still be readily available if a financial emergency crops up.

Mortgage accelerator loans have interest-only minimum payments during the first 10 years — although that goes against the idea of paying off your mortgage as fast as you can. After 10 years, the line of credit decreases by 1/240 each month over the remaining loan term (20 years x 12) forcing principal repayment until the loan is paid off at the end of the term.

These loan programs aren’t available in all 50 states. As of November 2006, CMG’s Home Ownership Accelerator program is available in over 20 states.

Brooke Barnett, “ownership accelerator specialist” at Rancho Funding, a San Ysidro, Calif., mortgage broker that offers the CMG loan program, sees it as an ideal option for financially savvy homeowners who spend less than they make each month.

The savvy part, being able to earn the mortgage interest rate on idle cash instead of the low rates paid on checking and savings accounts, attracts customers that take a big-picture view of their finances. Money that isn’t going toward expenses is reducing the balance on mortgages, and by doing that, reducing the interest expense.