Mortgage accelerator catches on

By DON TAYLOR
Tuesday, November 21, 2006
A different type of mortgage, called a "mortgage accelerator" loan, has migrated to the United States. It uses home equity borrowing and the borrower's paycheck to shorten the time until a mortgage is paid off, saving tens of thousands in interest expense.

Not to be confused with a biweekly mortgage loan that shortens a mortgage by paying an extra mortgage payment once a year, the mortgage accelerator loan program is based on an approach common in Australia and the United Kingdom, where borrowers deposit their paychecks into an account that, every month, applies every unspent dime against the mortgage loan balance.

In the United States, 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, or HELOC. Borrowers then directly deposit their entire paychecks into the HELOC. Monthly expenses, 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 loan rate, that saves you about $10 in interest expense that month.

Now $10 here and $10 there does add up over time, although both loan programs have annual fees of $30 to $60, but the accelerator part of the mortgage lies in having all your net pay going against the mortgage 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 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 the 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 additional flexibility, however, is in having the line of credit available if there is an emergency need for cash. Make additional principal payments on a conventional 30-year fixed-rate loan 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 loan 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 loan term.

These loan programs aren't available in all 50 states. As of November 2006, CMG's Home Ownership Accelerator program is available in more than 20 states and Macquarie's Asset Manager program is available in about 24 states with availability in a half-dozen more states on a correspondent lending arrangement.

Brooke Barnett, "ownership accelerator specialist" at Rancho Funding, a San Ysidro, Calif., mortgage broker that offers the CMG loan program, sees this loan program as ideal 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 the mortgage, and by doing that, reducing the interest expense.

Related links:

CMG's Home Ownership Accelerator: www.yrent.com/States_20_Available2.html

Macquarie's Asset Manager: www.yrent.com

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The benchmark 30-year, fixed-rate mortgage fell 15 basis points to 6.31 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.25 discount and origination points. One year ago, the mortgage index was 6.37 percent; four weeks ago, it was 6.31 percent.

The 15-year, fixed-rate mortgage fell 14 basis points to 6.02 percent. The 5/1 adjustable-rate mortgage fell 15 basis points to 6.13 percent.