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'Mortgage accelerator' loans come to U.S.

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.

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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 Australia, more than one-third of homeowners use a mortgage accelerator program. In the U.K., it's about 25 percent. In the U.S., two firms currently 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 begin directly depositing 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.

As a simple example, 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 7¾ percent loan rate, that saves you about $10.00 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 have positive monthly cash flow -- meaning you don't spend as much as you make. The simulation calculator on the CMG Web site has stock assumptions that you have 10 percent, 20 percent or even 25 percent of your net pay leftover each month that you can apply to your mortgage balance. The Macquarie site has its own simulation calculator.

Not for the financially indisciplined
Of course, 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.

Next: "... the real hook to this program ..."
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