What is an acceleration clause?
An acceleration clause is a contract obligation requiring borrowers to pay off their mortgage in full if they don’t meet certain requirements outlined in the mortgage. Many debt instruments contain acceleration clauses, but they are most common in the real estate industry. Since most mortgages involve large sums of money, acceleration clauses protect lenders when borrowers miss payments or break any covenants defined in the mortgage.
If you miss payments and default on your mortgage, your lender can initiate the acceleration clause, requiring you to pay the principal and interest owed on the loan immediately.
If you fail to meet the conditions of your mortgage, the acceleration clause doesn’t trigger automatically. It is up to the lender to decide whether or not to invoke its right to use the acceleration clause. However, lenders may lose the right to accelerate a mortgage if you correct the problem before the lender initiates the clause.
Many mortgages contain acceleration clauses to protect the lender’s interest should you transfer the rights to the property, securing the mortgage. If you transfer any interests in your property to another party without prior written consent from your lender, it can exercise the acceleration clause.
However, if you transfer the interest in your property to one of your heirs, your lender cannot use the acceleration clause.
Acceleration clause example
An acceleration clause may stipulate that upon the occurrence of any “event of default” or a continuing event of default, the holder of the mortgage may demand the full unpaid balance of the mortgage, along with any unpaid interest before the maturity date of the mortgage.
The clause may stipulate that the holder must pay all interest accrued, without a demand or notice of acceleration.
Events of acceleration also include filing for bankruptcy or any transfer of the property, whether involuntary or voluntary, securing the deed of trust without written consent from the lender.