In the home loan market, a breed of mortgage prepayment programs—sometimes called a mortgage accelerator loan, homeowner accelerator loan or mortgage accelerator program—are gaining traction. They promise to help you pay your mortgage off faster, thereby saving you money in interest over the life of your loan.
What is a mortgage accelerator loan?
In broad terms, a mortgage accelerator loan is any program that “helps homeowners pay off their mortgage balances much earlier, resulting in significant interest savings over the life of the loan and reducing the payment duration by several years,” says Robert Bullara, owner of Fine Realty International in Austin, Texas. “With mortgage accelerator programs, you pay a little extra each month toward your mortgage’s principal.”
There are formal mortgage accelerator loan programs—that means those you apply for and pay for—as well as less formalized strategies homeowners can employ to get similar payoff results over the life of their mortgage.
Types of mortgage accelerator loan programs
One type of mortgage accelerator loan is sometimes called a HELOC accelerator. This type of loan combines a bank account with a mortgage and HELOC, or home equity line of credit, into one product. Instead of a traditional mortgage or adjustable-rate mortgage, borrowers finance a mortgage using the HELOC and then begin depositing their paychecks into the HELOC account. Then, monthly expenses other than mortgage payments—like utilities, car payments, grocery bills and insurance—are funded by draws against the line of credit. The cash that’s left goes toward the mortgage.
One such product is the All In One loan offered by mortgage lender CMG Financial, which “allows homeowners to pay down more interest in the short term while giving them access to the equity built up in the property,” Bullara explains. According to the CMG Financial website, the deposits homeowners make into the account lower the loan’s principal, and interest is calculated based on the average daily balance.
This type of mortgage accelerator program has been popular in other countries, including Australia and the United Kingdom, but is just beginning to gain traction in the U.S.
Is a mortgage accelerator loan worth it?
Though there’s buzz around mortgage accelerator loans, these programs aren’t for everyone. Most have an annual fee — just like a credit card — and those are funds you could sink directly into paying your mortgage. Plus, for a less-than-disciplined borrower, the draw of having a home equity line of credit could actually enable them to live above their means, adding years and hefty interest debt over time.
“Accelerator mortgages tend to be of particular value for higher rate or additional rate taxpayers, as well as for people with large savings who don’t rely on accrued interest to finance their day-to-day lives,” Bullara says. “The major advantage for high-end taxpayers is that they do not have to pay tax on their savings interest. This type of loan is better for a high-net worth borrower that doesn’t live on a tight budget each month.”
Another watch-out for homebuyers considering a mortgage accelerator loan is that they could come with higher interest rates and fees than other mortgage types.
“If those interest rates and fees are higher, you could still be worse off overall,” Bullara says. “If it looks like you’ll pay more than you’ll save, it may be worth considering a more basic home loan with a lower rate and no fees.”
Other ways to pay off your mortgage early
When you get right down to it, the best way to accelerate your mortgage payoff is to simply pay more as fast as you can.
There are plenty of strategies to pay off your mortgage early, including adding a bit of extra money toward your principal each month or by contributing an extra mortgage payment each year.
Some people schedule a half mortgage payment every two weeks and, since there are 26 two-week periods in a year, that’s effectively one extra whole mortgage payment annually. Paying an extra mortgage payment (toward principal) per year can shave off years. Use Bankrate’s amortization calculator to see how much of a difference extra mortgage payments could make for your loan.
When deciding on a strategy, it’s important to consider the other factors in play. For instance, if you pay off your mortgage faster to the detriment of funding your retirement accounts or kid’s college fund, you could be missing out on growing those funds at a greater rate than what you’d save by paying off your mortgage.
When in doubt, it’s smart to sit down with a trusted financial adviser to determine if an early mortgage payoff aligns with your goals.
Featured image by blackCAT of Getty Images.