What Is a Mortgage Accelerator?
A mortgage accelerator is a type of mortgage loan program that resembles the combination of a home equity loan and a checking account. Borrowers' paychecks are deposited directly into the mortgage account, and that amount reduces the mortgage balance.
Then, as checks are written against the account during the month, the mortgage balance rises. Any amount deposited in the account that is not withdrawn through the check-writing process is applied to the mortgage balance at the end of the month as repayment of the loan’s principal. Mortgage accelerator loans were first marketed in the United States during the mid-2000s.
Key Takeaways
- A mortgage accelerator loan is a mortgage program that purports to help the homeowner pay their mortgage off at afaster speed than a more traditional loan.
- The appeal of this kind of loan is that faster repayment means that money is saved in the form of less interest owed overthe life of the loan.
- On the downside, such loans often have higher interest rates and annual fees and could be problematic for borrowers who are lower income.
- With one program, a mortgage is financed with a home equity line of credit (HELOC); paychecks are deposited into the HELOC account; monthly expenses are drawn against the HELOC, and what's left at the end of themonth goes to the mortgage.
How a Mortgage Accelerator Works
A mortgage accelerator loan is very different from a traditional 30-year fixed-rate mortgage. In a mortgage accelerator program, homebuyers receive a variable-ratehome equity line of credit (HELOC) instead of a fixed-rate loan for their first mortgage. Many lenders offer the accelerator for new home purchases as well as for refinancing an existing mortgage.
A holder of a traditional mortgage can make unscheduled principal payments, thereby accomplishing the same early retirement of principal as in a mortgage accelerator program. This shortens the life of the mortgage and saves on interest.
Mortgage accelerator loan programs have many potential benefits.One of their most attractive features is when a borrower’s paycheck is deposited into the mortgage account. Because it reduces the average monthly outstanding principal balance of the mortgage on which interest is charged. This is true even when the principal balance at the end of the month is equal to what it was at the beginning of the month.
Another plus is that interest accrues daily under the plan. Additionally, the amount of the paycheck that remains in the account at the end of the month might be larger than what would be paid toward the mortgage's principal balance under a traditional amortizing mortgage. When this is the case, the principal is retired early, reducing the mortgage's entire term andresulting in interest savings.
Limitations of Mortgage Accelerator Loans
Mortgage accelerator loans are generally most appropriate for borrowers who consistently have more money coming in than going out. Borrowers who have negative cash flows would continuously be adding to their mortgage debt.
One potential drawback of the mortgage accelerator loan program is that it might carry a higher interest rate than atraditional mortgage. This is especially true in a rising rate environment because thistype of loan includes a HELOC, which normally has a variable rate.
How Can I Accelerate My Mortgage?
The primary way to accelerate your mortgage is by making larger monthly payments. This will allow you to pay off your mortgage faster and save on interest charges. For example, if your 30-year mortgage requires you to make a monthly payment of $1,500 and you pay $2,500 every month, your mortgage will be paid off before 30 years.
Can a Bank Accelerate My Mortgage?
Yes, a bank can accelerate your mortgage if it is allowed in your mortgage contract. A bank can accelerate your mortgage for a few reasons, including missed payments, cancellation of homeowners' insurance, bankruptcy, and nonpayment of property taxes. The exact reasons will be detailed in your mortgage contract.
Is Acceleration the Same as Foreclosure?
No, acceleration is not the same as foreclosure but it is on the path to foreclosure. If you miss multiple payments on your mortgage, a bank can accelerate your loan, demanding payment. If you don't remedy the outstanding payment issues, then a bank can legally file for your home to be foreclosed.
The Bottom Line
While paying off your mortgage early is a great idea if you can do it, as it can save thousands in interest, it may not be easy for all borrowers or even cost-effective. While mortgage accelerators put borrowers on the path of paying down their mortgage faster, they can come with high interest rates and fees. As with any aspect of buying a home, do your research and seek professional advice to ensure you're getting the best deal and taking on debt that you can afford.
