What is a mortgage accelerator?
A mortgage accelerator is a type of mortgage program that looks like the combination of a home equity loan and a checking account. The borrowers’ paychecks are deposited directly into the mortgage account, and this amount reduces the mortgage balance. Then, as checks are issued to the account during the month, the mortgage balance increases. Any amount deposited into the account that is not withdrawn by the check writing process is applied to the mortgage balance at the end of the month as a repayment of the loan principal. Mortgage Accelerator Loans were first marketed in the United States in the mid-2000s.
Key points to remember
- An accelerated mortgage is a mortgage program that aims to help the homeowner pay off their mortgage faster than a more traditional loan.
- The appeal of this type of loan is that faster repayment means money is saved in the form of less interest owed over the life of the loan.
- On the other hand, these loans often have higher interest rates and annual fees and could be problematic for low income borrowers.
- With a program, a mortgage is financed with a Home Equity Line of Credit (HELOC); paychecks are deposited into the HELOC account; the monthly expenses are deducted from the HELOC, and what remains at the end of the month goes to the mortgage.
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How a mortgage accelerator works
An accelerated mortgage is very different from a traditional 30-year fixed rate mortgage. In a mortgage acceleration program, homebuyers receive an adjustable rate home equity line of credit (HELOC) instead of a fixed rate loan for their first mortgage. Many lenders offer the accelerator for the purchase of new homes as well as for refinancing an existing mortgage.
A traditional mortgage holder can make the same prepayment of principal as in a mortgage accelerator program, thereby shortening the life of the mortgage and saving interest by making unscheduled principal payments on the mortgage. traditional mortgage with amortization.
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Accelerated mortgage programs have a number of potential benefits. One of their most attractive features is the deposit of a borrower’s paycheck 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 benefit is that interest accrues daily as part of the plan. In addition, the amount of the paycheck that remains in the account at the end of the month may be more than what would be paid out of the mortgage principal balance under a traditional amortizing mortgage. When this is the case, the principal is prepaid, reducing the total term of the mortgage and saving on interest.
Limits on accelerated mortgages
Accelerated mortgages are generally the most suitable for borrowers who always have more money coming in than going out. Borrowers who have negative cash flow would continually increase their mortgage debt.
A potential downside of the accelerated mortgage program is that it can carry a higher interest rate than a traditional mortgage. This is especially true in a rising rate environment because this type of loan includes a HELOC, which normally has a variable rate.
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