As if the array of financing choices facing homebuyers weren't enough, there's a new kid on the block. Called a mortgage accelerator, this new kind of loan promises to drastically cut the interest paid on home loans by putting your paycheck to work all month.
Popular in the United Kingdom and Australia, the loans can now be had in some U.S. states through two firms, Macquarie Mortgages USA and CMG Financial Services, according to Bankrate.
Here's basically how they work. The borrower purchases a new property or refinances an existing property using a home equity line of credit. The borrower then directly deposits his or her entire paycheck into the home equity line of credit and uses the account like a bank, spending money as needed for everyday expenses.
The programs promise to reduce your mortgage interest in two ways. First, all the extra money left at the end of the month gets applied to the mortgage principal, paying the loan down faster than you might with fixed-rate payments. Second, your paycheck deposit effectively acts as a payment, lowering the balance of your loan, and therefore the interest charges, throughout the month.
The programs work on the assumption that the borrowers spend less than they earn and end the month with money left in the bank. They also promise to put homeowners' minds at ease because the home equity line of credit also acts as an emergency fund, available to be drawn upon at any time. The homeowners need not worry that they've tied up all their extra cash in home equity.
Some other elements to note: The loans require only interest payments during the first 10 years. If you stick to that payment schedule, you may not make too much headway paying your mortgage principal, even with the advantages of depositing your paycheck into the loan account.
The loans also come with variable rates that will fluctuate, though the programs set caps. This may not be attractive to anyone whose mortgage has a low fixed rate and no prepayment penalties. There are also closing costs and, possibly, other fees to take into account.
If paying off your home as fast as possible is your goal, than you can accomplish this without a special loan product. You can realize a large portion of the same interest reduction that is promised through a mortgage accelerator loan by simply sending every last dime left unspent at the end of the month to pay off more of your mortgage principal.
The concept begs the question of whether paying down your mortgage as fast as possible is a good idea. Like many financial questions that keep Fools awake at night, the answer to this depends on your particular circumstances.
If you absolutely hate debt and want to live in your house free and clear of any mortgage obligations as fast as possible, then go crazy. Send all your extra pennies to your mortgage company, and plan a party for the day you can say you own every square inch of your house. I imagine that many of us, however, must balance our mortgage dreams with other financial goals.
If you have any credit card balances that go unpaid each month, then every spare penny left at the end of the month should go directly to your credit cards. Reducing your mortgage principal faster than scheduled will reduce your interest payments over time, but there's little in nature that can grow faster than credit card debt building at double-digit interest rates. Visit the Credit Center for more help with paying off debt and learning the ins and outs of the credit industry.
You also probably don't want to throw all your extra money at your mortgage if you're not funding your retirement accounts adequately. You'll eventually have a lot more money at your disposal when you pay off your mortgage, but you'll lose the compounding advantage of time if you're not stocking your retirement accounts at the same time.
If you end the month with still more money in the bank and no college funds to fill or vacation plans afoot, you might want to invest that money in the stock market. Reserve this option only for money you don't need in the next five to seven years. Whether this offers more benefits than paying down your mortgage depends, in part, on your loan interest rate and the rate of returns on your investments. A loan prepayment is a sure thing, while investment returns may go up and down.
Could an accelerator program be a good idea if you've worked through your priorities and decided that paying off your mortgage quickly ranks at the top? Without closing costs or annual fees, you can try the idea by taking a do-it-yourself approach. Spend a couple months sending your extra cash to pay down the principal on your mortgage. Then see whether an accelerator loan gives you an advantage worth those extra costs.
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