Accelerator Mortgages

There is a lot of misinformation concerning mortgages in general and accelerator mortgages specifically. Below is an artcile I wrote for Battle Creek Enquirer which appeared Sunday the 16th, 2007. I will be more than happy to answer questions.

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The real estate market has changed dramatically in the past year as has lending money for the American Dream. While the evening news and the pundits on CNBC continue to lament the sub-prime lending melt-down, a number of savvy borrowers are looking to reduce their debt and actually pay their mortgages in full.

Owning a home free and clear used to be a grandiose ideal held by our parents and grandparents. We thought it sounded nice and even made retirement plans around not having a mortgage. However, the debt can appear insurmountable and the traditional ways of paying a mortgage quickly look like they require super-hero type discipline and income. This is why accelerator type mortgages are becoming increasingly popular.

We have all heard of bi-weekly mortgage payment programs. This may be a great way for some borrowers to budget better for their mortgage payments. Bi-weekly programs allow borrowers to make half the mortgage payment every two weeks. The result is 26 payments per year which equates to 13 regular monthly payments. One extra payment made per year will reduce a 30 year fixed rate mortgage by approximately 7 years.

There is a new mortgage in the United States that is quickly gaining momentum called the Home Ownership Accelerator. The idea comes from Australia and England where they have combined the best characteristics of a checking account and a mortgage. While this may sound odd, the benefit is faster mortgage debt reduction because all of the income is applied to the mortgage debt. This new bank account has the potential to save the borrower thousands in interest.

It works like this: Each time borrowers receive a paycheck, it is deposited into their new Home Ownership Accelerator bank account. Instead of the money sitting in checking or savings account waiting to be spent, it is first swept over and applied to the mortgage balance. Because the new account is their bank account and mortgage tied together, the borrower can still access the money they need for regular expenses throughout the month, it is just that the money is first used to drive down the principal balance of the mortgage. Interest is calculated on the daily balance which is where the benefits of compound interest take over. Assuming the borrower has, on average, more money being deposited than is being spent every month, they can potentially pay-off their 30 year mortgage in half to a third of the time. Borrowers who are using the Home Ownership Accelerator are using the account to increase their retirement savings too. This is not possible with a traditional mortgage. With a traditional mortgage, you can either pay-off the mortgage more quickly by applying money to the principal balance or you can invest in your savings but you cannot do both. Assuming the borrower’s expenses are less than their deposits, (i.e. they are not living paycheck to paycheck) they can simultaneously reduce the debt and get money into their portfolio.

Since July of 2005 when this new mortgage account was first offered in the greater Battle Creek area, over 100 families have benefited from this revolutionary product. Most of these folks will have their mortgages paid off in less than 10 years.

The Dream once held by our parents and grandparents of owning our homes free and clear is alive and well once again.