8 Kasım 2007 Perşembe

A new way to pay off your house

Accelerator loans, common in Australia and the U.K. but new to the U.S., use special accounts that encourage borrowers to apply all extra money toward their mortgages. The savings can be big. A different type of home loan, called a mortgage accelerator, has migrated to the United States. It uses home-equity borrowing and a borrower's paychecks to shorten the time until a mortgage is paid off, potentially saving tens of thousands of dollars in interest expense.
Not to be confused with biweekly programs that shorten a mortgage through extra payments, the mortgage-accelerator program is based on an approach common in Australia and the United Kingdom, where borrowers deposit their paychecks into accounts that, every month, apply every unspent dime against the mortgage loan balances.
In Australia, more than one-third of homeowners use mortgage-accelerator programs. In the U.K., it's about 25%. In the United States, the two firms now offering these mortgages are Macquarie Mortgages USA, which calls the program the Macquarie Asset Manager, and CMG Financial Services, whose offering is called the Home Ownership Accelerator.The premise is that borrowers finance a purchase or refinance existing property using home-equity lines of credit. Borrowers then directly deposit their entire paychecks into the credit accounts. Monthly expenses, other than mortgage payments, are funded by draws against the lines of credit, whether those are through automatic bill payments, checks, cash withdrawals or credit cards. Even if borrowers end up not paying anything extra on the principal during a month, they still capture some interest savings because the average balances are less than they would have been with conventional loans.
Here's how it works As an example, let's say your mortgage payment on a conventional fixed-rate mortgage is $2,000 and your monthly net income is $5,000. With the mortgage accelerator, even if you spend the $3,000 difference, your average mortgage balance for the month is $1,500 less than it was with the conventional mortgage.
That's because the entire $5,000 is deposited in the loan account and you made draws of $3,000 for living expenses spread over the month. At a 7.75% loan rate, that saves you about $10 in interest expense that month. Now, $10 here and $10 there does add up over time, although both loan programs have annual fees of $30 to $60, but the accelerator part of the mortgage lies in having all your net pay going against the mortgage and an assumption that you have a positive monthly cash flow -- meaning you don't spend as much as you make. A simulation calculator on CMG's Web site has stock assumptions that you may have 10%, 20% or even 25% of your net pay left over each month that you can apply to your mortgage balance. The Macquarie site has a calculator, too.
Help for the undisciplined Of course, all borrowers already have that money available with a conventional mortgage and without the cost of refinancing. A borrower would simply need the financial discipline to use all that money as an additional principal payment.
For the undisciplined, the mortgage-accelerator program makes the additional principal payments automatically. That's the real hook to this program: Unless you spend the money by drawing against the line of credit, your paycheck goes toward paying off the house.
Where a mortgage-accelerator loan program gives a homeowner additional flexibility, however, is in having a line of credit available if there is an emergency need for cash. If you make additional payments on a conventional 30-year fixed-rate loan, you can't borrow that money without taking out a home-equity line of credit or a home-equity loan. With the mortgage-accelerator program, you already have the line in place. That gives homeowners confidence that they can be aggressive in paying their mortgages and still have money readily available if a financial emergency crops up.
Homeowners could cobble together a payment plan similar to a mortgage accelerator on their own by taking out a conventional home-equity line of credit, but a mortgage product specifically structured for this approach to consumer finances has advantages.
Mortgage-accelerator loans have interest-only minimum payments during the first 10 years, although that goes against the idea of paying off a mortgage as fast as you can. After 10 years, the line of credit decreases by 1/240 each month over the remaining loan term (20 years multiplied by 12), forcing principal repayment until the loan is paid off.
Another argument for this approach to financing is that your idle cash is saving you the mortgage interest rate versus earning a low passbook-savings rate. Though short-term investing alternatives that pay higher rates do exist, the savings are automatic with the mortgage-accelerator program.
Now for the fine print A home-equity line of credit is a variable rate, and the interest rate will fluctuate with changes in the underlying pricing index. Lifetime caps limit a homeowner's exposure to higher interest rates, with CMG's Home Ownership Accelerator limiting that risk to 5% over the starting rate. The Macquarie Asset Manager loan program has a lifetime interest cap of 21%.
As of November, CMG's program is available in more than 20 states, and Macquarie's program is available in about two dozen, with availability in a half-dozen more states on a correspondent lending arrangement.
Brooke Barnett, an "ownership accelerator specialist" at Rancho Funding, a San Ysidro, Calif., mortgage broker that offers the CMG loan program, calls the program ideal for financially savvy homeowners who spend less than they make each month.
The savvy part -- being able to earn the mortgage interest rate on idle cash instead of the low rates paid on checking and savings accounts -- attracts customers who take a big-picture view of their finances. Money that isn't going toward expenses is reducing the balance on the mortgage and, by doing that, reducing the interest expense.
Barnett suggests that a Home Ownership Accelerator loan could also be used in lieu of taking out a reverse mortgage. With enough equity in the property, a homeowner could avoid minimum payments over time using negative amortization up to the amount of the home-equity line of credit.
Closing costs on a mortgage-accelerator loan are about equal to the closing costs on a conventional 30-year fixed-rate mortgage. Like any refinancing decision, those costs are a factor, and the longer you plan to be in the house the easier it is to justify refinancing your mortgage loan.
The lenders expect homeowners to be less rate-sensitive about these accelerator mortgages because of the interest savings available through the program. The product is new enough in the U.S. market that it will take some time to validate that expectation.
Interest savings are still available the old-fashioned way by making additional principal payments on a conventional fixed-rate mortgage. Bankrate.com's mortgage payment calculator allows you to make additional-principal-payment assumptions on your mortgage, and you can then compare the interest savings against the results of the calculators offered by Macquarie and CMG.
By Don Taylor, Bankrate.com

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