(Updated January 2015)
A mortgage accelerator is a fairly unusual form of buying or refinancing a home in the United States. While it's fairly common in certain other countries - such as Australia or the United Kingdom, accounting for one in four home purchases in the latter - many Americans homebuyers have never heard of it.
To be sure, there are several types of mortgage accelerator programs and it's important to differentiate between them. What they have in common is that they all seek to manage your mortgage payments in a way that reduces the interest you pay over the life of the mortgage.
The HELOC accelerator
This is the type that is commonly used abroad. It sets up a Home Equity Line of Credit (HELOC) to finance a home purchase.
"How can you do that?" you might ask. After all, don't you have to own a home to get a HELOC in the first place?
Well, yes. The way it works is that you buy a home by posting a certain down payment - say 20 percent or more of the purchase price. But instead of a conventional fixed-rate mortgage or ARM, you're set up with a HELOC that allows you to borrow up to a certain limit.
That limit is often the equity provided by your down payment. So you can draw on the HELOC as you wish, as long as you don't cut into that 20 percent equity.
Going forward, you then pay your entire paycheck into the HELOC each month. So if you earn $6,000 a month, that would give you $6,000 in new equity every month to work with. You then draw on the HELOC to pay bills and meet living expenses, and whatever you don't use at the end of the month goes toward reducing the mortgage principle owed.
What are the benefits?
One of the advantages of this is that, by paying your entire check into the HELOC at the beginning of the month, your average mortgage balance for that month is lower than it would be with a conventional mortgage. That means your interest charges are slightly lower, so more of your payment goes toward reducing principle. Over time, that adds up - accelerating your mortgage payoff.
This sort of HELOC also tends to have lower interest rates than on a conventional fixed-rate mortgage, often even lower than the initial rate on an ARM. However, it's a rate that adjusts frequently, usually once a month, so the rate can be more volatile than the other two.
This can be a good type of mortgage for borrowers with irregular incomes, because it allows you to make occasional large payments to reduce principle while at the same time preserving the option of paying little to nothing in those months when times are tight, even to the point of borrowing against your accumulated equity if need be.
It also provides a certain type of financial discipline, because you technically need to borrow against mortgage principle you've already paid off for all your other expenses, as opposed to paying for them out of cash on hand. It's a psychological difference, to be sure, but one that can keep a check on spending habits.
The HELOC isn't open-ended. After a certain period of time, the draw period of the HELOC ends and you have to begin paying down the remaining principle as a regular mortgage - often a 10-year draw and 20-year amortizing payoff. However, if your credit remains good, refinancing into a new accelerator HELOC with a new 10-year draw at that time is an option.
This is a fairly sophisticated financial product that works best for people who handle their money in a disciplined way. It can also provide a financial reserve that can be readily drawn upon in emergencies or for major expenditures. It's not a particularly good product for people who will continue to max out their available equity, unless you're the type of person who's comfortable with not paying down your loan and treating it as a semi-rental arrangement - as some people are.
The biweekly accelerator
The other type of accelerator you hear about is one where you make more than one payment a month. These often involve borrowers making a payment every two weeks, because that's the schedule many people get paid on.
The primary benefit of these accelerators isn't so much that you're paying half of your mortgage early this month, but that they have you making an extra mortgage payment per year. There are 52 weeks a year, meaning 26 biweekly payments, or the equivalent of 13 monthly payments - one extra. That extra payment can help you pay off a 30-year mortgage several years early, by knocking down both your principle and your interest payments.
There are companies that will offer to set up such arrangements for you, and will charge a fee for doing so. Here's the catch, though - you can do it yourself. Simply send a payment for half your monthly mortgage bill each time you get paid and you'll be on your own accelerator program without paying a dime to anyone. The only downside is if your mortgage has a penalty for prepayment - and if you're just looking for a mortgage now, you want to be sure to avoid those.
Is it right for you?
If you're interested in examining the options that an accelerated mortgage home loan refinance or purchase program represents, ask a home loan specialist to give you a detailed overview of the program. Compare it to the savings you can gain from a conventional mortgage, and you may find that you're a good candidate for an accelerated mortgage.