By Jennifer Bradley Franklin, Bankrate.com
In broad terms, mortgage acceleration or an accelerator loan is any program that “helps homeowners pay off their mortgage balances much earlier, resulting in significant interest savings over the life of the loan and reducing the payment duration by several years,” says Robert Bullara, owner of Fine Realty International in Austin, Texas.
“With mortgage accelerator programs, you pay a little extra each month toward your mortgage’s principal,” says Bullara.
Keep in mind: A mortgage acceleration program isn’t the same as an acceleration clause in your loan contract — more on that below.
What is an acceleration clause?
An acceleration clause, also referred to as a “demand feature,” is a provision in your mortgage contract that allows the lender to require a full repayment of the loan. You can find out if your mortgage includes this stipulation on page four of your closing disclosure. If your loan does, the conditions under which the clause can be imposed are typically spelled out in your mortgage note documents.
Types of mortgage accelerator programs
There are formal mortgage accelerator loan programs — that means those you apply and pay for — as well as less formalized strategies you can use to get similar payoff results over the life of your mortgage. Here’s an overview of the two main types of programs:
- HELOC accelerator: A HELOC accelerator combines a bank account with a mortgage and HELOC, or home equity line of credit. With this kind of program, you’ll deposit your paychecks into a HELOC and use that line of credit to pay your mortgage. You’ll then draw funds from the line to pay other expenses like car payments and utilities. After that, the remaining cash goes toward the mortgage.
- Biweekly mortgage payment accelerator: In a biweekly mortgage payment accelerator setup, you’ll make an accelerated mortgage payment every two weeks, typically by auto-withdrawal. The accelerator loan provider either pays your loan on your behalf every two weeks or once per month.
Pros and cons of mortgage accelerator loans
While the benefits might sound tempting, mortgage accelerator programs also have some drawbacks. If you’re considering one of these loans, weigh the pros and cons first:
Pros of mortgage acceleration
- Lets you pay off your mortgage quicker
- Reduces how much you pay in interest
- Helps you become debt-free faster than you would with a traditional mortgage
Cons of mortgage acceleration
- Interest rates can be higher than traditional mortgages
- May have steep upfront, annual or transaction fees
- Requires steady income and good money management
Alternatives to mortgage accelerator programs
When you get right down to it, the best way to accelerate your mortgage payoff is to simply pay more as fast as you can. Some tried-and-true strategies include:
- Add a bit of extra money toward your principal each month.
- Contribute an extra mortgage payment each year.
- Schedule a half-mortgage payment every two weeks, also known as biweekly payments. Since there are 26 two-week periods in a year, that’s effectively one extra mortgage payment annually.
No matter what alternatives you use, always notify your mortgage lender or servicer of your plans to ensure those extra payments go toward your principal rather than the interest on the loan.
When in doubt, it’s smart to sit down with a trusted financial adviser to determine if an early mortgage payoff aligns with your goals.
What borrowers should know about mortgage accelerator loans today
Mortgage accelerator loans aren’t for everyone. For a less-than-disciplined borrower, the draw of having a home equity line of credit could actually enable them to live above their means, adding years and hefty interest debt over time.
“Accelerator mortgages tend to be of particular value for higher rate or additional rate taxpayers, as well as for people with large savings who don’t rely on accrued interest to finance their day-to-day lives,” says Bullara. “The major advantage for high-end taxpayers is that they do not have to pay tax on their savings interest. This type of loan is better for a high-net worth borrower that doesn’t live on a tight budget each month.”
Plus, with higher interest rates and fees than other mortgage types, mortgage accelerator loans aren’t always a smart financial choice.
“If it looks like you’ll pay more than you’ll save, it may be worth considering a more basic home loan with a lower rate and no fees,” says Bullara.
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