Mortgage acceleration

Mortgage acceleration is a term given to the practice of paying off a mortgage loan faster than required by terms of the mortgage agreement. As interest on mortgages is compounded, early payments diminish the period needed to pay off the mortgage, and avoid a quotient of compounded interest.

In addition, acceleration may refer to a clause in a mortgage note that allows the mortgage holder to declare the entire debt of a defaulted mortgagor due and payable.

A commonplace method of mortgage acceleration is a so-called bi-weekly payment plan, in which half of the normal calendar monthly payment is made every two weeks, so that 13/12 of the yearly amount due is paid per annum. Commonplace too, is the practice of making ad hoc additional payments. The agreements associated with certain mortgages preclude or penalize early payments.

However, another type of mortgage acceleration concept appears to have been embraced by a variety of financial institutions and intermediaries, which offer products such as methods, software, mortgage-linked checking accounts, and home equity line of credit loan facilities advertised as being capable of assisting in achieving mortgage acceleration, and available at a range of premiums.

Most of these “mortgage acceleration” (also called “mortgage reduction”, “interest reduction” or “debt reduction”) programs or software are based on a trick.

The basic claim made is that by using a particular type of loan in a particular way (often following a “program”), the borrower can cut many years off the mortgage without making additional repayments – or similarly, that although additional payments are made, the savings increase significantly due to the use of a particular loan and/or strategy.

The concept usually involves a type of loan that allows the borrower to use the loan as their day-to-day transaction account. This loan may refinance the entire mortgage, be in addition to the mortgage (requiring regular transfers to the mortgage) or in some cases involves an “offset” account, that sits separately to the mortgage but offsets interest on any deposit against the mortgage interest.

Promoters can profit from the sale of software, providing “monitoring” or “support”, or from commissions from referrals to lenders. Examples are usually presented that show huge savings on the mortgage. These examples may be based on the borrower’s estimate of their regular expenditure, or on an “example” family. An underestimate of real expenditure (by the promoter or the borrower) leaves additional amounts in the mortgage (or related account) in the example, and the example therefore shows significant savings. However, the presentations represent that the savings are primarily due to the type of loan account and the way it is being used.

In theory, savings could be made by leaving funds that would otherwise be in a transaction or check account for bills and living expenses, in a mortgage or related account. For example, if a borrower had an average of $4,000 sitting in a check account, leaving this in their mortgage or related account could save about $280 per year on a 7% mortgage - or less than $6 per week.

Even $6 per week can make a difference to a mortgage in the long term, but there are almost always some costs involved in setting up the “program” and these will usually exceed the savings. Costs may include fees and interest incurred in relation to a separate line of credit loan, or in refinancing a mortgage. Interest and/or monthly fees on the new mortgage may be higher than on the old mortgage. The cost of software to “monitor” the program, or fees paid to set the program up will also reduce the meager savings that can be made.

While some promoters refer to the Australian experience, this type of marketing has all but ceased in Australia since the Australian regulator, the Australian Securities and Investments Commission (ASIC) took action to stop a range of brokers and software developers from making the above representations. [1] [2] [3] [4]

One such program points out the fact that people hold cash for emergencies and day-to-day spending in accounts that earn smaller returns. Why do they do this? This is done because immediate access to cash is needed: consumers are paying an Opportunity Cost to have the cash close at hand. A HELOC can provide similar flexibility since you can pull from a HELOC on-demand as if it were a checking account. Thus, you can actually take the cash you have on-hand and pay down your first mortgage, then draw from you HELOC when you need cash. This generally produces a better return, but it depends on your rates: In the US, mortgage and HELOC interest paid is tax deductible (be careful of Alternative Minimum Tax), whereas interest the bank pays you from a savings account is taxable. For example, if you're in a 25% tax bracket and have a HELOC tied to prime + 1 (=6%) the effective interest you pay to the bank is 4.5%. On the other hand, if you're earning 4% on your savings account, your effective yield is 3% because you have to pay 25% of that yield to the government. The return is a full 4.5% from any cash you divert away from checking. Thus, and cash you put toward your HELOC or first mortgage rather than checking/savings will net you a 1.5% advantage. However, there are a few ways this can backfire:

1) the bank may freeze your line of credit (this has been happening since the Credit Crunch) 2) you may become subject to Alternative Minimum Tax 3) the benefit will change based on your income tax rate, savings rate, checking rate, mortgage rate, and HELOC rate (which is generally tied to Prime)

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • acceleration clause — n: a clause (as in a loan agreement) that accelerates the date of payment in full under specified circumstances (as default by the debtor) Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. acceleration clause …   Law dictionary

  • Acceleration Clause — A contract provision that allows a lender to require a borrower to repay all or part of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment. Also known as… …   Investment dictionary

  • acceleration clause — A provision or clause in a mortgage, note, bond, deed of trust, or other credit agreement, that requires the maker, drawer or other obligor to pay part or all of the balance sooner than the date or dates specified for payment upon the occurrence… …   Black's law dictionary

  • acceleration clause — noun : a clause (as in a loan contract) providing for advancement of the date of payment under specified circumstances * * * a provision of a mortgage, loan, or the like that advances the date of payment under certain circumstances. [1930 35] * * …   Useful english dictionary

  • acceleration clause — a provision of a mortgage, loan, or the like that advances the date of payment under certain circumstances. [1930 35] * * * …   Universalium

  • acceleration clause — A clause in a note or mortgage stipulating that the whole debt secured thereby shall become due and payable upon the failure of the maker to pay the interest annually or to comply with any other condition of the contract. 11 Am J2d B & N § 181;… …   Ballentine's law dictionary

  • Flexible mortgage — The term flexible mortgage refers to a residential mortgage loan that offers flexibility in the requirements to make monthly repayments. The flexible mortgage first appeared in Australia in the early 1990s (hence the US term Australian mortgage) …   Wikipedia

  • Pay Off Your Mortgage in Two Years — is a television programme first aired on BBC2 in Early 2006. Its follow up series Did They Pay Off Their Mortgage in Two Years? began airing in January 2007. Presented by business expert René Carayol, the programme is an experiment that aims to… …   Wikipedia

  • Economic Affairs — ▪ 2006 Introduction In 2005 rising U.S. deficits, tight monetary policies, and higher oil prices triggered by hurricane damage in the Gulf of Mexico were moderating influences on the world economy and on U.S. stock markets, but some other… …   Universalium

  • Foreclosure — For Lacan s psychoanalytic process, see Foreclosure (psychoanalysis). House in Salinas, California under foreclosure, following the popping of the U.S. real estate bubble. Foreclosure is the legal process by which a mortgage lender (mortgagee),… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.