Accelerator Loans — What are They?
September 21, 2009 by admin
Filed under Mortgage Loans
Want to pay your house off faster?
A new type of loan, accelerator loans, have arrived in the United States. They are a popular loan in Australia and in the U.K. These loans are are special in that the lenders want the borrowers to put any and all extra money toward the total amount owed on the mortgage. This can lead to huge savings.
In order to qualify for accelerator loans a person has to be trying to use a home equity loan to purchase a new piece of property or refinance an old one. With an accelerator loan, the borrower must direct deposit their entire paycheck into the the loans account.
The amount of the mortgage payment must stay in the account. Any other expenses need to be payed via automatic payments, checks, cash withdrawals, or debit card. When a payment or withdrawal is made, it goes against the line of credit which was granted.
A borrower will end up with savings compared to the standard home loan, even if they do not end up paying anything on the principal of the loan in any given month. This is due to the fact that the average balance on the account will be less than it would have been for the standard loan, so the borrower pays less interest. Let’s take a minute to clarify this.
We will use a standard loan with a fixed rate and a payment of $2,000 and you have a monthly net income of $5,000. If you are using an accelerator loan and you spend the entire $3,000 which you brought in above your monthly payment, you would still have an average mortgage balance of approximately $1,500 less than what it would be if you used a standard mortgage loan.
The reason for this is that you initially deposited the full $5,000 and then made small withdrawals through out the month to cover your $3,000 in order to support your cost of living. On a mortgage with a fixed interest rate of 7.75, a person would save approximately $10 just in interest for the month.
With this $10 adding up each month, this will turn out to be a great savings in the end. Both of these loans have an annual fee of between $30 and $60, but the focus of the accelerator loan on a mortgage is in directly depositing your entire net pay against the mortgage and then making small withdrawals.
Even reverse mortgages can be replace by home ownership accelerator loans. Once enough equity is built up in the home, the owner can prevent having to make limited payments by using negative deferment over a period of time up to the amount of the home-equity line of credit.
You can expect closing costs to be about the same for both mortgage accelerator loans and standard 30-year fixed-rate loans. Closing costs effect any refinancing decision. However, the longer you need to take the loan out for, the more quality you are getting out of an accelerator loan, an the more money you are able to save.
Due to the amount of money that is saved in interest costs on the loan, most lenders expect homeowners to not be as worried about the interest rates on accelerator loans. Again, this product is fairly new to homeowners in the U.S. Therefore, it will take a bit of time before these savings will gain reputation and the accelerator loans become more popular. Do you have good financial discipline?
If the answer is yes, there is no reason you couldn’t be doing this now with your standard home loan or any type of mortgage and not have to face the cost of closing. The borrower would need enough financial discipline to use any extra monthly income for payment on the principal amount on the mortgage.
By simply putting an extra $100 to $300 (based on your finances each month) a month toward your principal, you could turn your 30-year loan into one that takes only 16-20 years to pay off.
It is possible for people to designe a program for themselves that works similar to a mortgage accelerator loan and not have to face the extra expenses of refinancing. By making additional principal payments on any loan can provide these same interest savings.
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