With the decline in the Real Estate Market a small roar has begun to erupt regarding Mortgage Acceleration Programs. There are several new concepts hitting the American Market regarding Mortgage Acceleration that are getting a good deal of attention.
Before taking a leap and investing in any type of Mortgage Accelleration Program it's important to understand just what Mortagage Acceleration is, and what it isnt?
So, What is Mortgage Acceleration?
Mortgage Acceleration is simple a process of making extra payments towards the principal balance of your mortgage. A typical mortgage is set up so that the borrower pays more interest at the beginning of the loan and more principal towards the end. On average the first 21 years of your mortgage are primarily interest and the last 9 years pay down principal. When you choose to accelerate your mortgage you cancel interest, build equity faster and potentially save thousands of dollars over the life of the loan.
What Mortgage Acceleration Isn't:
Mortgage Acceleration is not a magic bullet. It's basic mathematics and money management. If you pay more towards principal early in the life of a mortgage, you'll pay less interest to the lender. It's that simple.
Mortgage Acceleration Programs:
The concept of mortgage acceleration has been around for many years. Do-it-your selfers make pay an extra $100 or $200 a month towards principal, some make an extra payment annually thus reducing interest. Structured programs include:
The 15 Year Mortgage, The Bi-Weekly Payment Plan and the new kid on the block Money Merge Accounts also known as MMA's.
15 Year Mortgage: The 15 year mortgage is just that. It's a mortgage that from it's onset is scheduled to be paid off in 15 years. This is the most common form of mortgage acceleration program used in the United States. A 15 year mortgage has higher monthly payments and builds equity faster than a 30 year mortgage. Interest rates on 15 year mortgages are slightly lower than 30 year mortgages.
|Loan Length||30 Year Mortgage||15 Year Mortgage|
|Year Paid in Full||2037||2022|
For an extra $652.00 per month you will own your home free and clear in 15 years. The trade off is obviously do you have the extra $652.00 per month and what happens if your financial circumstances change. With the 15 year mortgage you are tied into the larger house payment for the life of the loan. While I don't believe that it's ever a bad idea to pay debt faster, a lot can happen in 15 years. A 15 year mortgage makes sense as long as you still have cash flow to put money into other investments such as IRA's and Savings.
Pros: Your mortgage is paid off in 15 years.
Cons: Higher Payment, must refinance to access equity if you need it.
Bi-Weekly Mortgage Payments: Bi-weekly mortgage programs that allow the convenience of having your house payment taken from your checking every 2 weeks. Few loan management companies have systems in place that allow the consumer to make bi-weekly payments on their own. Instead, it is usually necessary to go through a 3rd party administrator. The 3rd party administrator sets up an auto-debit from your checking account and pays your mortgage to the bank. In reality, bi-weekly programs are not actually paying your mortgage every 2 weeks, instead they normally make 1 payment each month to your lender. The auto debit every two weeks creates an extra 1 extra house payment to be made each year. In essence the bi-weekly program is nothing more than making an extra mortgage payment each year. In stead of making 12 payments in a year you make 13. Fees to set up bi-weekly programs are range from $295.00 to $379.00 plus monthly administration fees. Unless you like the convenience of having bi-weekly deductions, you can do this yourself by adding an addition 1/12th of a monthly payment to each house payment.
Pros: Easier Cash Flow, House is paid off 5-6 years sooner.
Cons: 3rd party administrator has uses your money for two weeks out of every month, cost of administrating the program.
Money Merge Accounts/Australian Mortgages: Although not new, money merge accounts (also known as Australian Mortgages) are new to the US market. It's estimated at 35% of Australians and Britian mortgagee's use the Mortgage Acceleration program. Like the 15 year mortgage and the bi-weekly payment program, Money Merge Accounts pay down principal on the primary mortgage more quickly than a traditional 30 year mortgage. They just do it differently. In order for Mortgage Acceleration programs work you must spend less than you make which is known as disposable income.
Money Merge Accounts use the benefits of an open-ended mortgage to cancel interest, thereby paying down principal faster. To use a money merge account, requires a fundamental shift in the way we manage money as follows:
Assumptions: $300,000 Mortgage, $5,000 monthly net income, paid biweekly at $2,500 each paycheck. Unspent income of $500.00 per month.
1. For the money merge account to work, you must have access to an open ended line of credit know as an ALOC or HELOC (Home Equity Line of Credit). Unlike closed ended mortgages, ALOC are open ended meaning that any money that goes into these accounts, pays down Principal and cancels interest. This is distinctly different from a closed end mortgage where payments are made to interest first and principal last.
2. The ALOC or HELOC is used as your primary checking account. To take full advantage of the line of credit, each month when you get paid, deposit your paycheck directly into the checking account/line of credit (HELOC)
3. Lets' assume that you have no debt, just your house payment. You get a line of credit using the equity in your home. At the start of the HELOC, you make a principal mortgage transfer of $5,000 from the HELOC to your primary mortgage. The principal on the primary mortgage is now $295,000 and the HELOC has a balance of $5,000 for a total of $300,000. This single transfer of $5,000 shave 1.5 years off the repayment period for the primary mortgage.
4. Deposit your $2,500 paycheck into the HELOC, which you use as a checking account. This paycheck immediately lowers the Principal balance of the HELOC to $2,500, thereby cancelling interest on 1/2 of the original $5,000 balance. Pay your bills, buy groceries etc from the HELOC. The HELOC balance will climb until you get paid again 2 weeks later when the next $2,500 paycheck is deposited, again lowering the balance on the open ended line of credit and cancelling interest. As long as you keep spending less than you make, the disposable income will continue to cancel and pay down the principal balance of the HELOC.
5. As the principal balance on the HELOC gets paid down, periodic principal transfers take place from the HELOC to the primary mortgage, thus lowering the balance of the principal mortgage more quickly and canceling interest overall.
Benefits: Interest is canceled and as equity grows on the principal balance of the mortgage, it's possible to increase the line of credit. This allows the consumer to have quick access to cash for other investments or life expenses. Much more control over your financial future and the ability to use the equity in the home for other financial and investment opportunities.
Cons: If you are inclined to spend more than you make or do a great deal of impulse shopping, you may want to rethink this strategy. Initial cost can be $3,500 for software to help you manage the program. HELOCs have variable rate of interest. If used as designed this interest is irrelevant, however if income decreases or disposable income decreases, the higher interest can become a factor.
My personal preference is the Money Merge Account, specifically the UFirst Software Product. I believe that it provides a financial compass that is far superior to any other product on the market.
Before you jump into any Mortgage Acceleration program, be sure to talk to a qualified Mortgage Planner who can discuss all the options available to you.
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-----------------------------------------------------------------------------------------------------------------------Kate Bourland is a Mortgage Planner located in Redding, California. Her specialties include Debt Elimination, Equity Planning and Credit repair with a focus on helping clients achieve financial freedom through education and outside the box thinking. She creates customized plans for each client that are focused on clients goals and needs. No matter what your goals, Kate is committed to providing solid professional planning to help you achieve those goals. Contact Kate by e-mail or by phone at 530-244-4345.
© 2007 Kate Bourland, all rights reserved. The opinions expressed in this blog are the opinions of Kate Bourland.