THE UN-MORTGAGE (Greg Rielly quoted )

A financial product popular in countries such as Australia, New Zealand and the United Kingdom is just now making its debut in the United States, according to Greg Rielly, a certified mortgage planner and mortgage banker at Mortgage Advisory Group, in Everett. Acting as a sort of hybrid between a home equity line of credit and a checking account, this new loan product offers homeowners the potential to pay down rapidly a mortgage balance without any change in spending or saving habits.

The process starts with the homeowner refinancing his or her current home loan with a specialized home equity line of credit. To understand how this product works, one must think of it not as a regular mortgage, with a fixed repayment period, but as more of a transaction account.

Borrowers using this home equity line apply their regular paychecks and other income as principal-only payments to the loan balance instead of depositing them in a checking account. This activity lowers the principal balance substantially. With a traditional mortgage loan, often only a small portion of the monthly payment is applied to principal, especially early in a loan's life.

When bills need to be paid, the borrower draws from the home equity line. What makes this product different is the borrower's ability to use instruments such as checks, ATM-debit cards and online bill payment to access the line of credit.

As long as expenses do not exceed income, the average daily balance of the loan will be lower during the month under these arrangements compared with a traditional mortgage amortization schedule. With a lower principal balance in place throughout the month, less interest will accrue.

According to information provided by CMG Mortgage Services, which markets the product through certified lenders as the Home Ownership Accelerator, a homeowner with $96,000 in annual net income can shave 14.6 years and more than $180,000 in interest payments from a 30-year traditional mortgage of $300,000 with a fixed interest rate of 6.5 percent using the specialized home equity line of credit. This scenario assumes the borrower spends only 90 percent of net income on monthly expenses.

And that's the big assumption: The borrower spends less than what is earned. The risk for homeowners using this product is that they might continually use the line to cover expenses in excess of income. In such cases, the loan's balance would increase over time, negating the potential benefits.

From Rielly's perspective, this product is not for everyone. In his view, it's ideal for a financially disciplined homeowner with a strong equity position and positive cash flow who wants more flexibility than is offered by traditional home-loan products. In the right hands, he says, this product can be a great money-management tool.

Some financially able homeowners prepay their mortgages to eliminate the burden of monthly payments and enjoy the financial security associated with being debt-free. However, mortgage advisers like Rielly argue against this approach.

Traditional mortgage prepayments are permanent and typically do not offer the borrower any increased liquidity, some advisers assert. As the mortgage is paid down, home equity increases, but there is no easy way for the borrower to access the equity. And recently, many banks have begun tightening the use of home equity lines of credit.

"I heard from a CPA whose client had recently come into some money, and she paid down a home equity line of credit by $50,000. Shortly after, the bank froze her line, and she no longer had access to those funds," Rielly says.

The new product provides for unlimited payment and withdrawal privileges, according to Rielly.

As with many home equity lines of credit, the product offered by Rielly's firm features a variable interest rate. The loan also has a fairly substantial upfront cost in the form of a discount fee.

While it's a distinct departure from conventional money-management methods, the product can simplify a household's finances. The average consumer holds multiple savings and checking accounts and often has a combination of credit accounts for various purposes, including credit cards, auto loans, personal installment loans and possibly home equity loans. This product could be used to refinance the consumer's mortgage and other loans and also eliminate the need for checking and savings accounts. IBC

Doreen Fox Kelsey is a writer who lives in Spokane and draws on 30 years of experience in the financial industry to educate and advocate for consumers on matters of financial importance.