Accelerator mortgage sounds good but could hurt you

Buyers may wish to think twice about home ownership accelerator

The lending business is certainly a creative one; when market needs change, they are quick to come out with a wide variety of “new” loan products. Ultimately, they’re all just different varieties of the same thing - you borrow a lot of money and you pay it back with a lot of interest. But the different “flavors” of loans are designed to accommodate just about everyone, so that houses can be purchased by the widest variety of consumers. Don’t have down payment? There’s a product for you. Don’t make much money today but think you’ll make a lot in five years? Your mortgage company has the answer.

The latest in a long string of creative products is a home loan that combines a mortgage and a home equity line of credit into a single, unified product. They go by several different names, but the product is most commonly referred to as a “home ownership accelerator.”

How does it work?

Instead of a traditional mortgage with regular monthly payments, you are given a line of credit that works like a checking account. You are expected to use this account for all of your financial needs - you deposit your paycheck into the account, and you write checks against it as needed. Despite this, the account represents your mortgage. As you deposit money into the account, the amount is credited to the amount that you owe on your home. As you write checks, that amount is debited. Despite the up and down movement of the account, even a temporary deposit of your paycheck will reduce, for a time, the amount that you owe. That means that the amount of interest that accrues on your loan will be temporarily decreased, as well.

Supporters of these loans say that using one will allow you to pay off your mortgage much faster, as the amount of interest that you pay will be substantially reduced over time. There may be some truth to that, for some people. For others, it could be a huge problem. Here is where it can go wrong - the interest rates are adjustable, so over time, they could get quite high. The loans tend to have an interest floor, so there is a limit to how low they can go. And there is nothing to prevent you from writing checks for amounts up to the amount of the original loan. If you have paid off $50,000 worth of your principal, that $50,000 is now available to you as credit. For the average, not-very-disciplined American consumer, this could be a ticket to a financial disaster.

Still, for consumers who tend to save a lot of their income, this product could, indeed, save a lot of money. The secret is to put money into the account and leave it there. Unfortunately, most people are not very good at that. This loan would be well suited to people who save and who have reached a point in their lives where their incomes are larger and fairly stable. For those buyers who are just starting out, a better choice would be a conventional, 30-year, fixed rate mortgage.