New mortgage product combines loan with checking account

Loan possibly paid off sooner with Home Ownership Accelerator

The final payment on a mortgage used to be a cause for celebration. People who had been regularly making monthly payments for more than three decades would often throw “mortgage burning” parties once the final payment was made. For those who spent most of their working career trying to pay off a house, it was a huge moment. Today, few buyers ever expect to pay off a mortgage. May people move often, so they just pay for a few years and then move on to a new house and a new loan. And the rise in housing prices has led many consumers not to pay off their homes, but to borrow more against them, raising the amount they owe rather than lowering it.

An interesting new mortgage product is designed not only to help people pay off their homes, but to do it sooner, rather than later.

The Home Ownership Accelerator, offered by a company called CMG Financial Services, is a mortgage product that is intended to make use of a quirk of interest compounding to allow a homeowner to pay off his or her home sooner, provided that the owner has some financial discipline. We saw a full page ad, but no details, for the mortgage in our local newspaper. The ad informed us that we needed to attend a free seminar to find the details. Not necessary; we have them here.

Interest on a mortgage is calculated on the average daily balance that a buyer still owes on a mortgage each month. That balance is used to determine how much interest should be added to the principal. The larger the amount owed, the greater the interest charge. That is why in the early years of a mortgage, most of your payment is interest. As the principal is reduced, so is the interest charge.

The Home Ownership Accelerator essentially turns your loan into a bank account. You deposit your paycheck into your account and that amount is credited towards your principal balance. You are still free to write checks as usual to pay the bills, but while that extra money is in your account, it reduces, however slightly, your average daily balance. That, in turn, reduces the amount of interest. Of course, if you actually write checks for more than the amount you deposited, and it appears that you can, then your balance will actually increase. This is known as negative amortization.

Does this plan work? Yes, it does, provided that you are financially disciplined enough to manage your money carefully and not overspend. The interest rate on this mortgage is a bit higher than for most adjustable rate loans, but if you either earn a lot of money or are a compulsive saver, it may help you pay off your loan sooner. Of course, it helps if you plan to stay in your house a long time and actually intend to pay off your mortgage. If you are, like a lot of Americans, just in your house for a few years, the Home Ownership Accelerator probably is not for you.

The bottom line - this product may or may not help you pay off your house sooner. It just depends on your individual needs. Talk to a lender if you aren’t sure.