A mortgage accelerator program can help a homeowner pay off the mortgage sooner and potentially save thousands in interest. These programs can permit homeowners to use a home equity line of credit in a complex arrangement to make large extra payments on a mortgage annually. However, fees can be high and the programs require considerable discipline and are not without risk. Self-managed early mortgage payoff programs may be better for most homeowners.
A financial advisor could help you create a financial plan for your home buying needs and goals.
Inside a Mortgage Accelerator Program
Mortgage accelerator programs, also called equity accelerator programs, are offered by some financial companies to help borrowers pay off mortgages sooner. The approach requires a homeowner to first take out a home equity line of credit (HELOC). If a homeowner with good credit and adequate income has a $300,000 home with a $200,000 loan balance and $100,000 of equity, a HELOC of $80,000 is likely to be available.
After closing on the HELOC, the homeowner takes his or her entire paycheck and pays that amount against the principal balance on the mortgage. For example, if the homeowner earns $5,000 a month, the entire amount would go to reduce mortgage principal.
To make the regular mortgage payment and pay other bills during the month, the homeowner will draw against the funds available from the HELOC. For the next couple of months the homeowner devotes paycheck income to paying the regular monthly mortgage payment and other expenses, and paying off the HELOC.
When the HELOC balance reaches zero after a couple of months the process begins again. If the cycle takes three months to complete, at the end of the year, the homeowner will have paid an extra $20,000 (which is equal to four monthly paychecks in our hypothetical example) against the mortgage principal.
Benefits of Mortgage Acceleration
The effect of making large extra payments against a mortgage principal is that the loan gets paid off much sooner. As an example, a homeowner with 25 years and $200,000 remaining on a 30-year 5% fixed-rate mortgage who pays an extra $20,000 per year will pay off the loan in less than half the original term.
Early payoff can save tens of thousands in interest. The above example results in saving nearly $110,000 in interest. In addition, mortgage acceleration can give homeowners much greater financial freedom without debt.
Drawbacks of Mortgage Acceleration
Mortgage acceleration has significant limits and risks, however. Some mortgage loans do not allow extra principal payments. Some lenders charge prepayment penalties that will erase part of the gains. Only homeowners with significant equity can qualify for HELOCs. Plus, the program only works if the homeowner has reliable income and sizable free cash flow every month after paying expenses.
Mortgage accelerator programs are complicated and require homeowners to show great discipline. Income has to be devoted to making payments against the mortgage or paying off the HELOC, as well as staying current on the monthly mortgage payments and other bills.
Companies that arrange mortgage accelerator programs often charge thousands of dollars in upfront fees to set them up, plus they may charge transaction fees. HELOCs also normally have variable interest rates, which can result in a borrower having to pay higher costs in the future.
Alternatives to Mortgage Acceleration Programs
There are a number of other ways to pay off a mortgage early. For instance, a homeowner can simply make extra payments against the mortgage when extra cash is available, without signing up with a company that offers a mortgage accelerator program. This can save on fees and provide flexibility while also paying off a loan faster.
Self-managed bi-weekly mortgage payment plans have borrowers make payments every two weeks instead of monthly. This results in one extra payment a year to apply against the principal.
Homeowners can also refinance to a shorter term. Refinancing a 30-year mortgage to a 15-year loan requires a larger monthly payment, and will also involve some fees, but will accomplish early loan payoff without much extra complexity.
Mortgage accelerator programs promise dramatically shorter payoff times for home loans, which can save lots on interest. However, the complexity, fees and limitations of these programs make them unsuitable for many borrowers. Alternatives such as self-managed biweekly payment plans can also save money while avoiding fees and increasing flexibility.
Tips for Paying Your Mortgage Off Early
- If you’re contemplating how to pay off your mortgage early, a financial advisor can help you evaluate the alternatives and identity the approach that best fits your situation and goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s mortgage comparison tool to compare mortgage rates from top lenders and find the one that best suits your needs.
- You can estimate your monthly mortgage payment with taxes, fees and insurance with our free mortgage calculator.
- Some companies offering mortgage accelerator-type programs have run afoul of regulators for exaggerating how well their offerings worked. Before taking out a mortgage, the Consumer Financial Protection Bureau advises consumers to work with financial institutions recommended by trusted advisors and contact several different financial institutions to compare costs and features. Similar advice applies to mortgage accelerators.
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