Mortgage accelerator loan: What is it and how does it work?

By Jennifer Bradley Franklin Bankrate com In broad terms mortgage acceleration or an accelerator loan is any plan that helps homeowners pay off their mortgage balances much earlier resulting in substantial interest savings over the life of the loan and reducing the payment duration by several years says Robert Bullara owner of Fine Realty International in Austin Texas With mortgage accelerator programs you pay a little extra each month toward your mortgage s principal says Bullara Related Articles Is it time to break up with your real estate agent People are melting their old jewelry for cash as gold prices soar Airlines are adding new routes Here s how you can save How buy online pick up in store supercharges credit card rewards Information Retail therapy is common how to curb it Keep in mind A mortgage acceleration campaign isn t the same as an acceleration clause in your loan contract more on that below What is an acceleration clause An acceleration clause also referred to as a demand feature is a provision in your mortgage contract that allows the lender to require a full repayment of the loan You can find out if your mortgage includes this stipulation on page four of your closing disclosure If your loan does the conditions under which the clause can be imposed are typically spelled out in your mortgage note documents Types of mortgage accelerator programs There are formal mortgage accelerator loan programs that means those you apply and pay for as well as less formalized strategies you can use to get similar payoff results over the life of your mortgage Here s an overview of the two main types of programs HELOC accelerator A HELOC accelerator combines a bank account with a mortgage and HELOC or home equity line of credit With this kind of project you ll deposit your paychecks into a HELOC and use that line of credit to pay your mortgage You ll then draw funds from the line to pay other expenses like car payments and utilities After that the remaining cash goes toward the mortgage Biweekly mortgage payment accelerator In a biweekly mortgage payment accelerator setup you ll make an accelerated mortgage payment every two weeks typically by auto-withdrawal The accelerator loan provider either pays your loan on your behalf every two weeks or once per month Pros and cons of mortgage accelerator loans While the benefits might sound tempting mortgage accelerator programs also have specific drawbacks If you re considering one of these loans weigh the pros and cons first Pros of mortgage acceleration Lets you pay off your mortgage quicker Reduces how much you pay in interest Helps you become debt-free faster than you would with a traditional mortgage Cons of mortgage acceleration Interest rates can be higher than traditional mortgages May have steep upfront annual or transaction fees Requires steady income and good money management Alternatives to mortgage accelerator programs When you get right down to it the best way to accelerate your mortgage payoff is to completely pay more as fast as you can Chosen tried-and-true strategies include Add a bit of extra money toward your principal each month Contribute an extra mortgage payment each year Schedule a half-mortgage payment every two weeks also known as biweekly payments Since there are two-week periods in a year that s effectively one extra mortgage payment annually No matter what alternatives you use dependably notify your mortgage lender or servicer of your plans to ensure those extra payments go toward your principal rather than the interest on the loan When in doubt it s smart to sit down with a trusted financial adviser to determine if an early mortgage payoff aligns with your goals What borrowers should know about mortgage accelerator loans this day Mortgage accelerator loans aren t for everyone For a less-than-disciplined borrower the draw of having a home equity line of credit could truly enable them to live above their means adding years and hefty interest debt over time Accelerator mortgages tend to be of particular value for higher rate or additional rate taxpayers as well as for people with large savings who don t rely on accrued interest to finance their day-to-day lives says Bullara The major advantage for high-end taxpayers is that they do not have to pay tax on their savings interest This type of loan is better for a high-net worth borrower that doesn t live on a tight budget each month Plus with higher interest rates and fees than other mortgage types mortgage accelerator loans aren t inevitably a smart financial choice If it looks like you ll pay more than you ll save it may be worth considering a more basic home loan with a lower rate and no fees says Bullara Bankrate com Distributed by Tribune Content Agency LLC