Mortgage Accelerator: What It is, How It Works

What Is a Mortgage Accelerator?

A mortgage accelerator is a mortgage loan program that combines a home equity loan and a checking account. Borrowers’ paychecks are directly deposited into the mortgage account, reducing the mortgage balance. As checks are written against the account during the month, the mortgage balance increases. Any amount not withdrawn through checks is applied to the mortgage balance at the end of the month as repayment of the loan’s principal. Mortgage accelerator loans were marketed in the United States during the mid-2000s.

Key Takeaways

• A mortgage accelerator loan helps homeowners pay off their mortgage faster than traditional loans.
• This kind of loan saves money in interest owed over the loan’s life.
• However, these loans often have higher interest rates, annual fees, and could be problematic for lower-income borrowers.
• In one program, a mortgage is financed with a home equity line of credit (HELOC), and paychecks are deposited into the HELOC account. Monthly expenses are drawn against the HELOC, and the remaining amount goes to the mortgage.

How a Mortgage Accelerator Works

A mortgage accelerator loan is different from a traditional 30-year fixed-rate mortgage. Homebuyers receive a variable-rate home equity line of credit (HELOC) instead of a fixed-rate loan for their first mortgage. Many lenders offer the accelerator for new home purchases and refinancing existing mortgages.

A traditional mortgage holder can achieve the same early retirement of principal as in a mortgage accelerator program by making unscheduled principal payments.

Mortgage accelerator loan programs have several benefits. When a borrower’s paycheck is deposited into the mortgage account, it reduces the average monthly outstanding principal balance, resulting in interest savings. Interest also accrues daily under the plan. Additionally, if the amount remaining in the account at the end of the month is larger than what would be paid toward the mortgage’s principal balance under a traditional mortgage, the principal is retired early, reducing the term and resulting in interest savings.

Limitations of Mortgage Accelerator Loans

Mortgage accelerator loans are most suitable for borrowers with consistent positive cash flows. Negative cash flow borrowers would continually add to their mortgage debt.

One potential drawback of the mortgage accelerator loan program is the possibility of a higher interest rate, especially in a rising rate environment, as these loans often include a HELOC with a variable rate.