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High speed mortgage payoff
Some mortgage accelerators say they can help borrowers
retire their loans early and save lots in interest.
By Les Christie, CNNMoney.com staff
writer
NEW YORK (CNNMoney.com) -- For borrowers who want to
pay off a mortgage faster, there's a plan from the land
Down Under that can add a little extra discipline.
It's a mortgage accelerator loan program pioneered in
Australia. Home-buyers get a variable-rate, home equity
line of credit (HELOC) instead of a fixed-rate loan for
their first mortgage. They deposit their paychecks into
the account and can draw on it to pay expenses and bills
- including the mortgage.
Any extra cash above what the borrower takes out is put toward
the HELOC.
"The money put into the account beyond interest owed
applies against the mortgage loan balance, accelerating
payoff and potentially saving tens of thousands in interest," said
Michael Barrett, Executive Director of Macquarie Mortgages
USA, one of the companies that offers the loan.
That's not the only benefit. When the account holder deposits
a check, the debt immediately falls for a lower balance
used to calculate interest. If the paycheck arrives on
the first of the month, and the mortgage isn't due until
the 28th, the balance falls by the size of the paycheck
for all the days between.
If you net $1,500 every two weeks, you could save $12
or $13 a month, which could knock 10 months off the term
of the loan and save almost $10,000.
Foreclosure rates could soar
The loan
is suitable only for borrowers who generally have more
money coming in than going out, according to
Kern Lewis, a marketing director for CMG Mortgage.
Borrowers with negative cash flow would just keep adding
to their
debt.
Lenders scrutinize applicants to make sure they're good
candidates, according to Lewis. Usually they want a loan-to-value
ratio - the amount owed compared with what the property
is worth - to be 80 percent or better.
"We strongly train our brokers they make sure that
people have positive cash flow before recommending this
product," he said.
CMG offers the accelerator for refinancing as well as
for new home purchases and has marketed it in the United
States for about two years.
"Our CEO came across the idea on a visit to Australia," said
Lewis. "Nothing like it existed here." In Australia,
as many as a third of all mortgage borrowers use
this kind of mortgage accelerator, he said.
CMG needed a couple years to get the system going and
to find a partner-lender. It eventually got one of the
biggest - General Motors Acceptance Corp. Meanwhile, Macquarie
opened up its stateside operation and launched a similar
product.
Subprime loan alternatives
Not every financial advisor believes mortgage accelerators
are a good idea. Some recommend their clients invest
extra cash in higher-yield securities, like equities,
than use it pay off low-interest debt like a prime mortgage.
The variable interest rate can also be higher on a HELOC
than on a fixed rate loan.
It can also be tough to figure out if a mortgage accelerator
makes sense for any given borrower, according to Keith
Gumbinger, of HSH Associates, a mortgage information publisher.
"It's an interesting concept," he said, "but
looking at the amortization is very complicated.
It's almost impossible to know if it works out for you.
You can't see
how the actual borrower's behavior affects it."
If borrowers increase their spending to the point where
their cash flow goes into negative territory, that would
slow the pay-off, not accelerate it. But for many borrowers
who need a little imposed discipline, it may be a good
deal.
According to a CMG calculator, a borrower with a $200,000
mortgage, who takes home $2,000 every two weeks and saves
20 percent of net pay could be mortgage-free in 12 years
using the accelerator compared with a conventional 30-year
fixed rate loan. The interest would also drop by $125,000.
Both CMG and Macquarie said their businesses are increasing
rapidly. But Gumbinger doubts they'll win a wide clientele.
"Other mortgage products have come and died on these
shores," he said. "Americans like the old,
fixed-rate loans. Oh, we'll take an ARM if we have to
but that's not
what we prefer."
"High-end, sophisticated borrowers who are intent
on quick amortization will probably support these
mortgage accelerator products. "
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