A Mortgage Accelerator is a strange concept to most American homeowners but it’s widely familiar to people in many other countries. So, what is a mortgage accelerator, how does it work, and who should use it? In this article, we’ll answer these questions and eliminate the mystery surrounding it. We’ll also discuss how to avoid bogus mortgage accelerator advice from unscrupulous companies selling overpriced software to unwary homeowners.

Benefits Of Using A Mortgage Accelerator:

1. A Mortgage Accelerator Reduces Interest Costs By Thousands Of Dollars

2. A Mortgage Accelerator Reduces Exposure To Long-Term Debt

3. A Mortgage Accelerator Leads To Greater Retirement Savings

1. What is A Mortgage Accelerator?

A Mortgage Accelerator is a financial planning system that reduces the time required to pay off a mortgage loan. This results in less total interest paid obviously, but conventional methods of mortgage reduction don’t work to the homeowners’ advantage as well as the method we’ll describe in this article.

The method of mortgage acceleration we’ll describe benefits homeowners because it takes advantage of the way that mortgage lenders calculate interest:

MORTGAGE INTEREST IS CALCULATED ON THE AVERAGE DAILY BALANCE AND CHARGED AT THE END OF THE MONTH (called monthly in arrears).

To illustrate, consider a 30 year, $350,000 mortgage at 5.25% having monthly payments of $1,932.71. The homeowner makes the first payment and here is how the payment is applied:

Opening balance: $350,000
Loan Repayment:  $401.46
Interest Charged:  $1,531.25
Closing Balance:    $349,598.54

The homeowner paid $1,932.71, but the loan was reduced by just $401.46. Since monthly payments don’t change, the homeowner can reduce monthly interest, the greatest part of the payment, by reducing the amount of interest from each monthly payment. Because the monthly payment does not change, if the monthly interest can be reduced, more of the monthly payment will be added to the portion of the payment going toward principle, thus accelerating the equity. This is what a Mortgage Accelerator does.

2. How Does A Mortgage Accelerator Work?

Remember that interest on a mortgage is calculated on the daily balance and charged at the end of the month. When a homeowner makes their regular payment, whether monthly, biweekly, or weekly, the daily balance of the loan remains the same until the next payment is made. A Mortgage Accelerator works by reducing the daily balance of the loan which in tern reduces the monthly interest on the loan and that also reduces the term of the loan. Therefore, a mortgage accelerator works by reducing the interest that is due each month on a mortgage loan. The traditional ways of loan reduction all require making extra payments:

a. Bi-weekly payments
b. One-time payments
c. Weekly payments
d. Paying more each month

However, the mortgage accelerator method that is most effective is one that reduces the amount of monthly interest that accrues on the loan, as described above. To do that, you’ll use a revolving line of credit. There are three types that will work well: a home equity line of credit (heloc), a line of credit attached to your regular checking account, or a personal savings account. The line of credit required is generally less than 2 months worth of the homeowners gross income.

Using a HELOC as a revolving line of credit

HELOCs are usually used to pay for home improvements, vacations, or discretionary purchases but instead, the heloc is used to pay down the mortgage. This is counter-intuitive, as most people cannot see the sense of using one loan to pay down another loan. But after understanding what happens next, it becomes clear as proven by the interest reduction that results.

A loan is taken from the heloc and deposited to the mortgage. Total debt remains the same, as the heloc loan balance increases and the mortgage decreases by the same amount. For illustration, a homeowner earning $7,500 per month takes a $10,000 loan from the heloc (7% rate) to reduce the mortgage balance. The homeowner deposits their $1,875 weekly paycheck into the heloc, and pays bills totaling $6,625 at the end of the month.

Remember, what we want to accomplish is to reduce the average daily balance of the total loan; the mortgage plus the heloc.

At the beginning of the first month, the mortgage balance is $350,000; the balance of the heloc is $0. Total debt is $350,000.

At the end of the 1st month, the mortgage balance is $340,000; the balance of the heloc is $9,125. Total debt is $349,125.

Therefore, the total debt has been reduced to $349,125, but the homeowner’s monthly payments are based on a $350,000 loan. When the bank receives the homeowner’s payment, the interest is based on the outstanding balance, which is $349,125, but the payment (which is fixed) is based on a larger loan. Since less interest is due, more of the monthly payment is credited to reducing the principal.

The difference is due to the reduction in mortgage interest plus funds remaining in the heloc at the end of the month. When the heloc is fully paid off (the time depends on the homeowner’s financial situation), the process repeats.

Another benefit is that surplus funds remaining in the heloc have reduced the mortgage, on which the homeowner is paying 5.25% interest. This has the same effect as the homeowner earning interest at the same rate as the mortgage, but even better, since there’s no tax on the interest saved.