What is mortgage acceleration and should I do it?
Mortgage acceleration steps
- Establish a HELOC as either a first or second mortgage
- Direct deposit your full monthly income into the HELOC
- Draw from the HELOC for monthly expenses
- Remaining funds are automatically contributed to monthly mortgage payments
Paying off the mortgage is many a homeowner’s dream. Lenders know this, and create numerous arrangements for borrowers to repay their home loans faster or at a supposed lower cost. Mortgage acceleration, also known as a money merge account, is one such repayment option.
Not to be confused with a mortgage acceleration clause — which is the first step of a foreclosure process when your lender calls in the entire loan — mortgage acceleration is a strategy to finance or refinance your home using automated payments into a home equity line of credit (HELOC).
How does mortgage acceleration work?
Mortgage acceleration can be used from the outset of your loan or applied to an existing loan. The lender servicing the mortgage acceleration arrangement sets up a financial account — typically a HELOC — into which your entire monthly paycheck is direct deposited.
With mortgage acceleration for a new mortgage, the HELOC is in the first lien position and effectively serves as your mortgage. For mortgage acceleration applied to an existing loan, the HELOC is in the second lien position and you borrow against the line of credit to pay down a portion of your mortgage.
You then draw from the HELOC for all your monthly expenses such as groceries, utilities and car payments. The money that remains in the HELOC at the end of the month goes toward your outstanding mortgage balance.
Lenders charge a fee for this service. For first lien mortgage acceleration HELOCs, costs are akin to standard loan closing costs. For second lien mortgage acceleration HELOCs, costs range from $2,000 to $5,000, with companies sometimes charging for the use of special software that automatically calculates and makes payments on your mortgage. Typically, an annual fee of about $100 also applies.
Pros and cons of mortgage acceleration
The benefit of mortgage acceleration is the ability to pay off your home loan much faster than you would on a typical 30-year amortization schedule. As you are continually paying down the mortgage balance on which interest is calculated, you pay less in interest over the life of the loan as well.
You also retain flexibility with your money. If an emergency expense pops up, you can still access the remainder of your income through your HELOC and forego making the extra contribution to your mortgage.
The astute borrower will recognize, however, that the mortgage acceleration arrangement is not a complex one. In fact, you could easily reap similar savings benefits by making additional payments toward your mortgage or establishing a free checking account with automatic payments directed to your mortgage balance. The difference is that mortgage acceleration programs set up an automated system to incentivize extra payments, whereas doing it on your own is driven by discipline alone. The question is whether that incentive is worth paying several thousand dollars for.
Depending on your income and loan balance, the cost of setting up and sustaining a mortgage acceleration program can cancel out any benefit from the money saved by paying off your loan faster. Moreover, your money may be better spent in ways other than making extra mortgage payments. Paying off high-interest credit card debt, establishing an emergency fund or investing in a securities portfolio are all ways your extra monthly funds could be put to another use.
Is mortgage acceleration right for me?
Not all loans are eligible for mortgage acceleration; speak with your lender for clarification. You must also have sufficient equity in your home to borrow against it through a HELOC. Most importantly, your income must be larger than your monthly expenses for mortgage acceleration to perform as expected. If you are living paycheck-to-paycheck with no leftover funds in the HELOC to contribute to the mortgage, there is no benefit to using this strategy. Furthermore, you risk racking up further debt by using the HELOC to spend more than you earn.
Acceleration vs. recasting vs. refinancing
For many borrowers, mortgage acceleration will not be the most cost-effective way of paying down a mortgage faster. There are alternative options with substantially lower fees, such as making biweekly mortgage payments that shake out to 13 payments a year rather than 12. With mortgage recasting, a large, lump-sum payment is made and the loan re-amortized. You could also simply make larger payments toward your mortgage balance while retaining the same loan conditions.
When choosing a creative repayment strategy, make sure the costs and benefits align with your finances and motivation to save. There are no special tricks to paying off your mortgage faster — the best plan is to secure a low interest rate initially or through a refinance and make consistent payments.