Mortgage acceleration plans: The future in mortgage lendingDaryl Turnerfifteen-year mortgages, bi-weekly programs, mortgage pay down Over the past two years, we have seen the emergence of what are known in the mortgage industry as mortgage acceleration plans. These are off-shoots from programs across Europe and Australia. Typically, our American versions of these accelerated plans have included fifteen-year mortgages, bi-weekly programs and the traditional method of digging into your pockets to get extra money for the principal. However, none of these versions have been particularly affordable, significant or reliable methods for meaningful mortgage pay down. This is the reason that the mortgage acceleration plans seem to have burst onto the scene, with greater numbers of people signing up for them each day, based on their ease of implementation and resultant, extensive diminution in the mortgage term period. These programs allow the client to pay off their mortgage in one-half to one-third of the time. Thus, with the number of these programs increasing, the dream of debt-free homeownership is realized much sooner in the economic life of the client. It behooves the Mortgage Broker to understand how these programs work and to understand the potential for the augmentation of his business. Program restructure These programs incorporate the use of the home equity line of credit (HELOC) product to enable the borrower to pay down the principal balance of the home (primary) mortgage, without utilizing out-of-pocket money. The result of the accelerated principle repayment is the dramatic reduction in the timeframe of the term of the first mortgage. Additionally, the HELOC is paid off within this timeframe as well. Whether first or second position, the HELOC functions like a checking or savings account. The borrower deposits his entire income into the account. He pays his bills with the account, just as he would with any other regular checking account, and his funds will always remain liquid. In the normal scenario, the borrower's savings account gives him negligible interest profit; however, the bank is allowed to earn significant profit on his deposited money. The HELOC account functions as an open-ended account (the first mortgage is a closed-ended account) that allows an interest-only payment based on a variable rate that is ultimately determined by the average monthly balance. In this instance, the entire existing mortgage is refinanced into the first position lien HELOC. By depositing his check into the account each month, the borrower effectively lowers this balance, thereby minimizing his interest charges. Since the monthly interest charge is less than that of the traditional mortgage (because the outstanding loan balance is lower than the traditional loan, secondary to deposited funds), more of the funds are applied to his loan balance. The borrower, therefore, further reduces the payment at a compounding rate, leading to faster mortgage payoff. In the case of the first position lien HELOC, the entire mortgage balance is decreased monthly by this process. Additionally, this repeated occurrence results in a marked reduction in the effective interest rate of the HELOC over time. The borrower can also augment this process by depositing "rainy day" money into the account. In conclusion, his use of the first position lien HELOC effectively uncouples the traditional relationship of how principal and interest are paid when the borrower makes a mortgage payment. This is secondary to the fact that the principal is paid down by any deposits to the account. Moreover, the interest charges to the borrower are reduced because there is a lower net mortgage balance, and the interest charges are calculated on the basis of the average daily mortgage balance, which is lower, in the account. The second type of mortgage acceleration plan uses a combination of a second position lien HELOC (second to the first mortgage) plus a software program that allows the borrower to pay off the primary mortgage and other associated debts such as credit cards, car loans, etc. Just like the first position lien HELOC, this HELOC will also function as a checking/savings account for the borrower, with the effect of income deposits lowering the monthly average balance, thereby substantially decreasing the effective interest rate of the line of credit. Additionally, the software computes a number of principal payment amounts to be made on the first mortgage in two- to six-month intervals during the year, utilizing the second position lien HELOC as the source of funds for the principal repayment. The software calculates the largest principal payment that can be derived from the HELOC with the least amount of interest charged. The result is the pay down of the mortgage in less than a third of the present duration of the term of the first mortgage. Because the software allows the client to view a financial snapshot of the borrower, it requires his participation and will demonstrate his progress and his ability to adhere to the budgetary plan. Both programs utilize the HELOC as a checking/savings account to accelerate the pay off of the mortgage in less than half the time without changing the borrower's spending or saving habits. These programs are not for everyone. They require clients that have positive cash flow and the discipline to increase the equity obtained through their active role in the program. The selection of the type of program to be used should be done on a case-by-case basis. Daryl Turner is a certified liability advisor and mortgage professional with Carteret Mortgage Corporation. He can be reached at (321) 213-0600 or e-mail [email protected].