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].
