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All About Accelerated Mortgage Loans

All About Accelerated Mortgage Loans

Already popular in the U.K. and Australia, accelerator loans have now made their way to the U.S. These loans, a special type of mortgage, give borrowers significant incentives to devote all extra cash to their payments. Accelerated mortgages use home-equity loans and your paychecks to abbreviate the time before your mortgage is paid off. The savings can be substantial, up to tens of thousands of dollars. In this post, we’ll discuss more about how these products work and whether they’re right for you.

How They Work

Accelerated mortgages are different from biweekly programs that shorten the length of a mortgage with additional payments. With accelerator loans, borrowers deposit their paychecks into special bank accounts and, each month, all of the money that is unspent goes toward the loan. This strategy is borrowed from a very popular approach in the U.K. and Australia. In Australia, over one-third of mortgages are accelerator loans. In the U.K., about 25% are accelerated.

An Example

To give you an idea of how accelerator loans work, let’s say that your payment is $2,000 per month and your net income is $5,000 per month. Even if you spend all of the $3,000 difference, your average outstanding balance is still $1,500 less than it would be with a regular loan. This is because all of your income is put into the account, and you then make withdrawals for your $3,000 of living expenses. Assuming a 7.75% interest rate, that would save you about $10/month in interest. These small savings add up over time and are usually well-worth the $30-$60 annual fee to participate in the accelerate program.

Is It Right for You?

If you spend less than you make each month, an accelerated mortgage could be a great way to put that idle extra cash to work for you. The interest your money will accrue in an accelerated account is considerably higher than what it would earn in a standard checking or savings account. In addition, the interest you earn on your money goes directly toward the balance, which saves you even more money on interest expense in the future. The closing costs of an accelerated mortgage are about the same as those of a conventional lending scenario. As an alternative to an accelerator loan, you could also simply make extra payments on your traditional, fixed-rate financing each month.

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