What are mortgage acceleration products?
Ah! That is the $64,000 question right about now.
Mortgage acceleration is probably the most significant concept to hit the marketplace since the 100% loan. There is literally so much discourse to have on the topic that a whole book could be written. I'll be as cogent as possible while still trying to cover the most important aspects.
The term "mortgage acceleration" (MA) is pretty simple when taken at face value.
You would assume (correctly) that it means to speed up the process of paying off your home.
The part that is revolutionary, confusing, amazing, risky, smart, stupid, etc. is what METHOD you use to accelerate your mortgage.
The hottest methods make bi weekly payment programs or 15 year fixed mortgages analogous to the first home computers--they were great when the first came along, but now there's a much more efficient way to produce far better results.
The new MA is really one of those concepts that appears "too good to be true." Although there are some pitfalls, if executed with all the proper education, the "too good to be true" promises of MA are actually achievable. How do I know? I have clients that are doing it now. They put a thesis on the topic of MA, just soak in this next sentence. The average homeowner, through restructuring their mortgage and the way they pay on it, can pay off their house and all their debt in 7-15 years without changing their living expenses.
That's right, half the time, spending the same amount of money.
And now the shouts of disbelief become deafening. "If that's true, why haven't I heard of it before?" "Why wouldn't everyone do it?" "What's the catch?" "How could something like this be possible without it completely dominating mortgage advertising and the news?"
Valid questions all, and all with sensible answers.
First of all, disbelief is OK in this case. You shouldn't believe that you can pay off your house in ten years until you understand the gameplan to get their backwards and forwards. My company's live online presentations take at least 45 minutes just to come to a catharsis on a simple process that only takes a few seconds to communicate. Literally, our brains are not wired to consider using money in the way that MA calls for. Even as a seasoned mortgage broker, the concept did not "click" for me when I first heard it. I needed visual support for the concept to actually "get it."
For that very reason, I will not attempt to lead anyone reading this to "get it" based on this discourse alone. You need to see it and hear it several times, with questions and follow up. Anyone reading this Wiki who wishes to attend a free live online web presentation hosted by me should contact me at email@example.com.
Again, let me urge you, do not limit your search for knowledge on mortgage acceleration to what I am about to write here. Seek out your own understanding, because this really is a turning point in mortgage history and if you're like 80% of the people I talk to, you'll want to get involved.
A brief history Mortgages have always been a conservative product and especially so in the United States. Our parents could not have dreamed of paying "no money down" for their first house. Their parents parents likely paid more than 50% down on their first home.
Only recently (relatively speaking), in the last 10-15 years have seen the rise to the foreground of more aggressive mortgage products such as adjustable rate mortgages, interest only loans, and most recently, negative amortization.
Lending institutions have always been in the business of making money, and LOTS of it.
So their goal is to charge you interest, and they are really good at it. Have you ever seen the amortization schedule of a 30 year fixed mortgage? It's not in your favor.
The only way to come out ahead in the mortgage lending game was to use the banks secrets against them. Simply put, somewhere along the line, someone figured out that they could employ a simple tactic to cut their interest over time significantly without spending any additional cash.
Somewhere (experts think Australia) people started to use their mortgages to help them win the interest game against the bank.
Bet they didn't see that one coming! At the core of most MA tactics is an interest only loan. The original Australia loan employs just one interest only loan. Some companies tout an interest only in conjunction with a 30 year fixed, while others want you to buy expensive
mortgage acceleration software all to manage a simple concept: SIMPLE INTEREST. As soon as the banks offered a loan program to clients that was based on simple interest, they opened the door for you to turn the tables on them and beat them at their own game (well, you'll never really beat them, but you can give them about 60% less money than you would otherwise).
Now I'm really confused! How does it work? And without visual aids it's natural to be confused. Don't worry. Here is what someone in Australia figured out almost 20 years ago that is poised to take the mortgage industry by storm: If you obtain a specific kind of interest only mortgage, and pay into it in a certain way, WITHOUT decreasing your living expenses, the simple act of using a different mortgage tool with a different payment paradigm will allow you to pay down your debt about 3 times faster.
It's important to note that many different companies have many different sure-fire methods of using MA, but the concept is generally the same at the end of the day: " bank on yourself."
When your paycheck in the bank, it sits there and waits, earning less than 1% interest while your mortgage payment sits and waits to be paid at 5-9% interest depending. Now, since a 30 year fixed loan is amortized, it wouldn't occur to us to pay it down any sooner than later, so we just sit and wait until the 1st (or the 15th) of the month rolls around and take the money from our checking account and put it toward our mortgage.
What if we just got one month ahead on our mortgage and instead of putting that payment into the checking account, we could put it in an interest bearing account? That would be great, but you usually have to sacrifice return for liquidity and most people don't want the hassle of micromanaging their money in such a way.
But what if your loan was interest only and compounded with simple interest? Now when you put your paycheck in the bank, your loan isn't waiting to be paid, it's accruing interest at the predetermined rate assuming you will only make the interest only payment. In other words, the payment on a simple interest loan is only the same as the quoted payment if you make the minimum payment and make it at the required time. IF YOU PUT IN ANY MORE MONEY OR PUT YOUR MONEY IN ANY SOONER, YOU ARE EFFECTIVELY EARNING INTEREST ON THOSE DOLLARS FOR THAT AMOUNT OF TIME.
But wait! If you wanted to do that, you'd have to know exactly how much money you'd spend each month and when. What if there was a way to put ALL your money right into your mortgage so that you could PREVENT it from accruing interest on whatever amount you just paid down AND you could still get access to your money to pay bills, buy dinner, do whatever with the same liquidity as cash? Well, it does exist, and it has for a long time. It's at the core of any good MA program, and when executed with discipline, IT WORKS.
So you can either have a fully amortizing loan, with a payoff schedule that's in favor of the bank, or you can have an interest only loan that will also benefit the bank UNLESS you pay more than the minimum amount OR make your payment earlier than suggested.
Now here's the no-brainer, there's a REALLY easy way to do both of those things. First of all if you just pay as if your interest only loan was fully amortizing. For example if your payment on your interest only loan is only 800 dollars, but it would have been 950 if it was fully amortized, you should pay 950 thus lowering your balance by 150 and lowering your interest for next month.
When you repeat that same step but with credit card and car payments, the cash flow result is even more powerful. There are exceptions such as 30 year fixed student loans at rates under 4%, but generally speaking, IF YOU WERE TO CONSOLIDATE ALL YOUR DEBT AND MORTGAGES INTO AN INTEREST ONLY LOAN AND CONTINUE TO MAKE THE SAME PAYMENT YOU WERE MAKING BEFORE (the sum of all your credit payments and mortgage) YOU WOULD HAVE TO GET A FULLY AMORTIZED LOAN AT AROUND 3% INTEREST RATE TO EQUAL THE INTEREST SAVINGS!
Now the only other challenge is how to get as much of your money as possible each month to go toward paying down your home without running out of money to spend. Ideally, there should be some sort of loan that lets you throw your whole paycheck at it in advance and then simply use checks or a debit card to get money back from that loan. Like a credit card, but tied to your house... WELL THERE IS. And you may already know the type of loan I'm talking about. A Home Equity Line of Credit (HELOC). Be warned, different HELOCS have different terms, so you'll need to consult an Mortgage Acceleration professional on your particular scenario to make sure you are getting the HELOC that is right for your circumstances. Several different variables have to be taken into consideration depending on how you get paid, what your current debts are, and what your expenses are (and how you are currently paying them).
It's not all roses Though it's a great thing, MA is not a magic pill you can take to make your mortgage go away. It still requires discipline and education, but you can, in essence, "beat the system." MA will be bad for you to the same extent that you don't stick with the plan (i.e. not putting your paycheck directly in the HELOC, or spending more money than you make). I don't recommend that anyone try to figure out how to do it on their own without consulting a company that has experience with MA. There are a lot of pitfalls. The nice things about the pitfalls is that they won't leave you any worse off than if you had simply done the average debt consolidation refinance. At least an MA plan gives you a tool that will allow you to do something positive with your mortgage.
If you want to learn more about a mortgage payoff acceleration program, I encourage you to email me to sign up for one of our free live trainings. We provide this service with no strings attached and no sales pitch simply to get the word out about mortgage acceleration. That brings up another point: **be wary **of someone aggressively trying to "pitch" you on the idea of MA. Don't get me wrong, I believe it's a great thing, but anyone with enough experience with MA should only present it to you as an option, with positives and negatives just like any other option.
If you have the discipline to execute the plan, you will be well rewarded. Be prepared for the concept of MA to sweep the nation in the next 3-5 years. Until then Happy Homeowning!
In response to the question about calculators, several companies out there have such calculators. Some of them are web based and might not allow enough manipulation for you to get an idea of how your specific scenario would compare. I agree it is a disservice to deny clients the opportunity for simple analysis. The costs and risks associated with proprietary content on a website cause concern to some people that have worked tirelessly to construct a top-notch calculator. I'm currently working on a 'Lite' version of my software to post online. In the meantime anyone that reads this Wiki is welcome to contact me to run their numbers at no cost. As a broker, I just like to be sure that clients aren't using my hard work to get loans with other brokers.