With higher interest rates putting the squeeze on borrowers, a number of readers, including Linda in Tampa, have heard from a new crop of companies offering a plan to "accelerate" their mortgages and save them a bundle-- for a fee. Here's what the people who are selling this product won't tell you.
I recently found out about a financial product called a mortgage accelerator. This is not a bimonthly payoff of a 30-year mortgage; it's a line of credit tied to an account with direct deposit that works like a checking account to pay out regular living expenses as well as paydown the balance of the house cost. The high average daily balance allows you to pay off the home loan much faster than a traditional mortgage. There is a fee, but the costs still seem so much lower than the accumulated interest of a 30 year mortgage. It sounds great, but could you investigate the good and bad points of this for me?
-- Linda R., Tampa, Fla.
There’s nothing illegal about these plans; they’re simply charging you a fee for something you can do on your own. They belong in the same category of services as “credit monitoring” companies that charge $50 a year to send you the same credit reports you can get on own for nothing. It’s kind of like someone asking to borrow your watch, telling you the time and then sending you a bill.
There are a number of flavors of “mortgage accelerators,” but they work the same way. The pitch goes like this: We’ll collect money from your checking account and make a mortgage payment on your behalf every two weeks, which works out to 13 monthly payments instead of 12. By making that extra payment, you’ll pay down your principal faster and save tens of thousands of dollars in interest payments over the life of the loan.
We called one of the more popular purveyors of this plan to get the details. To sign up, you’ll pay a one-time fee of $295 and then $5.42 a month (or about $65 a year). If the “accelerator” gets you out from under a 30-year mortgage five years early, the total cost of this plan comes to about $1,900. When you compare that to the tens of thousands of dollars in interest you’ll save, it sounds like a great deal.
Here’s the problem: you almost certainly can do the same thing yourself — for free. (Some mortgages specifically carry a “pre-payment penalty” — something to ask about, and avoid, when you’re shopping for a new loan). If yours doesn’t penalize pre-payment, you can send extra payments to reduce the principal any time you want — without paying anyone a fee.
So, as a service to our readers, try out our very own Answer Desk mortgage accelerator (at no charge). Here’s how it works:
Let’s say you just took out a $100,000, 30-year fixed mortgage at 6 percent. Your monthly payment comes to $599.55 and you’ll be fully paid off in 2036. During those 30 years you will have paid the bank $115,338.50 in interest. (Ouch.)
If you choose to go with the Answer Desk Accelerator “$50 Plan,” add $50 to each monthly mortgage payment. You’ll be paid off in just 24.5 years, with a total interest payment of $90,035.83 – or a savings of $25,302.67. For our “$100 Plan,” add $100 to your monthly payment, which will pay you off in full in 21 years. Total interest: $75,936.94. Savings: $39,401.56.
If all those extra payments are a hassle, you could also try our once-a-year Extra Monthly Payment Plan. You’ll be paid off in 25.5 years Total interest: $92,197.05 Savings: $23,141.45.
One caveat (which fee-based “accelerator” plans will forget to tell you): Our savings figures will be reduced somewhat by the tax deduction you’ll lose by paying less in mortgage interest, assuming you itemize. (To estimate your net savings, reduce the total by 10 to 35 percent, depending on your tax bracket.)
One of the pitches by mortgage accelerator purveyors is that most people “don’t have the discipline” to do this on their own. By having them deduct money from your checking account, they argue, they’ll help you stick with your early payoff plan. (On the other hand, if they screw up a monthly payment to your mortgage lender, you’re still responsible.)
The Answer Desk Accelerator has a feature to help you there, too. Try this: Open a checking account with an online bill payment feature, and then set it to churn out mortgage checks each month for $100 more than your monthly payment. Yes, things will be tight until you get used to it. But here’s one more number to help keep you on track. If you go with our $100 Plan, for example, the interest saved works out to $152.36 per payment. Though you’ll be out $100 in cash each month, over the (shortened) life of the loan, you’ll save $152.36 a month and keep it out of the bank’s hands. So our $100 Plan is really a $52.56 monthly raise.
Fee-based accelerator plans also promise to customize your plan to your specific mortgage terms and budget. The Answer Desk Accelerator has that covered, too. But you’ll need the help of a calculator to tailor your payments to your mortgage. There are a number of good ones out there; our favorite is at Bankrate.com
And it’s free.
We bought a house last year .. (and took out) a home equity line of credit at 7 percent, but it has climbed since to 8.5 percent. We have been paying for our HELOC for almost one year now, and I just realized that we barely paid the principal of the loan - almost 98 percent goes to interest rate or finance charge. What's the best way to pay off the HELOC, where a big chunk can go to its principal rather than interest rate? What would you suggest to pay off our loans quicker?
-- Francis F., East Meadow, N.Y.
You could give the Answer Desk HELOC Accelerator a try. But as you've found, the math on home equity loan's is a little different than on your conventional first mortgage — it’s even more heavily weighted in the bank's favor. (Which is why it probably wasn't explained to you properly when you applied for it.)
Unlike a mortgage or a home equity loan, most HELOCs are divided into two phases: the drawdown phase when you take money out, and the payback phase when you have to pay back the principal. In the drawdown phase, which can last as long as 10 years, you pay little, if any, principal (unless, of course, you come up with a lump sum to pay it off).
This is what makes HELOCs more difficult to get out from under. By limiting the monthly payments in the drawdown phases to interest only, the lender makes it much easier to borrow more than you otherwise could afford. And even though the monthly payments seem low, the drawdown costs you more in interest — because you’re carrying the original principal balance for years without paying it down.
HELOCs have also rapidly become more burdensome as short-term interest rates have risen. Three years ago, you could get a HELOC for 4 percent — very cheap money by historical standards. But as holders of HELOCs have discovered, the recent run-up in interest rates has roughly doubled the cost of these loans in three years. And unlike adjustable rate mortgages, which reset at a fixed schedule, HELOCs can — and do — change any time short-term interest rates change.
Even if rates go back down, you still face sharply higher payments when the credit line hits the payback phase. When they market these loans, most lenders reassure borrowers by pointing out that you can always just roll over your HELOC into a new one, putting you back in the “interest only” drawdown phase. Which is another way of saying you’re can be “interest slave” for the rest of your life.
The Answer Desk Accelerator HELOC plan can help. After paying off your monthly interest, send another check, and it will applied to pay down your principal. But if you’re carrying a big balance on your HELOC, you may want to tap any savings you've got to pay it off faster —especially if you’re paying 8 percent interest on a HELOC and getting 2 percent interest on those savings.