Mortgage Accelerator

What Is a Mortgage Accelerator?

A mortgage accelerator is a type of mortgage loan program that resembles the combination of a home equity loan and a checking account. Borrowers' paychecks are deposited directly into the mortgage account, and that amount reduces the mortgage balance. Then, as checks are written against the account during the month, the mortgage balance rises. Any amount deposited in the account that is not withdrawn through the check-writing process is applied to the mortgage balance at the end of the month as repayment of the loan’s principal. Mortgage accelerator loans were first marketed in the United States during the mid-2000s.

How a Mortgage Accelerator Works

A mortgage accelerator loan is very different from a traditional 30-year fixed-rate mortgage. In a mortgage accelerator program, homebuyers receive a variable-rate home equity line of credit (HELOC) instead of a fixed-rate loan for their first mortgage. Many lenders offer the accelerator for new home purchases as well as for refinancing an existing mortgage.

A holder of a traditional mortgage can accomplish the same early retirement of principal as in a mortgage accelerator program, and thereby shortening the life of the mortgage and realizing interest savings by making unscheduled principal payments on the traditional amortizing mortgage.

Mortgage accelerator loan programs have a number of potential benefits. One of their most attractive features is when a borrower’s paycheck is deposited into the mortgage account. Because it reduces the average monthly outstanding principal balance of the mortgage on which interest is charged. This is true even when the principal balance at the end of the month is equal to what it was at the beginning of the month.

Another plus is that interest accrues daily under the plan. Additionally, the amount of the paycheck that remains in the account at the end of the month might be larger than what would be paid toward the mortgage's principal balance under a traditional amortizing mortgage. When this is the case, the principal is retired early, reducing the mortgage's entire term and resulting in interest savings.

Limitations of Mortgage Accelerator Loans

Mortgage accelerator loans are generally most appropriate for borrowers who consistently have more money coming in than going out. Borrowers who have negative cash flows would continuously be adding to their mortgage debt.

One potential drawback of the mortgage accelerator loan program is that it might carry a higher interest rate than a traditional mortgage. This is especially true in a rising rate environment because this type of loan includes a HELOC, which normally has a variable rate.