Finance and Credit Professional

Accelerator loans, which are common in Australia and in the U.K., have just recently come to the United States. These special accounts encourage borrowers to apply all extra money toward their mortgages and the savings can be big.

The premise is that borrowers finance a purchase or refinance existing property using home-equity lines of credit. Borrowers then directly deposit their entire paychecks into the credit accounts.

Monthly expenses, other than mortgage payments, are funded by draws against the lines of credit, whether those are through automatic bill payments, checks, cash withdrawals or credit cards.

Even if borrowers end up not paying anything extra on the principal during a month, they still capture some interest savings because the average balances are less than they would have been with conventional loans.

Let's say that your mortgage payment is a conventional fixed-rate mortgage at $2,000 and your monthly net income is $5,000. With the mortgage accelerator, even if you spend the $3,000 difference, your average mortgage balance for the month is $1,500 less than it was with the conventional mortgage.

That's because the entire $5,000 is deposited in the loan account and you made draws of $3,000 for living expenses spread over the month. At a 7.75 percent loan rate, that saves you about $10 in interest expense that month.

Beginning with $10 here and there it adds up over time. Although both loan programs have annual fees of $30 to $60, the accelerator part of the mortgage lies in having all of your net pay going against the mortgage.

Closing costs on a mortgage accelerator loan are about equal to the closing costs on a conventional 30-year fixed-rate mortgage. Like any refinancing decision, those costs are a factor, and the longer you plan to be in the house the easier it is to justify refinancing your mortgage loan.

If you have the discipline you could be doing the same right now with a conventional mortgage or really with any mortgage and without the cost of refinancing. A borrower would simply need the financial discipline to use that money as an additional principal payment.

If you would just put an extra $100 to $300 or more on your monthly payment (depending on your financial situation that month) you could have the control of changing your 30-year loan down to a 20, 19, 16 or whatever you choose.

Homeowners could put together a payment plan similar to a mortgage accelerator on their own without any extra expenses. Interest savings are still available the old-fashion way by making these additional principal payments on any type of loan.

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