Michael,
I would like to respond to the thread on the Home Ownership Accelerator that was discussed here last year. Scott is right in “there is no magic” to how this loan works. However, the biggest mistake people make when they look at this loan is ignoring the flexibility it allows borrowers, which in return makes it work so well compare to a traditional mortgage. The biggest problem with sending in extra money to reduce your principal on a loan is that you can’t get that money back if you need it. Therefore, people are hesitant to send in enough money to make a real difference in reducing principal. The Accelerator is designed to allow you to aggressively pay down principal with all your extra money and use it to reduce principal until you need it in the future.
One of the biggest myths on this program is that you can achieve the same results by sending in extra money to your current mortgage holder and that your monthly cash flow doesn’t really make much difference. You can pay off your mortgage faster by sending in extra money but you are unlikely to match the performance of the Accelerator because you can’t send in every spare dollar. It doesn’t make sense because the lender is not going to give it back to you if you need it and you can’t predict when the next situation may come up where you may need some money. Almost everyone agrees we need some kind of “rainy day” fund. The Accelerator automatically holds that money against your mortgage paying down your principal until you need it.
Scott gives an example based on numbers he entered into our simulator last year showing an APR of over 7%. The actual rate most of our clients are paying is currently below 4%. The loan is tied to the 1-month Libor (currently at 2.82%) and has a range of available margins which are added to the index to calculate the rate on the loan. We show our clients how to use the simulator to see how fast they can recoup their closing cost and most end up buying the margin down to the .75% because the breakeven is within a couple of years. When Scott used our simulator, it assumed a rate over 7% but that same loan today would currently have a rate of 5.32%. Rates will go up and down on this loan but the Libor index has average around 4% since 1997 which would translate into an average rate as low as 4.75%.
I am the first to say that this loan is not for everyone. Most people including Scott and Suze Orman have dismissed this loan as some kind of gimmick that isn’t necessary. However, do some research on the internet and you will find several critics have taken a second look and after getting a true understanding on how the loan works, have change their minds. For someone who is just getting by and doesn’t have any additional money to put aside, this is not a great loan. For those who do save 10% or more of their take home pay, this loan is a powerful tool that will allow you to greatly reduce the interest you pay and allow you access to the equity you build up for future investment or other needs.
Sincerely,
Brian Ott
