Financial Product Designed to Pay Off Mortgages: U.S. Homeowners Have ‘New’ Way to be Mortgage-free More Quickly

In the last few years, the United States has seen the introduction of a financial product from Australia and the United Kingdom that is designed to help homeowners save thousands of dollars in interest by paying off their mortgages rapidly. Although the economic downturn apparently has slowed the spread of these products, consumers may see these products offered more readily when the economy recuperates.

These financial products come in various forms, but they essentially all work the same way: a homeowner obtains a mortgage loan, has paychecks (and other funds) deposited directly into an account that is tied to the mortgage, and has the entire balance in the account automatically applied toward the home loan.

Depending on the particular product, the homeowner can either write checks against the account or uses a credit card for monthly expenses and then pays off the balance on the card from the account on the due date. While the unspent funds sit in the account, the daily interest that accumulates on the mortgage is lowered and the homeowner pays off the loan more quickly than in a conventional mortgage loan arrangement. In other words, the average daily balance in the account helps lower the average principal and interest payments.

 

The fees on these types of loans vary from lender to lender but have been reported as averaging between $3,000 to $4,000. The fee may involve payment for proprietary software for a tickler system that prompts the homeowner on when and how much to pay each month. These fees become part of the mortgage loan balance.

Names for Mortgage Loans with Affiliated Checking Accounts

Although this type of account functions as a home equity line of credit (HELOC) cum mortgage accelerator, lenders are not calling them that. Instead, the names given to these products include money merge accounts, mortgage checking accounts, home loan checking accounts, home ownership accelerator, and line-of-credit mortgages. In the United Kingdom and Canada, they are also known as current account mortgages.

It is important to know the difference between a HELOC and a money merge account. A HELOC is usually a second lien on a home and is used to pay for home improvements, consolidate other debts, or provide funds for emergencies. A person who draws on a HELOC must then make monthly payments and cannot draw more funds during the repayment period.

In contrast, a money merge account is a first lien used to buy property or refinance existing mortgages. Further, as described in the mortgageprofessor.com article “The CMG Plan: Your Mortgage as a Checking Account” (revised version Jan. 7, 2008), there is no required payment in a money merge account arrangement, and the homeowner can withdraw funds during the repayment period as long as the current balance does not exceed the maximum balance.

Ideal Consumers of Mortgage Loans with Affiliated Checking Accounts

Lenders are touting these money merge accounts to homebuyers and homeowners who want no sacrifice or change in lifestyle. Lenders also point out that funds that sit in conventional savings and checking accounts earn little interest, while funds in money merge accounts work for the homeowner by paying down the mortgage.

The ideal consumers of this type of financial product are individuals who want the psychological comfort of being mortgage-free as soon as possible but who doubt they can achieve this on their own. It also helps to have discretionary funds that can sit in the accounts untouched. Many of these programs provide financial advisers, as well, which is another attractive feature for many borrowers.

As with anything else, money merge accounts are not suited for everyone, and there are downsides as well. These are discussed in another article.