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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, November 18, 2007 Is an equity accelerator program for you? A Lake Stevens couple is following a plan that can save them thousands, but experts say the program isn't for everyone. By Debra Smith Herald Writer Last year Jennifer and Mike Wheat refinanced to a new kind of mortgage that could help the Lake Stevens couple pay off their loan in about 11 years for thousands less than if they had opted for a traditional, fixed-rate 30-year loan. Variations of this program are known by different names including "mortgage accelerator loan," "equity acceleration" and "money merge account." These mortgages are used, not without controversy, by borrowers in Australia and the United Kingdom, and they're becoming more common in the United States. All are based on the premise that borrowers deposit their paychecks into an account that applies every cent that isn't spent each day to the mortgage loan balance. Here's how it works: Borrowers finance a new property or refinance existing property using a home equity line of credit with a checking account attached. Borrowers deposit their entire paychecks directly into the account. When they need to pay other bills, they may write checks, use a debit card or withdraw cash from the account. Rather than paying a fixed amount of interest, the borrower pays a rate that adjusts each day based on the principal and the interest rate. Each day there is money in the account, the mortgage principal is lower and theoretically the borrower saves on interest over time. If borrowers adhere to the plan, they can pay off their mortgage years sooner, saving tens of thousands of dollars that would have been spent on interest. If things go wrong -- if interest rates spike or a borrower spends too much of their paycheck each month -- it could mean maxing out the line of credit and paying far more in interest than a fixed rate loan. This loan needs to be approached with caution, said Andrew Austin and Robert Brooks, the managing partners and mortgage brokers at Beacon Financial Group in Lake Stevens who sold this product to the Wheats. This is not a good mortgage for borrowers who spend all their paycheck each month. The ideal candidates are fiscally disciplined, earn more than they spend and have excellent credit, Brooks said. They tend to have owned a home for awhile and are looking for ways to build wealth before retirement. For the program to be effective, borrowers should have a minimum of 10 percent of their paycheck left over after all the bills are paid. And they usually have an open mind, because this requires a new way of thinking, he said. A philosophy change is how his partner Austin put it. By all accounts, the Wheats fit that profile. Jennifer Wheat, a bookkeeper for the family business, describes herself as conservative with money: She pays off her credit cards each month and doesn't carry any outstanding loans, other than the mortgage. Before they refinanced to this program, she would withdraw all the money they planned to spend each month and divvy it into envelopes. When it was gone, she didn't spend any more. The program required them to make changes. Wheat no longer withdraws cash at the beginning of the month because she wants it to keep the principal down as long as possible. Instead she charges everything to her credit card, and pays it off at the end of the month. She tracks what she spends by keeping receipts. One of the reasons this program is working for the couple is they are using the account as a receptacle for cash that normally would have sat in a savings account or CD, earning little interest. Wheat calls it the "bank of me." Twice a year she has to pay a sizable chunk to property taxes, but holding the money in the meanwhile means she is paying less interest. "Some people who can't budget or who aren't conservative with money may look at this loan and say, 'Wow, I'm getting ahead and I've got extra money. I could go out to dinner tonight, I could go on vacation,'" Wheat said. "You still have to hold yourself accountable." One of the trade-offs of this program is that it comes with a variable interest rate that's often higher than an annual percentage rate for a 30-year fixed rate loan. Austin said borrowers need to get out of the mind-set that a rock-bottom interest rate is everything. Borrowers using this plan save so much by paying off early, it easily makes up for the increased rates, he said. Some of these loan programs come with annuals fees. At least one of the programs from United First Financial, which Beacon does not sell, includes a $3,500 software package. No piece of software will make someone stop spending $200 a month on coffee or delay purchasing a $1,000 flat-screen television, said Rich Sweum, a senior mortgage planner and branch manager for Homestead Mortgage in Everett. He called the software "Quicken on steroids." In order for the program to work, borrowers need to have enough discretionary income to apply to the principal, interest rates need to stay stable and the borrower needs to have steady source of income, he said. "The minute you go backward, it negates all the benefits you've accumulated," he said. There also are the costs of signing up and borrowers can pay off their mortgage early by simply making extra payments to the principal, Sweum said. "It might be the best scheme in the world on paper," Sweum said. "The reality is our society does not have a savings mentality. Our society has a spending mentality." "There's a good side, but this isn't a good idea for most people." Debra Smith: 425-339-3197; dsmith@heraldnet.com.

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