HOME OWNERSHIP ACCELERATOR®
20 (FREQUENTLY ASKED) QUESTIONS

Note:  Please see our website on the Home Ownership Accelerator below

1. Is this some kind of software, bi-weekly payment system, or other gimmick?
No.  The Home Ownership Accelerator is real home loan.  In fact, it’s the only patented home loan on the market today and is unique in the United States.  It is a special first-lien line of credit with a proactive integrated deposit account built into the loan.  It replaces your conventional mortgage (and second mortgage also), and it allows your idle cash to work for you, not the bank, offsetting interest that you’d otherwise pay on your loan balance.  Over time, this could save you tens or even hundreds of thousands in interest, even compared to today’s low fixed-rate loans.   And importantly, it could help you pay off years sooner. 

2. How does it work?
It’s very simple.  You can finance up to 75% of the value of your home with the Home Ownership Accelerator loan.  When you get paid, instead of depositing your paycheck into your traditional checking account, you deposit it into the Home Ownership Accelerator account.  This immediately drives down the balance on your loan.  Interest is computed based on your daily balance, so since your balance is lower, you save interest.  For expenses, it works just like your regular checking account.  You have an ATM/POS card, unlimited checkwriting with no per-check fees, online banking, bill-pay, and account-to-account transfers.  But while your money is waiting to be spent, it saves you interest.  You can also deposit unneeded funds, in order to pay down your loan even faster.  Saving interest means you’ll have more money for principal paydown, potentially cutting years off your loan – – with no change to spending habits. 

3. What is the rate on this loan?
It’s the first question most consumers have been trained to ask, but it’s less important than “what’s the total interest cost on this loan?”  That said, the rate on the HOA can adjust, but to dismiss the loan on these grounds would be a mistake.  The balance-reduction features of the Accelerator loan cause it to perform differently than a typical ARM and can generate significant overall interest cost savings even in a rising rate environment.  The rate is based on the variable 1-month LIBOR index published in the Wall Street Journal on the last business day of each month, plus a margin which never changes.  Typically the fully-indexed (total) rate will be below that of concurrent fixed-rate loans.  For example, as of July 2010, the index was at 0.35%, and the margins available ranged from 2.85%-3.35% (depending on whether you pay discount points or not), for a fully-indexed initial rate of between 3.2% and 3.7% (further discounts available for stellar credit or substantial equity).   There is a minimum/floor rate of 3.5%, and a lifetime cap of just 6% over the initial starting rate, which is very low compared to most ARM’s and about 10% lower than typical home equity lines of credit.  The important thing to remember is that with the Accelerator, it’s not just about the rate.  In many cases, your principal balance can be driven down dramatically over time, more than offsetting the effects of future rising rates.  So even if rates go up above current fixed rate levels, you could still very well end up paying less interest overall, while paying off years earlier. The way to prove this out is to run your numbers in the patent-pending HOA Simulator http://www.hoasimulator.com with the help of a HOA-Certified mortgage professional. 

4. With fixed rates near record lows, is it really the best time to get into the Accelerator?
Given that rates are indeed near record lows, there is little argument that rates will probably go up in the future.  On the surface, that would seem to indicate that locking in a low fixed rate makes sense.  However, with the Home Ownership Accelerator, you are able to drive down your principal balance with each inbound deposit, which can save large amounts of interest over time – even if rates are going up.   The more positive your cash flow is, and the more aggressively you reduce debt, the less interest you’ll pay and the faster you’ll pay off.   Since your finances are unique, you should talk with a HOA-Certified mortgage professional and jointly run your numbers through the patent-pending Simulator at www.hoasimulator.com , which will estimate your payoff timing and interest savings compared to today’s great fixed rates and in the context of a rising-rate environment.  If the numbers work, you should strongly consider this loan.  If they don’t, you can rest assured that your current method of financing your home is a good one.  Generally, if you are cash-flow positive and have good credit, you’ll be amazed at the power of your own money working for you. 

5. Is the 1-month LIBOR a relatively stable index?
While it represents the rate that banks charge each other for short-term loans, the 1-month LIBOR generally tracks with the Federal Reserve’s monetary policy.  This is because banks always have the ability to borrow from each other or from their central bank’s Discount window.  So, when the Fed adjusts the Discount rate, 1-month LIBOR tends to follow (in fact, it historically exhibits a 98% correlation to the Prime Rate, which correlates exactly with the Fed’s moves).  The Fed only meets a certain number of times per year, and they typically adjust rates by +/-0.25% or leave them unchanged.  They prefer not to make larger changes since it can unnerve the economy.  This results in a relatively stable index.  Since 1989, there have been only 9 monthly moves larger than 0.5%, with 5 of these in the downward direction, and with all but one of the 4 upward changes being offset by corresponding downward changes in the subsequent month.  Since 1989, the 1-month LIBOR’s long-term historical average is about 4.25%, and during uptrends (as it follows the Fed tightening rates) the average rate of increase is just 1.45% per year.  

6. I was taught that having a mortgage is a good thing, and allows me to invest my money elsewhere instead of paying off my home.  Isn’t that right?
If your investments are consistently earning you significantly more than your current mortgage rate on a risk-adjusted basis, inflation-adjusted basis, then fair enough, it may make sense to have a mortgage longer-term.  Consider, however, that the inflation-adjusted, dividend-adjusted, real total return of the S&P 500 from 1950-2009 was 7.0% annually (source:  simplestockinvesting.com).   Over a shorter period of time (say 30 years, to match your mortgage), on a risk-adjusted basis, the market’s return could be even less – say 5-6%, only slightly ahead of your mortgage cost, if at all.  So depending on your financial situation, risk tolerance, and time horizon, paying down the mortgage faster could be an even better idea.  And with the HOA, you have the flexibility to reverse course and redeploy your wealth back into the markets as you (and your financial advisor) see fit.  

7. Won’t paying less mortgage interest reduce my tax deduction?

Yes, and this is good, because you’ve eliminated your interest burden. We believe that “paying interest is not in your best interest.” Paying $3 in interest to get approximately $1 in tax deductions is not a good long-term strategy. Think of it this way: Would you want to pay higher interest rate so that you got a larger deduction? Of course not! So getting rid of your mortgage quickly can be prudent in this respect.

 

8. Is the interest on the HOA loan tax deductible while I have it?
The HOA follows the same rules for tax deductibility as any other home loan, so in most cases, it will be.  According to IRS publication 936, interest paid on any qualified mortgage loan used to purchase, construct, or substantially improve a home is deductible to the extent that the “acquisition debt” does not exceed $1 million (married filing jointly).  Plus, if tax law requirements are met (and where state law allows), interest on home equity indebtedness of up to $100,000 (used for living expenses, etc.) may be deducted for income-tax purposes.  See your tax advisor for guidance. 

9. Why hasn’t this loan been offered to the public in the past?
It’s simple. Banks have historically dominated the mortgage market, and they make money by paying small interest rates on deposits, and then loaning that money back out in the form of mortgages, earning a profit on the “spread” between their loan rates and deposit rates. If banks offered this to their customers, their spread would disappear, and with it, considerable profits.  Further, banks know that most people only keep their 30-year fixed rate mortgages about 3-5 years on average.  With these 1930’s-era instruments, interest is heavily front-loaded – – the majority of your payment is interest for 17-20 years.  Banks know this, and count on life changes and rate-chasing refinances to ensure that you’re refinancing frequently and paying back principal as slowly as possible.  

10. Couldn’t I just make extra payments to my fixed rate loan in order to save interest and pay off sooner?
Of course you could.  However, only about 1 in 20 people make extra payments on a regular basis.  Why?  First, it takes discipline to make that extra commitment, month after month.  Something always comes up, and you end up skipping the extra payment.  Second, you can’t get that money back.  Mortgages are one-way instruments, and you have to be sure that you won’t need that extra payment for any unexpected expenses.  Third, most of our money is allocated and we can’t make use of it, even if we don’t need it for a long time into the future.  So we end up using a small portion of our excess funds to prepay the mortgage – – and it never seems to make much of a dent in the loan.    The Home Ownership Accelerator solves all three problems:  It’s automatic:  your entire paycheck goes into the loan, and the default is that ALL of your money attacks your loan balance immediately, until you need it for expenses.  It’s reversible:  you can access your money for expenses 24/7.  It has high impact:  all of your funds go to work for you, not the bank, even if you’ll need some of those funds for expenses later.

 

11. It’s a credit line.  How does that work compared to a mortgage?
A credit line is like a two-way mortgage.  You can pay it down (deposit funds) or draw against the line (withdraw funds).   Your credit line is the maximum amount you can borrow under the terms of the agreement. This is usually higher than your first draw amount, which will typically be used to pay off an old mortgage (in a refinance) or complete a purchase transaction.  You can draw up to your credit line, and the amount you have available is the difference between your principal balance and the line amount.  Your credit line will remain level throughout the initial 10-year “interest-only” period where you do not need to reduce your balance, and then the credit line limit will decline by 1/240 per month throughout the subsequent 20 years, straightlining down to zero at the end of the 30-year term.  That means that at least during the last 20 years, you will need to be making progress in paying down principal.  To be clear however, the loan balance does not amortize like a regular loan – – you are responsible for making payments (deposits) and staying below the credit line limit.

12.  How is interest charged, and what is the payment on the loan?
Essentially, your payment is determined by the interest due on your balance and by any principal reduction required in order to stay at or below your credit limit.  The Home Ownership Accelerator is the only loan where you pay principal first!  Think about it.   With all other loans, interest is charged based on the initial monthly balance on your loan, and is always taken from your payment first.  With the HOA, interest is computed on the last business day of each month, based on your daily principal balance during the period.  This balance has usually been reduced by inbound deposits!  The payment is due 25 days later.  If you have an inbound deposit during this grace period, any interest due is deducted from that.  If not, and if you have available credit, it’s simply added to your principal balance on the due date.  It’s typical for HOA clients who are paying down their loan and have available credit to never have to write a check to pay the interest due on their loan – – they simply keep making deposits and spending less than they earn.  With the HOA, there is no “set” payment like a regular loan – – since it’s a line of credit, you’re in control of the timing and amount of inflows (deposits) and outflows (withdrawals).  This makes it ideal for people whose income might fluctuate.  Naturally, the more payments (deposits) you make the faster your loan will pay off.  While this seems obvious, the real difference here is that with a conventional loan, making larger payments can be unattractive, especially if it turns out that you need the money back for unexpected expenses.  With the HOA, you can pay down aggressively and later retrieve those funds under the terms of the line of credit, if it turns out you need them.

13.   How much does this loan cost?
The types of costs associated with getting a Home Ownership Accelerator loan are typical to that of a conventional mortgage: you’ll have to pay an origination fee (to the agent that you work with, and not to exceed 2 points), a processing fee (to the loan company that you work with, and not to exceed $795), a lender fee (not to exceed $895), title, escrow, appraisal, and other third-party fees.  Like any loan, you can also pay discount points in order to get an even better rate (in this case, a lower margin), which is usually a good idea if you are going to be in the house for 3 years or longer.   With the HOA there is a small $60 annual fee, which covers the additional transactional expenses associated with servicing the loan.  Your lender will provide you with an Important Terms disclosure document within 3 days of application which outlines all this and more, in detail.   

14. Can my line of credit be reduced or frozen?
This can happen to any line of credit, but only under certain specific circumstances outlined under federal law.  Among these, if you are in default, or it becomes clear that you cannot meet the repayment obligations, or if your property value declines significantly, or the rate on your loan surpasses the maximum APR on the loan, the lender has the option to reduce or suspend access to your line until those conditions are remedied.  Recently, many traditional home equity lines of credit (HELOC’s) were suspended by banks when property values fell dramatically, so you may be familiar with this situation. Keep in mind that many of these were high combined loan-to-value loans, where it did not take much of a property value decline for the loan to be “underwater” relative to the property value, resulting in a suspension.  The HOA, on the other hand, requires a minimum of 25% equity, so property values would have to fall significantly again, in order for a line reduction to be in order.

15. Should I close my old checking account?
We recommend that you keep your old checking account open. This allows you to quickly deposit checks and cash, then transfer the funds electronically into your HOA account.

16. Are my payments FDIC insured?
This is a line of credit, not a savings account, and it converts your inbound cash to home equity almost immediately.   The checking account portion of the HOA sweeps inbound deposits to the line of credit, and is FDIC insured, but this occurs quickly, so in effect, there is no idle cash to insure.  Once your full loan balance is paid off, though, any inbound deposits will build up in the checking side of the HOA, and those funds are of course FDIC insured.

17. What happens when I pay off the loan early?
The line of credit is a 30-year-access line of credit.  If you pay off the loan early, you still have access to the available equity, up to your credit line amount, until your 30-year term is complete. If you continue to make deposits into the account, and your loan is paid in full, those deposits can be transferred out, and your account will still remain open.

18. Will my loan be sold? Who will service it?
CMG works with its servicing partner Ameriprise Bank, part of Ameriprise Financial (one of the largest financial advisor firms in the nation), who will service the loan and power the transactional aspects of the product (the ATM card, checks, electronic transfers, etc.).  Your statements will come from Ameriprise Bank.

19. Do I need to change my spending habits?
No. Generally that will not be necessary, and since more of your income will be going towards principal, you’ll likely come out ahead even then. However, you’ll find that if you can find ways to trim expenses even more, you’ll pay off even earlier.

 

20. Can I use this loan as a platform from which to make other outside investments?
Of course.  Sophisticated investors will see it as an opportunity to “borrow” money from their accumulated equity (created by paying down principal) and “reinvest” it in an outside investment at a higher rate of return, netting the difference between the two. Bear in mind that you are borrowing against your home equity to make outside investments, and you should consult your financial advisor as to the risks associated with such investments.

The Meredith Mortgage Team, CMPS®

Certified mortgage planning specialist

“We Will Always Have Your Best  

  Interest In Mind”   

 

 

Erin & Kathleen

The Bay Area’s Premier

Mortgage Banker and Broker

 

(925)983-3048 office

(925)226-3215 efax

(925)918-0585 mobile

meredithteam@cmgmortgage.com

emeredith@cmgmortgage.com

Apply For Mortgage Financing with The Meredith Team, Click Below: 

http://www.cmgmortgage.com/LO/meredithteam/GetStartedApply.shtml

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