What are mortgage accelerators?

Among the various options you have for home loan financing are mortgage accelerators.

These plans weren't always available in the U.S., as their popularity centered in Australia and the U.K. They recently have become more evident in the States and can provide home buyers with a great strategy for paying their mortgage bills.

How do mortgage accelerators work?

An accelerator combines the features of a mortgage, checking account, savings account and home equity line of credit into one financial product. It can be used for a new home purchase or refinancing.

Once you have a mortgage accelerator, you'll deposit all of your paychecks into the HELOC. These deposits are applied to the principal balance of your loan. You're allowed to used the funds you've deposited via check purchases, ATM withdrawals and other transactions. This money can be put toward all your other expenses, including utilities, property taxes, insurance and more. This is where the checking account and HELOC features of a mortgage accelerator come into play.

At the end of each month, whatever money you haven't spent from your deposit counts toward payments on your principal.

What are the risks of using mortgage accelerators?

Like all financing options, accelerators have their fair share of pros and cons. One benefit of the loan is you can pay down your outstanding mortgage balance faster. If you're a particularly frugal person who doesn't do a lot of spending outside of bills and other necessary expenses, you can have a nice chunk of change left at the end of each month to apply to your principal.

Another advantage is you can still withdraw money against those funds even after they have been applied. This is helpful if you have a sudden need for a large amount of money in a short amount of time. If your home is a fixer-upper and the home inspection reveals several repairs that need to be made, for example, you may not have the funds for the work to be completed. In these instances, many homeowners turn to a HELOC or home equity loan for the money they need, but these financing options aren't available until 10 percent of the mortgage balance is repaid. With a mortgage accelerator, you already have a line of credit you can access.

These benefits are available, but you must be financially responsible if you want to avoid the pitfalls that can come with a mortgage accelerator. Here are some factors to keep in mind:

• Mortgage accelerators are loans. Although these financing products have features of a checking account, they are still loans. You can withdraw money from the account, but those amounts are added to the principal and must be repaid. Unlike a checking account, you won't be stopped from making additional purchases because you've exceeded the amount you deposit, which means you could pay more for the home if you don't responsibly use the account.
• Interest earned on savings is taxed. The savings account portion of your mortgage accelerator will earn interest on your deposits. The one downside, however, is these earnings will be taxed.
• Mortgage accelerators aren't widely available. If you think you're able to handle the responsibilities of one of these loans, you'll need to determine if you can get one if your state. Few lenders offer mortgage accelerators in the U.S. and do so in a limited number of states.
• You need to plan ahead. These loan products are not for individuals who don't have some idea of where they will stand financially in a few years. Although this holds true for any mortgage, mortgage accelerators require direct deposit of your paycheck, which could present issues if you're unemployed for some time.