This Where We Live article incorrectly said that a home-equity line of credit cannot be used as a deposit on a home. It should have said that such a line of credit cannot be used as if it were a deposit account at a bank.
The Mortgage Professor
CMG's 'Accelerator' Mortgage Deserves a Second Look
Two years ago, I wrote a fairly critical piece about CMG Financial's Home Ownership Accelerator mortgage loan program. I have since taken a closer look at the complicated program and have decided that my initial review did not do it justice.
The Accelerator is a permanent mortgage that has some features usually found in a deposit account at a bank and other features similar to those in a home-equity line of credit. Here's more about each of the aspects of this type of loan, which is similar to mortgages that have been available for several years in the United Kingdom and Australia:
As the borrower spends money by writing checks or withdrawing cash from an ATM, the loan balance rises. Even if the balance at the end of the month is the same as it was the beginning, the average balance -- and therefore the interest charge -- is lower.
But there are important differences. CMG's loan is a first lien and is used to purchase properties and to refinance existing loans. A line of credit is usually a second lien and is used for other purposes, such as home improvements and consolidating debts. A line of credit cannot be used as a deposit to buy a home.
Perhaps the most important difference is that a borrower using an Accelerator loan has no required monthly payment and can even withdraw funds during the repayment period as long as the current mortgage balance is below the maximum balance. A line-of-credit borrower must make a payment every month and cannot make withdrawals during the repayment period.
The Accelerator maximum is unchanged during the first 10 years unless the borrower exercises a one-time option to increase it. During the 20-year repayment period, the maximum balance declines every month by 1/240 of the amount at the beginning of the repayment period.
The interest rate risk is also much lower on the Accelerator loan. The maximum rate is 5 percent over the initial rate, whereas home-equity credit lines have no contractual maximums; they are constrained only by state usury ceilings, which range from 18 to 24 percent.
The rate on this product is fully indexed, meaning that it equals the current value of the rate index plus a margin, starting the first month. The margin is 2.25 percent, a common margin on prime hybrid ARMs. The index was about 5 percent in October, making the starting rate about 7.25 percent. This was well above the starting rate on hybrid ARMs and fixed-rate loans.
However, Accelerator borrowers can get 90 percent loans (10 percent down) without paying for mortgage insurance. Further, for 2.75 points (2.75 percent of the loan amount), borrowers can buy down the margin from 2.25 percent to 0.75 percent, which would reduce the starting rate to 5.75 percent. This is a bargain, even if you pay off your loan very quickly. Every Accelerator borrower should buy down the margin to 0.75 percent.
Assuming you buy down the margin and take a 90 percent loan, the cost of this loan is not much different from other ARMs that do not offer the same advantages.
This is a mortgage for responsible borrowers. You need a FICO credit score of at least 680, you aren't required to escrow taxes and insurance, and you must put 10 percent down.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site,http:/
Copyright 2007 Jack Guttentag
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