Ask an Expert: What is a mortgage accelerator loan? Hawaii

A: A mortgage accelerator is an innovative type of home loan that’s new to the United States. In the U.K. and Australia, however, these mortgages have long been used as an effective way to pay down your mortgage more quickly.

The first thing to understand is that a mortgage accelerator is a revolving home equity line of credit (HELOC), not an amortized loan. That means you do not have a fixed payment to make each month. Instead, you may pay only the interest for the first 10 years. Of course, paying only interest does nothing to reduce your mortgage principal, so here’s where the innovative part comes in: you arrange to have your entire paycheck deposited to your line of credit account. When you need access to your money for day-to-day expenses, you use the HELOC just like a checking account -- you can pay bills online or by mail, and you can make cash withdrawals with an ATM card.

So how does this save you money? The key is that interest on a line of credit is calculated daily, so every reduction in the balance, even if it’s only temporary, means you pay less interest. With your salary going directly into the HELOC, the balance will drop dramatically every time you get paid, and then it will creep back up slowly as you draw on the money. Meanwhile, instead of that idle cash earning little or nothing in a checking account, it will save you 5 or 6 percent (whatever the current rate is on the HELOC) in interest. Over the long run, with every unspent dollar of your paycheck going toward reducing your principal, you could wind up owning your home much more quickly than you would have with an amortized loan.

Most amortized mortgages allow you to make extra payments to reduce the principal, but if you wind up needing that money for an emergency, you can’t get it back without taking out another loan. One of the selling points of the mortgage accelerator is that you can reduce the principal with every extra dollar, while still having access to the funds should you need them.

Mortgage accelerator HELOCs come with one caveat: they can be dangerous for those who overspend. If your biweekly net income is $3,000, but you withdraw $6,200 over the course of a month -- which you’re free to do with a revolving line of credit -- your principal will go up instead of down. Rather than paying your home loan faster, you may wind up dragging it out longer. If you don’t have the discipline to spend less than you make, you’re better off with an amortized loan, which builds in the forced discipline of a stable monthly payment.