When it comes to a new type of mortgage that’s been drawing big interest from consumers and mortgage brokers, however, it’s the behind-the-scenes action that will determine whether homeowners’ wishes come true or if they end up with a Stupid Investment of the Week.

The Home Ownership Accelerator loan from CMG Financial Services could go either way. While the mortgage program has significant potential to help some buyers, a whole lot of unseen or less-than-apparent factors will determine if it actually lives up to the hype. For many consumers, it won’t. Stupid Investment of the Week showcases the conditions and characteristics that make an investment less than ideal for the average consumer, in the hope that highlighting danger zones in one situation will make it easier for consumers to avoid trouble elsewhere. While obviously not a purchase recommendation, neither is this column meant to be an automatic sell signal, as there may be times when dumping a problem investment simply compounds the issue. In the case of the Home Ownership Accelerator, consumers who already have the loan simply need to be sure to use it in a way that delivers the actual savings it promises. But that won’t always be so easy.

The Home Ownership Accelerator is actually a version of something called an all-in-one loan — sometimes called an offset loan — that is more readily available overseas. California-based CMG, which expects to generate more than $2 billion in Accelerator loans this year, started offering it last fall. It is being sold in several states and drawing significant interest from other lenders. In reality, the Accelerator is a 30-year home-equity line of credit. Refinancing into the program makes that line of credit the central financial vehicle in your life because the plan works best when all of your income and all of your expenses run through that single account. The savings starts when your paychecks are deposited directly toward the loan. This cuts the outstanding loan balance — even if most of the reduction is temporary — and reduces the interest accrued on your borrowings. Traditionally, consumers put their paychecks into bank accounts that pay little or no interest while the cash sits inactive; the Accelerator allows the paycheck to reduce the average daily balance, and that savings adds up over time. How quickly it adds up depends on the homeowner’s spending. Every time consumers access the line of credit by check or debit card, their outstanding balance grows by the amount they spend. For years, financial specialists have warned against refinancing a mortgage and folding in credit-card and short-term debts because that kind of move converts ordinary spending items into long-term debt.

The Home Ownership Accelerator has the potential to turn your next trip to the grocery store or your next vacation into an event that takes years to pay off.
And the rate to get it paid off might not be so attractive; the mortgage’s rate adjusts every month, and is tied to the one-month LIBOR rate, rather than the Treasury rate used for most conventional mortgages. Right now, that’s a costly trade-off; leveling the rate field today would force the borrower to buy down the interest rate as much as possible. "If I can drop my principal balance by a huge amount every time I get paid, it makes the interest rate on the loan much less important to me," says Doug Nesbit, who helped CMG develop the loan. "I’ll pay less interest over the life of the loan, and that’s what’s important." While total dollars paid in interest is the bottom line, ignoring rates is like telling investors not to look behind the curtain, particularly in a case where the key issue is dropping the balance by a "huge amount" every month. Nesbit acknowledges that the Home Ownership Accelerator is not for everyone. He suggested that anyone living paycheck to paycheck or carrying a low credit score won’t qualify, and said that the deal only works for those with a positive cash flow, preferably people who save 10% of their income or more.

Disciplined savers?

CMG has a terrific online calculator — available at cmgfs.com — which makes almost every deal look like a winner for someone with those basic characteristics — until you start playing with the finer adjustments in the system. At that point, it becomes clear that for CMG’s rosy projections to come true, virtually all of a homeowner’s savings must go to paying off the loan rather than to outside investments.

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This week is packed with relevant economic releases, meaning we will likely see plenty of movement in the financial markets and mortgage rates. The data starts Tuesday morning with the release of May’s Retail Sales and Producer Price Index (PPI) reports. The sales data measures consumer spending, which is important to the bond market because consumer spending mak es up two-thirds of the U.S. economy. Analysts are expecting to see sales rose 0.1% last month. No change in sales, or better yet a drop in sales, would be good news for the bond market and could lead to lower mortgage rates Tuesday.

The second report of the day is May’s Producer Price Index (PPI), which helps us measure inflationary pressures at the producer level of the economy. There are two readings of this index, the overall and the core data. The core data is considered to be the more important of the two because it excludes more volatile food and energy prices. A large increase could raise fear in the bond market that inflation is a threat to the economy. This would not be good news for bond prices or mortgage rates since inflation erodes the value of a bond’s future fixed interest payments. Rising inflation causes investors to sell bonds, driving prices lower and mortgage rates higher. Analysts are expecting to see an increase of 0.5% in the overall index and a 0.2% rise in the core data.

Wednesday’s CPI report is the next piece of data scheduled for release this week. It is extremely important to the bond market and mortgage rates because it measures inflationary pressures at the consumer level of the economy. As with the PPI, there are two readings to this index- the overall and core data readings. The core data is the more important since it excludes more volatile food and energy prices. If Wednesday’s release reveals rapidly rising prices, the bond market will most likely tank and mortgage rates will rise sharply. However, if the release shows readings lower than +0.4% in the overall and +0.2% in the core data, we should see the bond market move higher and mortgage rates move lower.

Late Wednesday, the Federal Reserve will release its Beige Book. This data details economic conditions throughout the U.S. by region. It is relied upon heavily by the Federal Reserve during FOMC meetings when determining monetary po licy. If it shows slowing economic activity, the bond market may thrive and mortgage rates could drop shortly after the 2:00 PM ET release. If it reveals significant signs of improvement from the last release, we could see mortgage rates revise higher Wednesday afternoon.

Thursday’s only important release is May’s Industrial Production data. This report will be released at 9:15 AM and can also cause movement in the financial markets and mortgage rates. It measures output at U.S. factories, mines and utilities, giving us an important measurement of manufacturing sector strength. If it reveals that production is rising, concerns of manufacturing strength may come into play in the bond market. A decline would indicate that the manufacturing sector is weaker than expected and should help push mortgage rates lower. Current forecasts are calling for an increase of 0.2%.

The last report of the week is June’s preliminary reading to the University of Michigan Index of Consumer Sentiment. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. It is expected to show a reading of 79.0, which is a slight decline from last month’s final reading of 79.1. If it shows a larger decline in consumer confidence, bond prices will likely rise. This should lead to mortgage rates moving slightly lower Friday.

Overall, it is going to be quite a busy week for the financial markets. We will likely see changes to mortgage rates several days this week, with a possibility of seeing afternoon revisions at least one day, possibly more. I feel that Tuesday or Wednesday will be the most important days of the week due to the number of reports being released and the importance of that day’s data. Accordingly, this would be a very good week to maintain fairly constant contact with your mortgage professional.

If I were considering financing/refinancing a home, I would…. Lock if my c losing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Lock if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

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