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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