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Mortgage payoff on steroids

David Lazarus

April 9, 2008

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When Stockton resident Kevin Byrd refinanced his mortgage a couple of years ago, he figured he'd need the full 30 years to pay off more than $300,000 in debt.

Now he expects to get it done in just 10 years. Or less.

Byrd, 50, is employing a system called an accelerated mortgage plan that essentially uses a line of credit to pay down his home loan in record time.

It's not for everyone. But for those with plenty of financial discipline -- and as much as $3,500 to shell out for a special computer program -- this might be something to consider.

"I didn't believe it at first," Byrd said. "But as long as you're making more money than you're spending, it'll work."

Here's the deal: Accelerated mortgage plans hinge on using a line of credit based on your home equity as a repository for your paychecks and as the vehicle for paying down your mortgage.

The equity line provides the liquidity to make payments of between $5,000 and $15,000 against your principal at periodic intervals. As you deposit additional paychecks into the line of credit, the software tells you when the account has evened out again and when another principal payment can be made.

The faster you pay down your mortgage, the quicker each regular payment will consist primarily of principal, thus shortening the term of the loan. That's the basic idea.

Even though the equity line probably comes with a higher interest rate than your original home loan, proponents of the system say that the short-term nature of the line of credit -- you're repaying it every few weeks or months -- ends up being cheaper over the long haul than the interest that would accrue on your mortgage.

But that assumes you're consistently making more money each month than you're spending on food, fuel and other necessities. It also assumes that you'll never fall behind in repaying your equity line or need extra cash for some unexpected expense -- a job loss, say, or a health problem.

In that case, you can quickly find yourself drowning in debt.

"People have to be really disciplined and understand the system," said Randy Ramirez, president of Wilshire Financial Inc., a Pasadena mortgage broker. "If they don't, it can really backfire."

The accelerated mortgage system is relatively new to the United States but it's been widely used overseas for years. In Australia, it's estimated that more than one-third of all homeowners use such a system. In Britain, about a quarter of homeowners are said to use this approach.

Americans, when they're inclined to actually pay off their debts, tend to adopt more conservative tactics. Many homeowners will simply add $100 or $200 to their monthly mortgage payments to be applied to paying down the principal.

Another increasingly common method is to make an extra month's payment each year, or to make two payments every couple of weeks that add up to an extra month's payment (for a total of 13 months' worth of payments annually).

Each of these approaches accomplishes the same thing: a speedier reduction in principal and thus a lowering of the balance on which interest accrues.

Each also has the benefit of being largely risk-free. If you have the extra cash, you're using it to pay down your mortgage. If you don't, you're still making your basic monthly payments.

Mortgage pros say that paying a little extra each month can shave about eight years' worth of payments off the average 30-year loan, saving homeowners tens of thousands of dollars in interest.

The newfangled accelerated mortgage plans are more aggressive because they commit all of a person's discretionary income to paying down principal. You're not saving; you're not investing in stocks. The system is predicated on having no other financial goal except to rid yourself of your mortgage.

If all goes according to plan, the system can knock about 20 years off a 30-year loan.

One of the most widely used accelerated mortgage software programs is sold by a Utah company called United First Financial. It costs $3,500 and requires users to stay on top of entering all necessary data to calculate optimal monthly mortgage payments.

United First Financial says it has about 10,000 customers nationwide.

"It's a great contribution that we're making to the American family," said Greg Somerville, a California sales agent for the company.

He said sales have gotten tougher in recent months because of the anemic housing market. As the value of people's homes declines, the available equity for lines of credit evaporates.

As a result, Somerville said he's increasingly steering customers into accelerated mortgage plans that hinge not on lines of credit but on credit cards.

You heard that right. In such cases, you're borrowing from a credit card to pay down your mortgage. And you'd better hope you don't miss any card payments or you'll get slapped with a passel of late fees and see your interest rate soar to around 30%.

"This just makes people be even more disciplined with the program," Somerville said.

That, or it results in people's ruin.

Ted Grose, a West L.A. mortgage broker and former president of the California Assn. of Mortgage Brokers, said tying your mortgage to a credit card is like playing with fire.

"Credit card debt is exceedingly dangerous," he said.

His advice for people interested in accelerated mortgage systems is to stick to lines of credit and to minimize the potential for human error. Grose said he tells clients to look into plans that are largely automated and don't require laborious bookkeeping on the computer.

One such alternative is offered by a San Ramon, Calif., company called CMG Financial Services. Rather than selling software, it offers lines of credit that replace your primary mortgage and that also come with built-in checking accounts.

The idea here is that by depositing your paycheck directly to your equity line, you'll be in a position to devote more discretionary funds to paying off the loan after meeting other expenses.

The company says it has about 6,500 clients using the service.

When I first heard about accelerated mortgages, I figured they must be a scam. As best as I can tell, they're not.

But the plans require steady positive cash flow and an ability to resist eating into your home's equity even though that checkbook in your pocket is making it tantalizingly easy to go out and buy that pricey Prius you've had your eye on for months.

Me, I'll stick with paying an extra hundred bucks toward my principal each month. It ain't flashy, but I'm not losing any sleep at night.

Consumer Confidential runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.