Two years ago I wrote a fairly critical piece about the The Home Ownership
Accelerator (HOA) offered by CMG mortgage that did not do it justice. HOA is
fairly complicated and this time I took a harder look.
HOA is a permanent mortgage that has some features found only in a demand deposit account at a bank, and other features similar to those in a home equity line of credit (HELOC), except better.
An HOA can be used as if it was a checking account. A borrower\u2019s paycheck,
instead of being deposited in a bank account to earn little or no interest, pays
down the mortgage balance. The borrower thus earns the mortgage rate starting
the day of deposit.
As the borrower spends money, by writing checks, withdrawing cash from an
ATM, or using a bill-pay service, the mortgage balance rises. Even if the balance
at the end of the month is the same as at the beginning, the average balance \u2013 and
therefore the interest charge -- is lower.
Both HOA and a home equity line of credit (HELOC) accrue interest daily, and
adjust the interest rate frequently -- monthly on the HOA, anytime on the
HELOC. Borrowers can draw up to a specified maximum amount at any point
during an initial 10-year draw period, with repayment required over the ensuing
But there are important differences. HOA is a first lien and is used to purchase
properties and to refinance existing loans. A HELOC is usually a second lien and
is used for other purposes, such as home improvements and consolidating other
debts. A HELOC cannot be used as a deposit.
Perhaps the most important difference is that an HOA borrower has no required
payment, and can even withdraw funds during the repayment period, so long as
the current balance is below the maximum balance. A HELOC borrower must
make a payment every month and cannot make withdrawals during the
The HOA 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.
HOA is an adjustable rate mortgage (ARM) with monthly rate adjustments.
Monthly adjustments make the HOA more sensitive to market changes in both
directions than hybrid ARMs on which the initial rate is fixed for 2 to 10 years.
The HOA rate is fully-indexed, meaning that it equals the current value of the
rate index plus the margin, starting in month 1. The margin is 2.25%, which is a
common margin on prime hybrid ARMs. The index was about 5% in October,
2007 making the HOA start rate about 7.25%. This was well above the start rate
on hybrid ARMs.
However, HOA borrowers can get 90% loans (10% down) without paying for
mortgage insurance. Further, for 2.75 points, borrowers can buy down the
margin from 2.25% to 0.75%, which would reduce the start rate to 5.75%. This is
a bargain, even if you pay off your loan very quickly.
If you pay off in 3 years, for example, you will earn 25-29% on your investment,
depending on the exact payoff configuration, and if you pay off in 10 years, it goes
to 36-43%. Every HOA borrower should buy down the margin to .75%.
HOA is over-hyped as an early payoff tool, because the prospect of paying off
early captures people\u2019s attention. However, while the intra-monthly interest
savings described earlier are real, they don\u2019t add up to much.* To pay off a 30-
year loan in 10 or 15 years requires extra payments, and you don\u2019t need HOA to
make extra payments. The flexibility of the HOA, however, makes it easier.
Flexibility is the major virtue of the HOA. Borrowers with money that they might use to pay down the mortgage, but don\u2019t because they might need it again, don\u2019t have to make that choice. They can use it, and if they need it again, they can draw it out. Borrowers with highly unstable incomes can make a large payment when they are flush, and skip making payments when they are not.
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