What's a 'mortgage accelerator'?

We bought a house last year .. (and took out) a home equity line of credit at 7 percent, but it has climbed since to 8.5 percent.  We have been paying for our HELOC for almost one year now, and I just realized that we barely paid the principal of the loan - almost 98 percent goes to interest rate or finance charge. What's the best way to pay off the HELOC, where a big chunk can go to its principal rather than interest rate?  What would you suggest to pay off our loans quicker?
-- Francis F., East Meadow, N.Y.

You could give the Answer Desk HELOC Accelerator a try. But as you've found, the math on home equity loan's is a little different than on your conventional first mortgage — it’s even more heavily weighted in the bank's favor. (Which is why it probably wasn't explained to you properly when you applied for it.)

Unlike a mortgage or a home equity loan, most HELOCs are divided into two phases: the drawdown phase when you take money out, and the payback phase when you have to pay back the principal. In the drawdown phase, which can last as long as 10 years, you pay little, if any, principal (unless, of course, you come up with a lump sum to pay it off).

This is what makes HELOCs more difficult to get out from under. By limiting the monthly payments in the drawdown phases to interest only, the lender makes it much easier to borrow more than you otherwise could afford. And even though the monthly payments seem low, the drawdown costs you more in interest — because you’re carrying the original principal balance for years without paying it down.

HELOCs have also rapidly become more burdensome as short-term interest rates have risen. Three years ago, you could get a HELOC for 4 percent — very cheap money by historical standards. But as holders of HELOCs have discovered, the recent run-up in interest rates has roughly doubled the cost of these loans in three years. And unlike adjustable rate mortgages, which reset at a fixed schedule, HELOCs can — and do — change any time short-term interest rates change.

Even if rates go back down, you still face sharply higher payments when the credit line hits the payback phase. When they market these loans, most lenders reassure borrowers by pointing out that you can always just roll over your HELOC into a new one, putting you back in the “interest only” drawdown phase. Which is another way of saying you’re can be “interest slave” for the rest of your life.

The Answer Desk Accelerator HELOC plan can help. After paying off your monthly interest, send another check, and it will applied to pay down your principal. But if you’re carrying a big balance on your HELOC, you may want to tap any savings you've got to pay it off faster —especially if you’re paying 8 percent interest on a HELOC and getting 2 percent interest on those savings.

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