Borrowers who benefit most from an all-in-one mortgage generally have the goal to pay down their loan quickly or own their home outright, but they also want some liquidity if they find themselves short on cash for an unexpected expense. Homeowners who want to make home improvements without a definite timeline might also benefit from an all-in-one mortgage. Here’s an example of how an all-in-one mortgage could work: Let’s say you qualify for a $300,000 mortgage loan at 5% interest. With a 30-year loan, let’s assume your total payment is $2,000 a month, including taxes. Maybe you know that you’ll need a new car and may want to help a child pay for college in the next 30 years, but you have a short-term goal to pay down your loan early so you can reduce the total interest costs. With an all-in-one mortgage, you could make an extra payment each month, reducing your principal and the time you’ll spend repaying the loan. If in 10 years you decide you need some of the extra cash you’ve “saved” through the all-in-one mortgage, all you have to do to make a withdrawal is write a check, use a debit card, or transfer funds from your mortgage to your bank account. How you access the money may vary depending on your mortgage lender.
Alternate name: Offset mortgage (U.K. product with similar structures)Acronym: AIO mortgage
How Do All-in-One Mortgages Work?
When you pay your mortgage each month, it’s like making a deposit. The concept is that you’ll pay more into an all-in-one mortgage account than the monthly payment. Since the interest is calculated based on the average daily balance of the loan’s principal, ideally this reduces the amount of mortgage interest you pay over time. A product that combines a checking or savings account functionality with your home mortgage seems quite comprehensive at first. It’s important to understand exactly how the product works, however, to make sure it provides you with options rather than tempting you to spend too much. When money goes into the account, it reduces your mortgage principal (albeit temporarily). That extra few days of reduced principal following payday saves you interest expenses because deposits go toward paying the principal first. Since the interest is charged on the daily average balance on the loan—like a credit card—reducing the principal faster means you pay less in interest, potentially saving you thousands of dollars over the life of your loan. It also means you could pay off your mortgage sooner. However, withdrawals from the account to pay bills (again, like a normal checking account) bump the principal back up as the money goes out. You can also withdraw money from the account at any time by using your home equity in a similar way to a home equity line of credit. You don’t have to apply for separate loans or lines of credit. Accessing your equity is as simple as using your debit card. But be aware that if you do that, the outstanding balance grows by the amount you spend. In other words, your everyday expenses could end up taking years to pay off, and you may get stuck paying additional interest on those purchases, essentially negating the upside of an all-in-one mortgage.
Do I Need an All-in-One Mortgage?
Because all-in-one mortgages usually require strong credit and aren’t widely offered by banks and credit unions, there’s a good chance you don’t need one, since there are other ways to achieve liquidity while paying down a mortgage quickly. Again, the factors that make an all-in-one mortgage most attractive include the opportunity to combine your bank account with your mortgage, and easy access to your home’s equity, along with the ability to reduce interest payments and pay off your home loan faster. An all-in-one mortgage might also be for you if you want to keep cash on hand for unexpected or large expenses, and you want to pay off your mortgage early. Having a checkbook that lets you use your home’s equity to instantly pay for things may be tempting, so knowing yourself and your habits is key when considering this type of loan.
Alternatives to All-in-One Loans
A similar solution can be cobbled together by paying on a conventional 30-year mortgage while depositing “extra payments” into a separate savings account each month when you have the ability to do so. That savings account can be your emergency fund, but you can also use it to pay off the remainder of your mortgage if you want. While this solution isn’t a perfect approximation of the all-in-one mortgage, it illustrates what you might do if you don’t qualify or don’t have access to a lender who offers these loans.
How Much Does an All-in-One Mortgage Cost?
All-in-one mortgages typically come with an annual fee, as well as higher interest rates. If you’re considering an all-in-one mortgage, it may be helpful to do the math to see if you’ll come out ahead. For instance, do you need to pay off your 30-year mortgage in 29 years or much earlier (for example, 20 years) to make the higher interest rate and annual fees worth it? An all-in-one loan simulator can help you do some of these calculations.
All-in-One Mortgage vs. Cash-Out Refinancing
One common way homeowners access their equity is a cash-out refinance. Here’s how it compares to an all-in-one mortgage:
