In April 2022, I decided to leverage some of my home equity to cover business expenses and further expand my real estate investments. As I researched my options, I came across something called an “all-in-one mortgage” (AIO), which is a type of home equity line of credit (HELOC).
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Imagine if you simply paid your mortgage interest instead of amortizing it, combined your mortgage with a checking account, and could access your home equity by simply writing a check, you could potentially pay off your mortgage in 12 years instead of 30. Sounds too good to be true, but it’s not. That’s exactly what I experienced with AIO Mortgage.
AIO home loan structure
AIO mortgages (also known as “offset” mortgages) have been available in other countries for over 40 years, but only became available in the United States in 2007. These mortgages differ from 30-year fixed-rate mortgages in that they combine banking and borrowing into one account. In other words, your mortgage is in a combined account that also includes checking, debit card, and wire transfer services.
AIO interest rates are based on a spread of 3.5 to 3.7 percentage points over current one-year Treasury bills. This percentage has remained at around 3.7%. Add in the current 3.7% spread and the interest rate is in the low 7% range. (I was locked in at 7% because I chose to pay more points to keep the same rate for 5 years.)
AIO home loan: principal, not interest, takes priority
With an AIO home loan, each time you make a deposit, the principal is paid first before the daily simple interest on the loan is calculated. For example, let’s say your loan balance is $300,000 and you receive a $10,000 fee. You deposit $10,000 and pay $4,000 in invoices that month. You still have $6,000 left in your account. Your simple interest payment for that month will be based on the loan amount of $294,000 instead of $300,000.
In this way, the amount transferred through the AIO reduces (“offsets”) the interest you pay each time you deposit into your account, allowing you to pay off your principal much faster (12 years instead of 30).
The real cost of amortizing a mortgage
Most borrowers don’t realize how high the interest costs are on a 30-year mortgage. Frankly, lenders are acting like bandits because they not only receive upfront points and fees for making the loan, but they also collect a whopping 50 percent to 60 percent of the total interest owed by the borrower during the first 10 years of owning the home.
case study
Assume you purchase a home and take out a $300,000 30-year fixed-rate mortgage with an interest rate of 5.7%. According to Bankrate, your monthly payments will be $1,741.
Using the same example, if you receive a $10,000 fee check and pay $4,000 on your invoice, you will still have $6,000 left in your account. At this point, your AIO loan has a loan balance of $294,000. What’s interesting is that your payment for the month at 7.2 simple percent would be $1,764. This is only $23.00 more than the $1,741 payment after depreciation.
The appeal of AIO is that the monthly payment amount decreases each month as you reduce your balance. With a traditional amortizing mortgage, you’ll pay $1,741 over 30 years.
The most shocking statistics about paid-off mortgages
But what’s really shocking is the actual interest rate that lenders charge you. In this case, the total interest you would pay over the life of this loan would be $326,832. This is $26,832 more than the original loan amount of $300,000.
This difference is why you can pay off your balance in as little as 12 years with an AIO. When I was taking out an AIO mortgage, one AIO specialist explained to me:
“The average person with this loan product pays off their mortgage in about 12 years without changing any of their financial habits. The only difference is where they put their money each month. With an AIO mortgage, interest rates are less important than with most types of loans because of how quickly the loan is paid off. The way interest is calculated and paid can sometimes save you hundreds of thousands of dollars in interest on your loan.”
Please note that monthly payments are interest only. Principal payments occur as you use your account, and any excess amounts each month are applied toward reducing the principal of your loan.
Never refinance again
If you need money for an emergency, to replace your HVAC unit, or to fund your child’s college education, you can access your funds simply by writing a check. No waiting times, no refinances, no fees, no second mortgages.
When I received a large amount of insurance money after my husband’s death, I paid off the balance on the AIO. The great thing is, if you have the full amount of your 2022 line of credit in hand and want to access it, you can use your debit card to call if you need a wire transfer.
AIOs have much more stringent underwriting requirements
An AIO is a type of adjustable-rate mortgage (ARM) in which the interest rate is calculated daily. A common option is a 30-year loan with a fixed rate for the first five years and a variable rate thereafter. Some lenders may use AIOs to make loans of as much as $2 million to $3 million.
AIOs are underwritten like any other mortgage loan, including origination fees, underwriting fees, title services, and appraisals. The loan-to-value ratio cannot exceed 80% of the appraised value, and borrowers must have a minimum credit score of 700 to qualify.
AIOs are portfolio loans, that is, loans issued directly to the borrower rather than sold on the secondary market. In other words, the lender keeps this loan on its books.
Disadvantages of AIO home loan
There are two main drawbacks to AIO mortgages:
lack of discipline
With an AIO mortgage, accessing equity is as easy as writing a check, making overspending a serious temptation. AIO home loans are not for people who cannot resist temptation.
higher interest rate
Most lenders price all-in-one mortgages at higher interest rates than traditional fixed-rate loans. Your minimum monthly payments are interest only (calculated based on your average daily balance), so you don’t have to reduce your principal at any point during the 30-year term.
A full line of credit is available for the first 120 months. The line of credit then begins to amortize monthly over the remaining 20 years until the loan matures. Negative depreciation is not allowed for this product.
Resources for obtaining an AIO home loan
CMG Financial is now the leading provider of all-in-one mortgages (and I got my loan here). CMG is partnering with North Point Bank to provide the financing. Northpointe offers a complete set of banking services, including debit cards, bill payments, a mobile app, and an excellent customer service department.
Other active AIO mortgage finance companies include Merchants Bank of Indiana and RWM Home Loan.
Although available nationwide, as with any specialty mortgage product, it’s wise to work with a loan officer or mortgage broker experienced with your state’s program. A quick search for “all-in-one loan” or “transactional offset mortgage” will reveal more active originators.
Traditional amortizing mortgages lock up your cash and force you to choose between equity and liquidity. It also imposes a 30-year payment period. All-in-one gives you both capital and liquidity, and best of all, you can pay off your mortgage much faster than previously thought.
