Ask Eli: Anonymous lender review of the “All-in-One” mortgage

This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Eli Residential channel. Enjoy!

Question: On social media, I have seen a new loan program advertised called the All in One mortgage. Whom might this program benefit and are there any pitfalls to look out for?

TL;DR Video Summary (3:13)

Answer: With mortgage rates so high, we’re seeing new products or new angles on old products (like the 2-1 Buydown) and lots of mixed information about why rates are high or where rates are likely heading in 2023 and beyond. So in keeping up with my promise to provide relevant, transparent information on the mortgage market, let’s talk about another buzzy product being discussed lately, the All-in-One Mortgage.

It’s a fairly simple product, but cutting through the marketing of it to know if it’s the right product for you isn’t easy.

The rest of this article is a guest column generously written anonymously by a lender at a local bank that offers this product, but wishes to remain anonymous so they could provide an honest review. So enjoy a brutally honest review of a mortgage product that isn’t as great as the marketing makes it seem…

The creators of the AiO claim in their marketing that this loan will pay off a homeowner’s mortgage faster than a traditional mortgage, but we have found this not to be the case and that the AiO may be more expensive than a traditional mortgage, on an apples-to-apples basis.

The goal of this article is to provide a quick overview of this product, as well as discuss which situations the AiO may or may not be a good financial instrument for the purchase or refinance of a home.

Mortgage, Home Equity Line, and Checking Account “All in One”

The All in One (AiO) mortgage combines a mortgage, a home equity line of credit and a checking account, all in one financial instrument. The AiO allows you to purchase a home just like any other mortgage, where you would apply for a pre-approval, shop for a home, and once a home is under contract, the AiO would fund the majority of the home’s purchase price.

In addition, you can deposit your pay into this account, and pay all your bills from this account, just like any other checking or savings account. The account has an ATM card and allows automatic bill pay. Finally, the AiO acts like a Home Equity Line of Credit (HELOC), allowing you to access your home’s equity should you have such life events as paying for a child’s wedding or building an addition to your home.

Whether this product is a good fit for you depends on your goals and priorities, so the following summarizes how the AiO fits with certain personal and financial goals.

AiO Recalculates Interest Daily, Not Monthly

A traditional mortgage charges interest on the outstanding balance as of the date of the last mortgage payment, and you pay interest on this balance for each day of the month until the next mortgage payment. In contrast, the AiO mortgage calculates interest daily, so if you deposit your paycheck in the account, this immediately reduces the balance on which interest is calculated.

Said differently, if you make an additional payment to principal mid-month, the AiO would calculate interest on the lower balance for the remainder of the month, whereas a traditional mortgage would not. The creators of the AiO mortgage share that this feature saves interest, which it does.

However, the AiO mortgage has a higher starting interest rate than a traditional 30-year fixed mortgage and the AiO does not have a permanently fixed rate of interest, so the interest rate on this product may be higher or lower in the future, as it is market-driven.

Hence, any interest savings due to the AiO paying interest daily can be lost due to the higher initial interest rate and/or increases in the program’s interest rate down the road. This does not mean that the AiO would not save on interest; however, there are many instances when the amount of interest you pay may be higher despite the advantages of daily interest recalculations, so be sure to discuss interest rate risk with your financial advisor.

Early Mortgage Pay-Off, True or False?

The creators of the AiO mortgage claim that the AiO will pay off your mortgage far faster than a traditional mortgage. To evaluate this claim, we’ve employed the assistance of a technical financial expert, who has both 20 years of experience in the mortgage industry and, before joining the mortgage industry, a finance role for a Fortune 300 company. As this individual’s company also offers the AiO product, the individual wished to remain unnamed.

The findings were that, on an apples-to-apples basis, the AiO mortgage did not result in the mortgage being paid off materially faster than a traditional mortgage. We used the simulator on an AiO mortgage website, and summarized the results below.

For our analysis, we assumed a purchase of a $1.0M home, a 25% down payment, making the loan principal $750,000. We assumed a 6.5% interest rate on the 30-year fixed loan, the homeowner’s household has $15,000/month after tax income and that household had $4,200 remaining of their take home pay after payment of the mortgage and all other monthly expenses.

The AiO website automatically assumes the following:

• All of the $4,200 remaining after paying expenses is used to reduce the loan’s principal.
• The AiO website compares the above to a 30-year fixed mortgage with assumptions above, but does not assume any additional payments are made to principal.
• The AiO website concludes that your mortgage would be paid down in 132 months (11.0 years), but the rapid payoff of the AiO mortgage is primarily a result of the assumption that extra payments are made in the AiO scenario and not the traditional.

If the same extra principal payment of $4,200 per month was applied to a traditional mortgage, the 30-year fixed mortgage would be paid off in under ten years and have a lower amount of interest paid, as the AiO would have a longer pay down period and higher interest rate.

Alternatively, if we assume that neither the AiO or the 30-year fixed mortgage pay the extra $4,200 toward principal each month, the AiO would be paid down seven months faster than the 30 year fixed (353 months vs. 360 months); however, due to the higher interest rate for the AiO, the 30 year fixed is forecasted to pay — by the AiO’s own calculator — over $490,000 less in interest than the AiO mortgage.

Ability to Borrow not Unique to AiOs

If one has an AiO mortgage, the amount of principal paid down is, at any time in the future, available to be taken back out in cash. For example, ten years after you purchase your home, if you have a medical emergency, you can use the equity in your home to obtain cash almost as fast as one could take cash from a savings account.

The AiO is not the only mortgage product to offer this flexibility. Traditional mortgages (e.g. 30-year fixed loan) offer HELOCS that allow easy access to cash tied to your equity, once the line of credit is approved.

In both cases, you will be charged a market interest rate on funds borrowed against your home’s equity.

We do want to share a word of caution that the largest risk to any form of a HELOC is that one may spend money on goods and services that would not have been purchased if funds from the HELOC were not easily available.

A Worthwhile Option for Investment Properties

The AiO mortgage is the only product I know that will allow one to have a HELOC secured against one’s investment/rental property, as most HELOCs are for primary residences or (sometimes) second homes. In addition, the AiO allows one to borrow up to 70% of the value of the home, with a limit of $1.0M. Any current mortgages must be closed with the balance rolled into the AiO, and cash back is limited to $250,000.

While an investment property HELOC is not an advertised use for this product, in our opinion, this is one of the best uses of the AiO mortgage.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460