What Are the Disadvantages of an All-In-One Mortgage Account?

An all-in-one mortgage ties your home loan to your savings.

An all-in-one mortgage ties your home loan to your savings.

Busy people have very little time to review monthly mortgage, home equity and bank statements. The all-in-one mortgage provides you with a simple solution: your mortgage, home loan and savings account are one and the same. However, despite simplifying your filing process, all-in-one mortgages have certain drawbacks that mean that these loans are not ideal for everyone.

All-in-One Loans

All-in-one loans are based around good, old-fashioned home mortgages. Many banks offer a choice of a fixed or variable interest rate loans for purchase or refinancing your home. When you make a loan payment, the lender actually deposits your money into a connected savings account. Both your deposit and the resultant interest are applied to the loan balance, so that you can more quickly reduce the balance than with a conventional payment. If you need to withdraw cash, you actually borrow it from a linked home equity loan. As the equity loan balance increases, your savings balance decreases. You can deposit and withdraw cash as often as you like until the loan term ends. When that time arrives, you have to pay off the balance you owe on both the mortgage and the equity loan.

Interest Margin

The savings accounts within all-in-one mortgages work like a basic savings account. Typically, these accounts pay much lower rates of return than less liquid products such as certificates of deposit. The equity loan portion of the account assumes the second lien position behind the actual mortgage. Generally, interest rates on second lien loans are much higher than on first mortgages. In a nutshell, you pay far more on the equity loan for accessing your money than you earn in the savings account when you deposit the money. The margin between the two interest rates can make these loans quite costly.

Discipline

On a conventional mortgage, you pay a monthly payment and are not allowed to take your money back any time you find yourself short of cash. With an all-in-one loan, you have easy access to your money. If you need new tires for your car, a new oven or cash to go on vacation, you can withdraw the money you just paid toward your mortgage. This kind of flexibility can create problems for people who are badly disciplined or fall into financial trouble y. Beware overuse of the equity loan: You may find yourself struggling to stay on top of the monthly payments once you get into the habit of tapping it.

Negative Equity

Some lenders don't allow you to access your equity loan unless you have built up at least 10 percent equity in your home; others impose no such restrictions. This means that most lenders allow you to access 100 percent of the equity in your home. As the interest accrues on the debt, your balance continues to grow -- you develop negative equity as the loan balance exceeds the property value. If you want to sell your home, you have to pay cash out of pocket to get out from under the all-in-one loan. Falling home prices during economic recessions can worsen this problem, as in financial crises with thousands of "underwater" homeowners who owe more than the value of their home..

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