In April 2022, I decided to tap into part of my home equity to fund business expenses and to further expand my real estate investments. As I researched options, I came across something called an “all-in-one mortgage” (AIO,) a type of home equity line of credit (HELOC).
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Imagine paying simple rather than amortized mortgage interest, having a combined mortgage and checking account where you can access your home equity merely by writing a check, and that could allow you to pay off your mortgage in 12 years rather than 30 years. Sounds too good to be true, but it’s not. It’s exactly what I have experienced with my AIO mortgage.
How AIO mortgages work
An AIO mortgage (sometimes called an “offset” mortgage) has been used in other countries for over 40 years but has only been available in the U.S. since 2007. These mortgages differ from the 30-year fixed-rate mortgage by combining banking and borrowing together into a single account. In other words, your mortgage is in a combined account that also includes checking, debit card and wire transfer services.
The interest rate on an AIO is based upon a spread of 3.5 to 3.7 percentage points over the current one-year Treasury Bill. This rate has been hovering around 3.7 percent. Adding the current spread of 3.7 percent, your interest rate would be in the low seven percent range. (Mine has been fixed at 7 percent since I opted to pay more points to keep the rate the same for 5 years.)
AIO mortgages: Principal, not interest, first
With an AIO mortgage, every time you make a deposit, it pays down the principal first before the simple daily interest on your loan is calculated. For example, assume your loan balance is $300,000 and you receive a $10,000 commission. You deposit the $10,000 and pay $4,000 in bills that month. You still have $6,000 in the account. Your simple interest payment for that month with be based on a loan amount of $294,000, not $300,000.
This is how you can pay the principal down so quickly (in as little as 12 years rather than 30 years) since the amount of money you channel through AIO reduces (“offsets”) the interest you pay every time you make a deposit into the account.
The real cost of amortized mortgages
Most borrowers don’t realize how expensive the interest costs are on 30-year mortgages. Quite frankly, the lenders make out like bandits since they not only get their up-front points and fees for originating the loan, but they also collect a whopping 50 percent to 60 percent of the total amount of interest due during the first 10 years the borrower owns the home.
Case study
Assume that you’re purchasing a home where you will be obtaining a $300,000, 30-year fixed-rate mortgage at an interest rate of 5.7 percent. According to Bankrate, your monthly payment would be $1,741 per month.
Using the same example where you receive a commission check for $10,000, where you pay $4,000 on bills, you would still have $6,000 in your account. At that point, with an AIO loan, your loan balance would be $294,000. What’s fascinating is that your payment that month at 7.2 simple percent would be $1,764. That’s just $23.00 more than the amortized payment amount of $1,741.
What makes the AIO so appealing is that every month you lower your balance, your monthly payment will decrease. With a traditional amortized mortgage, you’re paying $1,741 for the entire 30 years.
The most shocking statistic about your amortized mortgage
But here’s what is really shocking — it’s how much actual interest the lender charges you. In this case, the total interest you would pay over the life of this loan is $326,832; that’s $26,832 more than the original loan amount of $300,000.
This difference is the reason that with an AIO you can pay down the balance in as little as 12 years. As one AIO specialist explained to me when I was getting my AIO mortgage:
“The average person using this loan product will completely pay off their mortgage in approximately 12 years without changing any of their financial habits. The only change is where they park their money each month. In an AIO mortgage, the rate matters less than most types of financing, because of how quickly the loan is paid off. Their interest savings can sometimes be hundreds of thousands of dollars on their loan, due to how the interest is calculated and the payments are made.”
Please note that you still make interest-only payments each month. The principal paydown happens as you use your account, and the excess money each month is applied to reducing the principal on the loan.
Never refinance again
If you need money for an emergency, to replace the HVAC unit, or help fund your children’s college education, you can access it simply by writing a check — no waiting, no refinance, no fees and no second mortgage required.
When I received a large insurance settlement after my husband’s death, I paid off the balance on my AIO. What’s great is that I now have the full credit line amount that I started with in 2022, and if I want to access it, I can use my debit card to call if I need to wire money.
AIOs have much stricter underwriting requirements
AIOs are a type of adjustable-rate mortgage (ARM) where the interest rate is calculated daily. A popular option is a 30-year loan, with the first five years at a fixed rate, and then a variable rate after that. Some lenders may loan as much as $2 million to $3 million using an AIO.
AIOs are underwritten like any other mortgage, including an origination fee, underwriting fee, title work and an appraisal. The loan-to-value ratio cannot exceed 80 percent of the appraised value, and borrowers need a minimum credit score of 700 to qualify.
AIOs are portfolio loans, i.e., a loan that is issued directly to the borrower rather than being sold on the secondary market. In other words, the lender keeps this loan on their own books.
Disadvantages of AIO mortgages
The two primary disadvantages of an AIO mortgage are:
Lack of discipline
Overspending is a serious temptation because the AIO mortgage makes accessing your equity as easy as writing a check. If you can’t resist the temptation, an AIO mortgage is not for you.
Higher interest rates
Most lenders price all-in-one mortgages at a higher interest rate than traditional fixed-rate loans. The minimum monthly payment is interest-only (calculated on the average daily balance), so there is no required principal reduction at any point during the 30-year term.
The full credit line remains available for the first 120 months; after that, the credit limit begins to amortize monthly over the remaining 20 years until the loan matures. The product does not allow negative amortization.
Resources for obtaining an AIO mortgage
CMG Financial is currently the leading provider of All-in-One mortgages today (and where I obtained my loan). CMG has partnered with Northpointe Bank to service the loan. Northpointe provides a complete set of banking services, including debit cards, bill pay, a mobile app and an excellent customer service department.
Other active AIO mortgage lenders include Merchants Bank of Indiana and RWM Home Loans.
Availability is nationwide, but as with any specialized mortgage product, it’s smart to work with a loan officer or mortgage broker who is experienced with the program in your state. A quick search for “all-in-one loan” or “transactional offset mortgage” will also surface additional active originators.
Traditional amortized mortgages lock your cash away and force you to choose between equity and liquidity. They also saddle you with 30 years of payments. With an all-in-one you get both equity and liquidity, and best of all, you can pay off your mortgage much faster than you ever thought possible.
Bernice Ross is president and CEO of BrokerageUP and RealEstateCoach.com, the founder of Profit.RealEstate and a national speaker, author and trainer with over 1,500 published articles.
