What is an Acceleration Clause?

Does your home loan agreement contain an acceleration clause? You may want to check or ask your lawyer to check for you. You should also have your lawyer clarify what an acceleration clause does. In short, though, an acceleration clause, when triggered, will cause your entire remaining balance on your mortgage to become due – all at once. Obviously, you want to avoid triggering an acceleration clause, since very few home owners are able to come up with the entire principal of their home loan at once. Indeed, if you could afford something like this, you wouldn’t have needed the loan in the first place. In order to avoid triggering an acceleration clause, you’ll first need to know what it is.  
Acceleration Clause Basics
When you bought your house, you likely needed a loan to afford it. This is usually referred to as “taking out a mortgage” even though the mortgage itself is only one of the documents involved. A mortgage gives your lender the right to foreclose on your home if you default. However, you also signed a promissory note, embodies all of the material terms of your loan agreement. This is where you’ll find the acceleration clause.
Exactly what the acceleration clause does, is rather self-explanatory. Instead of paying your lender back slowly over a period of many years, your payment schedule is accelerated – the whole balance is due immediately.
Why Accelerate Repayment?
Acceleration exists as a remedy for lenders who want to protect their investment. For example, if you breach your loan agreement by falling behind on your mortgage payments, you lender can use the acceleration clause to demand the entire balance now. This may seem counterintuitive – if you didn’t have the money to make your mortgage payments, where are you going to come up with the entire principal? However, a borrower is likely to take out an additional loan to pay what they owe the lender enforcing the acceleration clause. Or, they may ask to borrow the money from a friend or relative. In any event, the acceleration clause forces the borrow to take desperate steps to keep their home that they may not have pursued absent the acceleration demand. Although these methods provide only a temporary band-aid for the borrower, they allow the lender to be completely paid back so that they can move on from what they view as a risky borrower.
Acceleration clauses can also be used to prevent unauthorized transfers of the underlying property. If your loan agreement contains a due-on-sale clause, then you will have to pay your lender the entire balance immediately upon the transfer of the property to another party. The rationale for this approach is the fact that your lender entered into an agreement to loan you money so that you could purchase a distinct piece of property. If you sell the property, you are inviting a third party to the transaction without your lender’s consent. Lenders seek to deter this with the threat of a due-on-sale clause. Have your lawyer review the agreement to see if it prohibits transfer entirely, or if it is permitted with your landlord’s consent.
Avoiding Acceleration?
The good thing about acceleration clauses is that it’s pretty easy to avoid triggering them. You pretty much just need to avoid breaching your lease – don’t do anything that your lease says not to do. Moreover, most of the typical triggering actions are things that common sense would have you avoid anyway, such as missing mortgage payments, not paying your property taxes, or transferring the property without approval from your lender.
On the other hand, if you do trigger the acceleration clause, you’re still not necessarily on the hook for the principal amount. This is because the lender’s right of foreclosure under the mortgage becomes active when you breach the loan agreement. This means that the lender can simply take the property from you in lieu of cash. This is why the mortgage instrument is included as part of the loan agreement: it protects both parties by covering the lender’s investment without putting borrowers on the hook for outlandish amounts of money.