How to Use a HELOC to Pay for Your House
Using a little understood technique of moving your money to its most advantageous position, you could cut 10 or even 20 years off your 30-year fixed home mortgage.
The concept is simple: move money worth x dollars over to a place where it’s worth y dollars, for example trading U.S. dollars for Euros–or whatever the money markets of the day show could be profitable. The difference doesn’t have to be very much. A gain of ½ a cent could yield a profit of $5000 overnight if $1,000,000 were placed in such a position. Stock markets work on a similar principle: invest a dollar today for something anticipated to be worth more than a dollar in the future.
Bringing it closer home, you can achieve results similar to these investment gains by moving your home’s equity to something that is costing you more than your house. The main difference is instead of spending a dollar to earn a profit of 15¢, you’ll spend 15¢ to avoid being charged the whole dollar.*
“What is costing me more than my house?” The simple answer is “the mortgage interest you pay on your house.”** Therefore, anything you can do to cut the mortgage interest charged you is a quick way to save money.
Now back to the notion of moving money from one place to another to realize a gain. Instead of x and y—which makes the eyes of everyone who did poorly in algebra glaze over, including my own, let’s call them cookies and ice cream. Your mortgage debt will be ice cream. We’ll get to the cookies in a minute. Right now, since the mortgage interest on your home could be your largest expense, we’ll call that a stomach ache. Stepping back to look at something not quite that costly which we might parlay into a savings at ice cream brings us back to the home itself, cookies.You convert some of your cookies, specifically home equity, to ice cream, your home loan. The amount you transfer will reduce your stomach ache (mortgage interest) exponentially. In other words, the more cookies (equity) you use to reduce the ice cream (principal of the mortgage), the more stomach ache (proportion of interest) you will avoid.
To illustrate, to borrow $200,000 for 30 years at 6% will ultimately cost you $231,676.38 in interest payments alone. That's a mighty big stomach ache! Transferring $5000 from your accumulated equity six months into your loan (assuming your home has increased in value), erases $22,651.35 from that projected interest. That’s exponential savings. Five thousand dollars of cookies cut nearly $23,000 from your stomach ache, a 453% return. Though it will take 28.1 years to fully appreciate your accomplishment, comparing it to any other kind of investment, this is a 16.1211% annualized return.
In order to draw $5000 of cookies out of your home’s equity, you’ll need a to get from a bank a home equity line of credit (HELOC)–far preferable to a home equity loan (HEL) for generating cash savings. Of course, the $5000 must be repaid. If you were unaware of ways to reduce interest on a HELOC, and paid it back over a year’s time at 8.25%, it would cost you $430. So in this worst of all cases scenario, the $22,651 you cut off your stomach ache cost you $430. That’s more than a 5000% increase in value, a 184% annualized return.
Some people object to debt and will not use this technique because it calls for a HELOC. In the example, the $5000 draw on home equity reduced the $200,000 of mortgage principal owed on the primary residence. By changing $5000 from mortgage debt into HELOC debt, we now have $195,000 in ice cream and $5000 in cookies. The same amount of sweets as before, just in a different form. In other words, we restructured a miniscule part of the home loan. We didn’t borrow more money. But we did cut the stomach ache by nearly $23,000.
Employing this technique not just once, but once a year, cuts $119,480 off projected mortgage interest paybacks—that’s a lot of stomach ache avoided. To put it in perspective, your home would be paid for in half the time, and you could pay someone’s way through college, or feed and clothe 30 starving children for 10 years.
For a complete guide to using your home to pay for your home, get the Let Your Mortgage Make You Rich kit, consisting of a 96-page workbook and several companion ebooks on fixing your credit, real estate, and becoming wealthy.
*these numbers are used to create a metaphor; they are not intended to illustrate actual expenditures or savings
9 Comments on How to Use a HELOC to Pay for Your House »
November 28, 2007
Money Merge Account Not a Scam | The Great Mortgage Revolt @ 9:03 am (Pingback)
[…] the principal on a mortgage, a technique that migrated to the U.S. from Australia in the 80s. Several books have been written on the […]
December 29, 2007
Pay Off Your Home Years Sooner | The Great Mortgage Revolt @ 11:06 am (Pingback)
[…] what if you don't have an extra $500 a month? That's where using the equity in your home (the paid-for portion, or increased value if properties have gone up in your area) comes in […]
January 17, 2008
Best Way to Pay off a Mortgage | The Great Mortgage Revolt @ 11:15 am (Pingback)
[…] The other thing you can do right now is read a little article about using your house to pay for your house. […]
January 19, 2008
Money Merge Account: Scam-a-licious | The Great Mortgage Revolt @ 10:41 am (Pingback)
[…] one of the many alternative programs available for under $100. Read more about the basic premise of using a home equity line of credit (HELOC) to pay off your home years […]
March 12, 2008
Have We Hit Mortgage Bottom Yet? | The Great Mortgage Revolt @ 5:58 pm (Pingback)
[…] advice? Pay off your home as soon as you can. Use your house to pay for your house, […]
July 6, 2008
Heloc @ 2:57 am:
What about the HELOC payment? You borrowed $5000 at the beginning of each year, if you pay it off over the course of the year, you have to pay an additional $435/month, or the HELOC balance would be $5430 at the end of the year. You do save $119,480 off of the interest on the mortgage, but you're doing so by paying extra principal. If you just paid the $435 HELOC payment as extra principal each month, you would save $121,587 in interest over the life of the mortgage. Why bother borrowing it and paying it back?
The Great Mortgage Revolt @ 7:26 am:
Hello Heloc - thanks for opening a discussion. I cannot comment on the numbers you proposed, because they are incomplete for making calculations. Missing info: term of loan, interest rate, interest rate on HELOC, family's discretionary income (or even net income).
However, there are some general principles on which I can comment.
1) The HELOC should be repaid painlessly by holding all the income until it's needed for bills. Therefore, interest accruing on the HELOC should amount to about 1/2 the going rate.
2) If it takes a family 12 months to repay a $5000 HELOC, they should be using a smaller amount. You are assuming that after mortgage, utilities, groceries, gas, tuition–all regular expenses including property takes, auto insurance, etc, the family HAS only $5000 that could be used part-time or full-time to replenish the HELOC. If money is that tight with them, they should be playing the game with a smaller amount.
3) If they use the technique in the next to the last chapter of the manual, they never write a check or have an automatic withdrawal of a monthly HELOC payment.
4) Taking money from a HELOC to apply to your mortgage principal is not "borrowing money." It is "moving money." Specifically, it is exchanging an expensive type of debt (mortgage) for an inexpensive type (HELOC).
5) The financial principle involved is the "velocity of money" It will always be more advantageous to apply a larger lump sum to a loan at the beginning of any period than to divide the lump sum and apply it in 12 (or even two) smaller amounts. It would be worthwhile to be able to check your numbers, because they seem to work counter to "velocity."
You are missing critical information on how the system in the article above works. If you are sincere, buy the book — or someone else's book.
Does this make sense?
September 22, 2008
Rich Wright @ 12:39 pm:
If one has adequate equity for a HELOC to pay off the entire balance of the conventional mortgage, would this not be the ideal thing to do? EX: $100,000.00 HELOC with an $80,000.00 balance on a mortgage with rates of 5% and 5.75% respectivly. The HELOC intrest is also deductable is it not? (both on same, primary property)
October 3, 2008
Doug @ 5:58 pm:
@Heloc and Rich Wright, think about what your mtg statements could look like after the first year (I'm ball-parking it here so, really, look at your amortization to see what I'm talking about in detail). In my case, my mtg payments in the first year lower my PRINCIPAL around about $1000. Now, if I were to have paid that $1000 up front, that would have knocked a year off of my schedule just in real dollars. So paying that $1000 up front already puts me about one year ahead of schedule - of course, I realize that another $1000 payment will not knock the same amount of time off the schedule since the principal payments the next year will equal more than around about $1000, which is true the next year and the next. HOWEVER, that extra $1000 DOES still knocks SOME time off - more than just a month but less than a full year.
So, you ask, how does the HELOC come into play? In an EFFECTIVE way? Well, you take a comfortable amount from your HELOC to pay down a chunk of your mtg. Then, when your paycheck comes in, you could put all or some of it into your HELOC to pay it down too, reducing the interest (and amount owed) by the amount of your paycheck.
Now I'm thinking you're asking, "what about the bills that are due right after I get my paycheck?" Well, pull some money out of your HELOC to pay those bills. Then when your next paycheck comes, again, put all of it or some of it into your HELOC again. That may pay it down completely, but you may still have some bills coming up so, draw from the HELOC some more to pay those bills too.
Now at the end of the month, hopefully your HELOC is close to being paid off with a balance close to $0 outstanding. At this point you can start all over again by sending your regular mtg payment plus an extra $1000 to apply to the principal again. All of which will come from your HELOC because, as I said at the beginning of this paragraph, your HELOC is $0 which implies that your checking/savings account balance is near $0 too.
But that is OK because you will be paid in a couple of weeks and that paycheck will all go into your HELOC balance again, then bills will need to be paid increasing the HELOC a little, then another paycheck and some more bills.
At this point, your next mtg payment will be due. If your HELOC is still in the red maybe you will only feel comfortable paying just the minimum mtg payment so that you can get your HELOC balance back down to $0 this month.
Or, maybe your are comfortable sending a bigger chunk from your HELOC, say $2000 or $3000, to pay down your mtg and then spend a couple of months only sending the minimum payment for your mtg while your paychecks pay down your HELOC to $0.
Then start all over again.
This begs the question of what about an emergency or a desired vacation that might equal a few thousand dollars, or even a layoff? Well, that gets to the question of how much your HELOC should be and how deep you dip into it each month. Someone brought up the question of taking $5000 from the HELOC to send to the mtg company. If one does so, one should also have a buffer ABOVE that amount REMAINING in the HELOC to draw upon.
This gets to YOUR specific situation. If you can only get a HELOC that is $5000 then by no means should you send all of it and all of your savings and checking account to your mortgage company. If you did so, and if you had an emergency you would then, theoretically, have to borrow money from other sources to handle that emergency. The idea is not to get in over your head - only work with small amounts for starters and back off if you see the HELOC balance owed getting too high and/or uncomfortable for you. If you first started by sending $1000 and realized you are going deeper into debt as the months go buy, drop down to $500 or $200 principal payments instead. Play with it until you are comfortable.
By the same token, if your bank (or better, credit union) gives you a whopping $30,000 HELOC ask yourself if you really should send in even half of that because how long would it take YOU to pay off that $15,000 balance to $0? If your take-home pay is $6000 every 2 weeks, maybe not long. If your take-home pay is $1200, then you should consider NOT using most of your HELOC but only send in some 1, 2, or $5000 at a time. Then if you have an emergency you still have well over $20,000 in your HELOC if you truly need it - and of course lets pray you wouldn't need it.
So anyway, that's my 2-cents worth.