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