There is a creatively sneaky and currently “under the radar” way of paying off your mortgage with greater speed than the traditional mortgage setup. This method is big in Australia and is just now starting to gain steam in the US. This method centers around using a traditional HELOC or home equity line of credit in a non traditional way. While this method works for some, as always, it is wise to check with your financial advisor and decide if it is right for you. There is no one size fits all for personal finance. It’s your future, not a pair of socks. If you are interested in learning how this non traditional HELOC usage works, read on.
In general, HELOCs work somewhat similarly to a credit card. You can borrow and pay back on the line of credit in an ongoing manner. The difference is, you borrow against the equity in your home, which you can then use however you want. The interest rate is typically substantially lower than that of an unsecured credit card. With a HELOC, the line of credit extended is secured with your house. You can typically set up access to your account with a debit card that you can make draws and purchases with for convenience sake.
IMPORTANT TO NOTE: This is NOT the same as a home equity loan. With a home equity loan, you’ll be handed a check or a lump sum. With a home equity line of credit, you can borrow money and pay it back as you need it multiple times.
So here’s how this specific strategy works: You take out a HELOC and then use it to pay off your primary mortgage in chunks. You then treat your HELOC account like your primary checking account and direct deposit your paychecks straight to this HELOC account, using this same account to pay your regular bills. You’ll pay off your mortgage faster making extra payments on your loan with any remaining unused money from your paycheck.
Some people will opt to obtain a credit card they use to float their expenses interest free for a pay cycle and then use the line of credit to pay that off rather than using their line directly for expenses. This too can reduce the principal on your loan faster, but takes dedication and self control to not use more credit than absolutely necessary.
One major benefit of using a HELOC is the low interest rates you’ll see vs. a typical credit card. Between the lower interest rate and quicker payoff schedule, it is possible to save a ton on your mortgage interest and avoid PMI on portions of the mortgage. But borrower beware: the interest rates on most HELOC set ups are adjustable. If rates skyrocket, so can your non-fixed HELOC rate. When you weigh this strategy against other repayment schedules, you will want to consider this factor against your risk aversion and cost vs. benefit.
The key is to religiously follow the system, deposit more than you spend, and put your whole paycheck into your HELOC- letting it automatically apply to your transferred mortgage.
Want to get started? Here are the steps to follow to implement this HELOC strategy:
- First, before diving headfirst into a HELOC, consider the key elements: What is your current mortgage? With how much you owe, how long would it take you to pay it off? You also need to calculate your HELOC limit and how much your monthly payments will be in comparison. Most importantly, ask yourself if you have the discipline to follow the system. Otherwise, you may end up with debt beyond your intentions, defeating the purpose of going through the hassle in the first place. Also, this probably isn’t the system for you if your income varies more than slightly and you are not always in the black. Predictability is your friend in this instance.
- Next, call your bank. Apply for a home equity line of credit. Make sure you don’t apply for the home equity loan. They are NOT the same thing. Ensure that it comes with a debit card. Unlike some other traditional options, HELOCs are flexible. You can easily access your credit and pay it back just like a credit card. You can use your HELOC for just about anything- including paying off your mortgage.
- Work the Plan. A typical borrowing period of a HELOC is 5-10 years. During this period, the monthly payments will be the interest for the loan only, which is a HELOC’s most attractive feature, keeping your responsibility lower. If you can’t pay off the entire mortgage in one shot, you will keep using it to pay off your mortgage in chunks as you go, rinsing and repeating the process. Remember, for this HELOC strategy to work, you will need a continuous cash flow. This means that you need to make sure your income is higher than your expenses and you keep paying off your mortgage with your HELOC, not funding other projects and expenses beyond your typical.
Will a HELOC strategy really allow me to pay off your home faster?
Yes, but only if you stick to it. It may sound a little complex, but broken down it’s not that bad. You are ultimately using the HELOC like your primary bank account and paying your paychecks into it, paying it down quicker with the excess.
Summing it up
Let’s recap. This strategy uses a Home Equity Line of Credit (HELOC) to pay off your mortgage (either all at once or in chunks depending on your limit and mortgage amount.) By using a HELOC like a checking account, direct depositing your paychecks every payday, you can use the excess money after paying regular bills and the HELOC payment to automatically apply to your mortgage balance that you transferred over. By doing this you pay off your mortgage faster with extra payments and potentially lower interest.
By using this strategy and sticking to it like a fly to a horse, you can potentially shave of years of payments and thousands in interest off your mortgage given the right circumstances. By being savvy and using self control, you can achieve financial success and pull ahead of the crowd. Choose a strategy and focus. Game on.