There are a variety of debates in the personal finance world about whether or not you should pay off your mortgage. With interest rates so low it often makes sense to take whatever money you have left over and invest it. While others, including myself, despite the idea of debt and would like to pay off our mortgage quicker. I know that the math favors investing, but I like the idea of paying off the mortgage early. In fact, I have already taken steps to do so. A few months ago I refinanced our mortgage to a 12 year loan at 2.875%. Additionally, I put our mortgage payment on a biweekly basis which will reduce our mortgage by another year or so. We should have it paid off in about 10 years instead of 12. All of those things are great. However, what if I wanted to pay off our mortgage faster without changing our payments/lifestyle? Sound impossible?
Well, I thought that same thing until I started investigating a bit further. What if I told you that you could pay off your loan using your current income, but changing the way you do your cash flow. According to some professionals you can pay it off in potentially 5-7 years.
How Do You Do It?
As they say the devil is in the details and this is where it can be a bit complicated. In order for this plan to work you basically have to replace your mortgage with a home equity line of credit. The HELOC replaces your mortgage essentially.
Now again you may be wondering how does that work. Well, it goes something like this. What happens is that there are HELOCs out there that can work as an All-in-one loan, which means that you can use the HELOC as a mortgage, checking, and savings account. You can pay your bills from the HELOC every month.
Now I know what some of you are thinking right now you are crazy. This is a scam. And I fully admit I have not applied for this and have not done it yet, but I am really intrigued by the prospect.
So how does your mortgage get paid off quicker you might ask. Well, here is how that part works. You need to do a few things. First, you need to need to have all of your paychecks deposited into your HELOC every month. For example, if you have a HELOC of $175,000 but make $5000 in take home pay then you immediately knock that mortgage down to $170,000.
You use the money that is in that HELOC to pay your regular expenses. So let’s say you have $5000 in your paycheck that reduces the HELOC to $170000, but you have $3000 in expenses. That will raise the HELOC at the end of the month up to $173000. Then you do the same thing the following month.
You pay the mortgage down faster for 2 reasons. First, your extra cash flow per month basically goes to reduce the principle of the HELOC. Additionally, HELOCs are calculated on a simple interest basis, not necessarily compound interest. So your interest is calculated every day, not necessarily at the end of the month/year like regular mortgages. Well, when you apply your paychecks to that HELOC each month it reduces the principle of that HELOC automatically and reduces the interest.
Depending on what calculator you use you can use your normal cash flow per month to drastically reduce the time and interest of your mortgage.
So do I have your attention yet? Well, there are some potential drawbacks of this type of plan to pay off your mortgage.
First, you have to not inflate your lifestyle with this loan. A HELOC basically works, in some respects as a credit card. The key is to NOT go above your monthly cash flow each month. So if you deposit your paychecks each month, reduce the balance, but then go out and spend more than what you earn then you are basically elongating your mortgage. You must have DISCIPLINE!!! The HELOC is not a piggy bank. You don’t go on vacation. You don’t buy a whole bunch of stuff. You need to have discipline for this to work.
Second, you MUST have positive cash flow each month. If you are just squeaking by each month or spend more than you earn than this won’t work. In fact, it will make it worse off for you because you will be tempted to spend that money that is part of the HELOC.
Third, this is NOT an instaneous thing. Just because you will reduce your time with your mortgage doesn’t mean it happens tomorrow. This will still take years. You will still have to make mortgage payments for a long-time (5-10 years or more depending on your situation and cash flow). So without discipline and a positive cash flow then this doesn’t work at all.
Fourth, many states don’t have this product. It isn’t available in our state of Rhode Island and in many states across the country. In my home state of Minnesota it is available. However, that doesn’t mean you need to do it. You need to sit down, educate yourself, and then proceed with what bests work for you.
Finally, it doesn’t necessarily take into account changes in your life. So what happens if you lose your job or your spouse loses their job or your cash flow changes (e.g. you have a kid or the like) then again this doesn’t work for you. You must maintain discipline and a positive cash flow for these kinds of mortgage accelerators to work.
I fully admit I am extremely interested in this way to pay off your mortgage quicker. However, there are pitfalls with this plan. First, it isn’t available to me in the state of Rhode Island. Second, I would have to do a lot more research before I would ever pull the trigger on such a plan. Third, I must continue with discipline and depending on the month and my desire to pay for repairs on our house that doesn’t necessarily occur every month. That said, I do believe I would be a good candidate for such a program. Finally, there are some other things that are required to obtain an All-in-One Loan or HELOC that would replace the mortgage. You need to have excellent credit. You need to have enough home equity for it to work (at least 80%). You need to have positive cash flow. You need to have discipline. You need to be able to budget and track your expenses. You might need other assets (e.g. retirement accounts and the like) for you to further qualify.
All of those things I actually have. However, I don’t have it available to me. Instead, I put this item out to you to make your own judgments.
Like anything you read here or other personal finance blogs. Do your own research first. Consult with others. Don’t just take my word for it. However, if you do it right it could be a way to rapidly decrease your mortgage. This type of program is actually quite popular in Australia and Great Britain, maybe it could work for you in the U.S.