How To Pay Off Your Mortgage with the Banks Money
83My Home My Castle - My Mortgage
Okay, so we know that our home is our castle, but it is also one of the most expensive item the average American purchases. While we have pride-of-ownership in our home and consider it our greatest asset we should also consider how much it cost us. What are the affects of our mortgage on our overall wealth?
A person who purchases a home and takes a $150,000.00 mortgage at 6% on a 30 year term will end up paying $323,758.80. Think about that for a moment. They will pay the purchase price plus the purchase price again plus another $24,000. Consider the difference in lifestyle between this person and one who owns their home debt free.
Most people when they purchase a home will haggle over $5,000 or whether the carpet will be replaced. This is a trivial amount compare to what you will pay in interest on your mortgage over the next 30 years.
Methods of Payoff
While there are many programs out there that will help you payoff your mortgage so that you can be debt free, most of them center around paying extra. In other words, you end up making more principle payments then what is called for in the mortgage repayment structure resulting in your balance coming down and you saving money in interest over the years.
While it makes sense to do this, when you stop and think about it, the money that is reducing the principle is money coming out of your monthly budget. In other words you have less money for other expenses or things you enjoy doing. This is the reason why most people don't pay extra on their mortgages.
Some of the methods for these accelerated mortgage payoffs include but are not limited to:
- Rounding your mortgage payment up to the nearest $100
- Bi monthly payment (making two 1/2 payments a month resulting in 13 full payments a year)
What I want to talk to you about is how to pay off your mortgage using the banks money. In other words reduce your mortgage balance without taking extra money out of your monthly income.
Before I dive into this let me tell you that there are companies out there that will do this for you. I have even provided a link to one of the many. I am not endorsing the company, but just want to let you know should you desire to use one. There is typically a pretty heavy fee associated with these companies so my thought is, why not put their fee toward my mortgage payoff?
One of Many Such Companies
- United First Financial Money Merge Account Program
United First Financial exclusively offers the Money Merge Account System in the United States and Canada. Ufirst developed the system to help eliminate debt, cancel interest and build wealth
Basic Concept
On the above loan example ($150,000/360 mos/6%) your monthly payment will be $899.33 (this represents principal and interest only - not taxes and insurance). On your very first payment (assuming it was paid on time) this payment would be broken down as $149.33 being applied toward the principal and $750.00 being applied toward interest (bank profit).
We understand that wit each payment this breakdown is going to change because interest is calculated on the outstanding balance and when the second payment comes due the balance is $149.33 less than it was on the first payment.
Stop and think for a moment. Even though the monthly payment is $899.33 if I would have paid $1,048.66 instead of the 899.33 which was due ($149.33 extra = one month's principle reduction) I would have reduced by 360 (30 years) payments by two payments instead of one. The reason for this is because I reduced the principle amount twice instead of once.
In a very simplistic term that $149.33 extra payment saved me $750.00 interest which I didn't have to pay. In reality it will save me far more than $750 because my extra reduced balance will be lower throughout my 30 year term thus saving me money every month.
Just think what would happen if I could put an extra payment of $1,000, $2,000 or $5,000 against my mortgage. The interest saving become staggering.
The problem is that most don't have the extra money laying around and if they did they don't want to apply it against their mortgage. So how can I leverage the banks money to pay off my loan?
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Your Basic Checking Account
I want you to think about your household checking account and how it works. People are paid differently (weekly, bi-weekly, monthly, commissions), but it really doesn't matter. We all handle our checking accounts the same way.
When we are paid we deposit the check into our checking account and then we pay our bills out of the account. I will give an example using a couple of bills, but you will get the picture. As you go through this try and apply the example to your specific monthly income and expenses:
Paycheck: $1,500.00 on the first of the month
Car payment: ($ 800.00) due on the 5th of the month
Checkbook balance: $ 700.00
Electric Bill ($ 100.00) due on the 10th of the month
Checkbook balance $ 600.00
Deposit Paycheck $1,500.00 on the 15th of the month
Checkbook balance $2,100.00
House payment ($ 899.33) Due on the 1st late on the 15th (this will be important)
Get the picture? Now, let me ask you a question. How much money do you make on the balance sitting in your checking account?
If you have an interest bearing checking account and carry a $25,000 or higher balance you may make .00000035% (just kidding, but it is really really low)
Remember the above breakdown of our mortgage payment? What if I could take my idle money that is sitting in my checking account and have it sit on my mortgage loan?
Remember how much money we could save it I could only apply an extra $149.33?
Let's see how this works
Revolving Line of Credit
The bank has a product called a Revolving Line of Credit. A revolving line of credit works like a checkbook in reverse. You get checks and instead of having a balance that you write checks against you have a line of credit that you write checks against.
When you write a check money is added to what you owe the bank and your are charged interest for using this money. But don't forget the amount of interest you are already paying to the bank for the usage of their money on your home loan.
On a revolving line of credit the interest is calculated on your average daily balance. Therefore, if you have a $500 balance the first five days of the month interest is only being calculated on that $500. If you pay it off then interest stops calculating. If you write a check for $1,000 then interest is calculated on the $1,000.00.
At the end of the month you may have had all different types of balances because there is typically no limit to how many transactions (payments/advances) you make on this line of credit.
Now let me show you how to put this together and put money into your pocket.
Getting Your Mortgage Paid Off
To pay your mortgage off with the banks money requires using your revolving line of credit like your checking account. However, the interest on your revolving line of credit will typically be higher than the interest on your mortgage so you have to pay attention to what you are doing.
Instead of taking your paycheck and depositing your money into your checking account and letting the money sit in the bank (allowing the bank to use it for free) why not make a principle payment on your mortgage (saving thousands of dollars) using your revolving line of credit?
Let's say you get paid $1,500 on the first and the 15th. Your mortgage payment is due on the first, but why pay it on the first. Your payment due on the first of September is paying for the interest in August. Therefore, it doesn't matter if you pay it on the 1st, 5th, 10th or 13th the interest that is deducted from it will be the same on a typical 30 year loan.
Let's say this person making $3,000.00 a month wrote a check from their line of credit for $1,000.00 (bank money) as a principle payment on their mortgage (in my example above that would cover about 6 months principle reduction saving over $4,000 interest immediately and thousands more over the life of the loan).
When they write this $1,000.00 the bank will charge them interest on it, but remember they just got paid $1,500.00. So instead of letting all their money sit in their checking account they take $1,000.00 and pay off the line of credit. Now they are saving money on their mortgage and it is costing them nothing. On the 5th their car payment is due. They may not have the money in their checking account so they pay their car payment with a check from their line of credit.
Now their line of credit is at $800 for which they will pay interest, but their $1,000 is still working on their mortgage. They continue doing the same thing using the line of credit when their bills come due, but on the 15th they get their second check which they will apply to their line of credit knocking down balance thus reducing their interest charges again.
With the ease of online banking it is easy to transfer money between checking account and line of credit. Because our mortgage is due on the first and late on the 15th and because it doesn't cost me any more to pay it on the first or pay it on the 15th I will wait to make my mortgage payment as late as possible without incurring a late fee. This allows me to keep my line of credit artificially lower for half a month.
What happens? I am using the banks money via my line of credit to reduce my interest charges on my mortgages resulting in thousands of dollars being saved.
There is a balance here that you want to achieve:
You want as much money applied to your mortgage as possible while also keeping the balance on your line of credit as low as possible.
Does this really work?
Absolutely! I am doing this on my mortgage. In my first 12 months of following this strategy I was able to reduce my balance the equivalent of 17 months while paying less than $200 interest on my revolving line of credit.
The biggest thing that is need is a "pay attention" attitude. Watch your balances on your line of credit, checkbook, and prepayment amounts. You can get excited and transfer too much and you end up paying a lot of non-deductible higher rate interest on your line of credit.
The key is to keep the balance of your line of credit below a predefined percentage that you determine. If you keep your line of credit at 50% of your net income then there will be periods of time during the month that you can bring your line of credit to a zero balance making your average daily balance (that your interest is calculated on) a very low amount.
You also don't want your line of credit balance to be too low because they you are losing money that could be sitting on your mortgage. You will get the hang of it as you work it and see your mortgage getting paid off. Typically you will be able to make an additional principle payment every 3-5 months.
Additional Information
This section is being added several months after this Hub was originally created. The purpose of this paragraph is to bring some clarification to those who read this and are interested in utilizing this program.
Most people that have read and commented on this Hub struggle in understanding this concept because their thinking is towards the principle balance of their loan. If you borrowed $200,000.00 to purchase your home, you HAVE to pay that $200K back. You borrowed this amount. The principle that you borrow is not the problem, it is the interest that costs you so much money!
If you transfer $5,000 from your home loan to your line of credit, you still owe the $5K, what this program does is uses a float to not have to pay interest on that $5K. That is where you save the money. Two things occur when you float the money. If you do it right you will pay little to know interest on the $5,000, plus there will be additional principle being paid on your mortgage with each payment thus giving you quicker amortization.
By keeping the right amount (based on your income) in the float you are constantly moving money from your mortgage to your line of credit so that you can float it and pay no interest on it. As you try to understand this don't focus your thinking on the mortgage balance, but on the interest that is being paid on the mortgage balance. If you get the interest in control the balance will automatically reduce faster.
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@check2check: The guy that was trying to sell you program probably had a computer program that managed the transfers between the loc and your account. You don't do this every month, you do as the balance on the loc permits, which is what this persons program does. I do it without the program.
Hi, rising glory, thanks for the info. This concept was brought to my awareness by a gentleman that wanted $3,500 to set me up on a similar plan. I was skeptic and not at all interested at what seemed to be a costly piece of advise. I am not sure I completely get the whole picture yet. First off, In your example, this person did this every month would they have a balance of $12,000 owed to the loc? If this were so then I could see the $150000 mortgage dwindling in 5 to 7 yrs. But now one would accumulate a balance of approximately $84,000 on the loc plus interest.I understand how that would save you years of interest, yet now I would be paying interest on the loc until it's paid off? Another question, say I had $20000 capital would it be better to be my own line of credit? But this would dwindle my emergency fund in less then 2 yrs. Maybe I'm more lost then I had thought , Ahh I will figure it out, guess I will just read more info or maybe buy a book. Which reading material would you recommend that best describes your example situation, and where A person in this situation stands to be in a short future? Thanks again hope I made sense
@Loan Ranger: Actually the program that I talk about here was based off what is more common in places like the UK and I think Australia also. Great points that you make, thanks for contributing!!!!
In the UK I have an Offset Mortgage Current Account. Instead of earning interest on my current (checking) account, I don't pay mortgage interest on any money I have in my current account. So the more money I have in my current account, the more interest I save, which comes off the capital balance each month, saving even more interest over the term of the mortgage.
To maximise this, I use a credit card to pay for everything I can throughout the month, and then clear the credit card at the end of each month so I don't pay interest on the card. This maximises the amount of time all my money stays in my account each month, thus maximising the interest saved.
On top of that, I have an Amex credit card which pays me a cash back of 5% on everything I spend. How fab is that? I buy as much as I can through the month on the cash back card, earning 5% back, and I am also saving interest on my mortgage at the same time. Just by doing that, I have saved nearly £8,000 in interest in the last 4 years.
This stuff works - you just need to apply yourself and lose the 'I can't be bothered' attitude that some people adopt when it comes to finances.
I understand this process. People are not realizing that the savings are in the interest being paid, not the priciple. You get charged on the principle you have left so why not pay it early? I'm so excited about this idea and I will discuss it with my hubby. Thank you for posting this and I will let you know how it works!
@Sabi - yes either way the $5K in your example has to be paid back. The difficulty people have with this concept comes from tradition thinking. Bottom line, if you borrowed $200K you have to pay back $200K. There is not a way that I know of to "not pay" back principle. However, the cost to your wealth is not the principle you pay, but the interest you pay. This whole structure is reducing interest cost through the utilization of floating money interest free. If I am able to save $50K in interest over the course of my loan that $50K becomes principle reduction resulting in a quicker payoff of my mortgage.
I like the concept. However, what I can't seem to figure out is how much extra cash goes towards paying the LOC on a yearly basis. I am a cash flow guy, so, let's say that I use the LOC to pay $5000 per year of additional principal payment however I sill have to end up repaying the LOC $5000 or part there of. I am right in assuming that whoever is doing this has additional $5000 at their disposable to pay their LOC in addition to making their regular payment. Am I right in understanding that this approach pays the mortgage and reduces the principal as quickly as possible and still have to come up with that extra $5000 per year to make that additional LOC payment.
I would like to know when you use your line of credit and you and your spouses names are on it. Why then is the bank denying me access to were the funds transferred to and for what purpose. They transferred to accounts in my now ex wife's name and they said the courts would have to subpoena,for they are not turning them over to me. Also there are other properties she co-owned as joint tenant with her mother that was not divulged in our Divorce. I have all the evidence to show and have been to the Federal authorities but were told that they were not much interested and if they investigated they would not tell me. Also since I have also uncovered Freddy Mac, money coming out of an Investment fund in my ex's name paying down the mortgages on both of our homes. And the money has my name attached without my knowledge till the Divorce began. And the mortgage loan originator omitted information on our refinances that the mortgages were payed down during different refinances on both properties.This was her mother and then her mother got my ex a job at the same bank. The bank has ignored my request for pay-off letters and full documentation of loans.The statements on the mortgage loan account are not showing the extra money being applied. How can I find out? Over 20,000 was applied to one home over 3 different loans. And the other 28,000 was applied over several loans. Now mind you I made early withdrawal from my retirement account to make Mortgages for my wife at the time lied to me saying we could not make our bills. Also large sums of money were coming out of our equity line of credit.85,000 then 40,000 and another 45,000 and another spread over three months going into a custom management account in her and her mothers name. All records were on my subpoena that was denied by the bank.My ex got the homes in the divorce per the mediation agreement and she assumed all credit card debt of 85,000. They are now arguing the credit debt and the courts are allowing them ignoring the mediation contract that are binding by the courts. Where do I get help with insufficient funds to turn them in for prosecution and to whom? the FBI nothing, Office of the Inspector General told me to shut my mouth and go on with my life unless I wanted to be put in front of a twelve panel jury. After he told me about a 60,000 HUD loan in my name I know nothing about and who took advantage of it 13 years ago. Taken advantage of where do you turn for help with no money to fight? And why is the system courts and monetary system trying to keep me from bringing this out for all to see? Miguel
@Amit - the key to your question is in the float. Using your $1,000 example with the loc I have the $1,000 to make the principle payment where I may not have the cash to make a principle payment.
Yes, you will eventually pay back the loc, but you will be amazed at how much you can principally reduce your mortgage while floating the balance for little to no cost.
Hi
I thought i got a grasp of this theory but got a little confused again. You mentioned that we will use banks money to pay off the mortgage.
Say i take 1000$ from LOC and make a payment towards my mortgage principle. Now immediately (or in a few days time depending on the balance in checking) i can payback the 1000$ from my checking account to LOC to reduce any interest on the LOC borrowed money.
Question) Why would i NOT pay from Checking to my Mortgage Principle directly instead of :
Withdraw from LOC
Pay the Mortgage Principle
Payback to LOC from Checking.
Ir-respective of anything, i will HAVE to pay back to LOC at the end of the day. If i have money in my checking account, then I should definitely directly pay directly to mortgage principle. If im a low income worker, which has less cash on hand, then it might make sense to use the LOC and pay a little interest on it.
Right?
Well said! Great article.
@Brian, They are getting harder to come by but they are still around. Personally, I have a personal unsecured line of credit. Rate is variable...something over something, it's been awhile now so I don't remember the index it's tied to. Anyway the rate has hovered around 6%. You just have to do some leg work. My line is through a local bank, you know the kind that only has a couple of branches in your local area.
So how do you establish a Revolving Line of Credit? My bank and mortgage company don't offer "line of credit" except taking it as a "home equity line of credit"...that's bleeding the wrong way. The only revolving line of credit I can find is through a small business account. Is there a way to do this without creating a shell business? Love to give this a try, but need just a little more guidance on the mechanics.
In this article it explains how to utilize this method, which you can do in your situation. The refinance from 15 to 30 will cost you dearly over time, but as you mention "cash flow" is the key ingredient for you at this point. I would focus on getting my cash flow consistent before I concerned myself with debt reduction. Once the cash flow is there you can then go full steam to get the other debt liquidated.
If it were me I would figure out how to dump the car. With the numbers you gave you are going to pay over $12K to pay off a $9K balance on a non-asset. Read my Hub found at: http://hubpages.com/hub/Buy-a-Car-Right
Your rates on your loans are decent and will work nicely in the type of program I have laid out, but being unemployed brings in other factors not listed in this piece.
You don't want to commit too much of your money into debt reduction at this point because of your cash flow problems. You could create other problems if you are not careful. Worse case scenario, let's say you loose your home...well if that happens who wants to have paid down the balance another $1,000? So I say: 1. Get out from under the car loan, 2. Get by until you get a job 3. Once those are in line utilize this strategy.
I found your page after being up late one night watching one of those "mortgage millionaire" shows when they slipped and mentioned how to pay off your mortgage leveraging the bank's money in 5-7 years with no additional payment. As a past loan officer this intrigued me and brought me to this sight. presently unemployed for 13 months.
Here is my situation and would love to get your strategy.
Car payment $239/mo 4.5 years left, $9000 balance.
Refinanced from 15 year to 30 year to lower payment do to unemployment. This is killing me seeing the interest I am now paying. 29 years left. 5.625% $132000
Equity line $26,000 7% interest. *** I have an additional $135,000 on the same line.
Here is what I need from you. How can I get to pay off and loans as soon as possible of these three loans? Should I go lowest to highest? Should I use the additional equity line to pay down to an optimal amount on the fixed loans? ie the car loan and home loan?
I would love to pay off the car asap do to present cash flow situation.
I know others have similiar situations with unemployment at 10%, 100% for me and any help to pay some bills quickly for cash flow and then to get debt5 out of the way would be of great help. I may be able to put a few bucks but not much toward paying these loans off.
I wait with great excitement on your thoughts.
Thank you in advance.
Crammous, thanks for the comment, but I don't use a spreadsheet for this...don't have it broken down this way, but the mathematics are pretty self explanatory
Rising Glory, I think we could all use your examples in clear mathematical spreadsheet example form, detailing the comparison of your LOC method with the non-LOC method (including extra principal payments say on the 1st), and how the savings come through clearly demonstrated, mathematically, side by side, not using language like "float". Please explain the following with spreadsheet mathematical precision:
"Remember that the full $1,000 is saving me money on my mortgage for the full 30 days, but I only paid interest on $750.00. Therefore I have used $250 free during the month."
Please make the spreadsheet downloadable and virus free :).
I would start where I am. If you don't have any room on your HELOC you will still reduce your interest charges if you leave excess cash sitting on your HELOC instead of sitting in a checking account.
If you have a small amount of room on your HELOC then just use what you can. The key in this is how long you leave excess cash on the HELOC.
Example: If your car payment is due on the 20th, don't pay it on the 10th. Let the money sit on the HELOC. If your 1st mortgage is due on the first and a penalty is charged on the 16th then don't pay it till the 15th and let the mortgage payment sit on your HELOC.
OK. I'm new to this and I'm trying to get my head wrapped around it. You know we are taught all our lives one way.....
I do have a question. I have a 241000 mtg with a HELOC already of 17500. I have 23 years left to pay the mtg. Should I try to pay off the HELOC and start with an "empty" balance or can I start now? Oh, and I am one of the few that get paid once a month. YEA! and I am one of the ones mentioned that do live pay check to pay check.
Hello Barb, This method will work on any fully amortized loan. I've even used it on auto loans. Obviously, the larger and longer the term of the loan the greater the potential savings will be.
is this method only useful for conventional 30yr mortgages or can you reap financial advantage even for 15yr mortgage? would this method be worth using?
Mike, thanks for the input even though it is riddled with errors. If you really want to live risky then put your money in a retirement account. For most, they are now only break even after huge losses. The market now, from a fundamental standpoint, is WAY over priced and has no basis to be at it's current levels. From a technical standpoint it appears to be making a top and ready for at the very least an intermediate pullback. In other words, those who have over the past nine months only achieved break-even are getting ready for another roller coaster ride down.
Your final analysis is also incorrect because the person you refer to who lives paycheck to paycheck will never have the ability to reduce their payment as described without the utilizing this or a similar approach to rapid reduction.
Become a 3 percenter! 3% of the population control the wealth. The rest do the same things the other 97% do and think they are going to get ahead.
This is a risky and unnecessary method to take. It would be effective for folks that are relying on or living check to check. But, these same folks should probably put money away in other areas like emergency or retirement funds instead of risking it with additional lines of credit.
Floating money with credit while waiting for checks only increases risk, while they still end up having to use their own money pay down the extra principal. Only now we are manufacturing "savings" from using a line of credit we didn't even have to use.
Example: I get my first check, instead of paying the payment on the first I pay 1000 towards principal.
2nd check - i make the regular payment now just before its late.
I get the same benefit as I would have with the LOC with no risk. In either case, I'm not going to have more "free" spending money during the month because it would have to either go to the LOC or straight to the principal payment.
This works if your mortgage is a revolving line....this is a much easier method then as I described. The problem for so many is that they are negative (mortgage higher than value) and can't obtain a revolving mortgage loan.
how bout we cut out the middle step here (the LOC) and just deposit our paychecks straight into the bank's account where our mortgage is? For example, our mortgage is through a bank where we can actually get a credit or debit card on the same account where the money sits. So all that money sitting there while not being used is compounding interest down each month just as you've said here with the transferring back and forth with the loc, etc.
If I understand you right then I disagree. If "you" have the additional money then "you" are paying down your mortgage with "your" money. I am using money that I don't have (banks money) and floating it so that I am reducing my balance and profiting off the float.
Thanks for the explanation. I think the key thing I was missing here is that you make a mortgage payment that is larger than your scheduled payment and get more out of that payment by leveraging the LOC and timing of the payment.
The assumption is that you have additional money in your budget to put towards early principal payments. You could achieve a similar result by simply making additional principal payments, but the LOC method is a way to maximize the savings.
I got confused when I read “The problem is that most don't have the extra money laying around and if they did they don't want to apply it against their mortgage. So how can I leverage the banks money to pay off my loan?”.
Thanks.
First of all CO, a personal line of credit or equity will work. I personally use a personal line of credit.
On the other side of your question don't get bogged down on the example, but catch the concept. Let me explain another way. If I have a line of credit that charges on the "average daily balance" (that is key) then my goal is that I want to keep my "average" artificially low. What I mean by artificially low is that instead of letting $$$ sit in my checking account that I don't need for 2 weeks then I park it on the line of credit so that my average daily balance is lower even though the advance I made on my mortgage is still saving me interest.
Example: If you have a $200K mortgage at 6% interest. On your first payment you will pay $1,000 in interest and $199.10 towards the principle.
If I make a $1,000 principle payment I have advanced my loan five months because that $1,000 principle payment is taking care of five $199.10's (the first five payments)(I realize this number changes a few penny's each month).
So when you are making your 2nd payment it is really like making your 6th payment meaning that on your second payment $204.13 will go toward principle. (that extra $5 is like an extra $60 principle payment, but it didn't cost you anything) You are now reducing the principle of your mortgage at an accelerated rate because you wouldn't have reached that point until after you had made $5,995.50 worth of payments (5x1,199.10). Therefore right up front I have saved several thousand dollars, but the increased reduction will continue to grow over the years ahead.
On the line of credit side. Let's say we are paying 10% on the personal line of credit. The interest for one month assuming that I have $1,000 balance from the 1st to the 30th will be a little over $8.00. I also have created another payment in my household budget that I don't want. So my objective is to eliminate any monthly payments on my personal line of credit and to also not pay interest on the banks money. In addition I don't want to reduce my disposable income as you described.
For easy figuring let's say that I have a car payment of $500 that is due on the 15th, my budget is such that I need all of my disposable income, I am only paid once a month, and all of my other bills are paid on the first (that is not typical as we have a variety of bills paid throughout the month like groceries, etc that can help lower our average daily balance)
The money that is allocated will now be applied to my line of credit making my line of credit balance $500 (instead of $1,000) from the 1st to the 15th. There is also no payment that is now due because my balance is zero.
Because my budget is such that I have limited disposable income I then make my car payment on the 15th bringing my line of credit balance back to the $1,000.00.
When the bank calculates the interest on my loan I had a $500 balance for 15 days and a $1,000 balance for 15 days making my average balance for the month $750.00, which is what my interest is calculated on. Interest charge is now $5 instead of $8.
Remember that the full $1,000 is saving me money on my mortgage for the full 30 days, but I only paid interest on $750.00. Therefore I have used $250 free during the month.
Most people are not paid once a month and most can make larger principle payments keeping the spread between the mortgage reduction and the artificial balance greater. Then multiply the different of this spread over a 5 or 10 year period and the amount of savings (using free money) is staggering.
The key is how much can you put on your mortgage and how low can you keep the line of credit with the float. By timing your income payments to your line of credit at the right time of the month you will also never have a "monthly payment" that is due because the income you put on your line will satisfy any upcoming payments.
Make sense?
Hi,
Thank you for your post. This has definitely got me thinking. However, there is something I am failing to understand and I was hoping you can help clear it up. If I understand the example correctly, the break down is as follows:
1st of the month
- Make $1,000 principal payment on mortgage from the line of credit
- Receive $1,500 paycheck into checking account
- Make $1,000 payment from checking account into line of credit
- Net Result: +$500 checking; $0 line of credit; +$1,000 mortgage
5th of the month
- Make $800 car payment from the line of credit
- Net Result: +$500 checking; -$800 line of credit; +$1,000 mortgage
15th of the month
- Receive $1,500 paycheck into checking account
- Make $800 payment from checking account into line of credit
- Net Result: +$1,200 checking; $0 line of credit; +$1,000 mortgage
If I got this right, then your monthly disposable income as of the 15th is $1,200. It would have been $2,200 if you had not made the additional $1,000 principal payment from the LOC and the paid it off from your paycheck. You have $1,000 less disposable income at this point. What do I not understand here (I don’t fully grasp the concept of the float)?
When is the mortgage payment made under this example and how are the balances affected?
Do you have to have a Home Equity Line of Credit or will a regular unsecured line of credit work the same?
Thank you in advance!
-CO
Real Estate is cyclical - what goes down will also go up. Of course one could always choose not to pay, but then you will loose the property and your credit. Not smart!
Real estate market has crashed..no need to pay loan :)
Good question jeremy because I think many would think along the same line. You are correct in that you are not "inheriting" the money. The basis of this statement is where most fail in the area of money. They think they have to possess in order to gain. While you can save a lot of money making double payments the extra payments are coming out of your household budget resulting in YOU paying the money back. The key here is leverage which you've missed. The savings is in the "float."
Simple illustration. I make a $1,000 principle payment on my line of credit. That money has not affected my monthly budget. Then as I receiving income, realizing I don't spend all of my income immediately, I let it sit on my line of credit till I need it instead of it sitting in my checking account doing nothing. At the end of the month due to my transfers in and transfers out let's say I have an average daily balance of $500. That means even though I used $1,000 and will compound my savings on my mortgage with the full $1,000 I am only paying interest on $500. Net result is using $500 for free.
As I stated, in one years time I paid down my mortgage the equivalent of 18 months which is roughly $33,000 of interest savings. The interest paid on the line of credit in the same year was less than $200.
Not understanding leverage is killing people financially.
I don't understand how you would be using the "Banks money with the scheme" You don't inherit anything from the Bank except savings on interest that you would have paid over the coarse of the loan, and besides you can accomplish the same savings by making double payments per month. If you use $1000 of LOC to make a payment on your loan, then you have to make a $1000 payment to pay off your LOC at the end of the month, so why not just pay the $1000 straight from your checking account and be done with it? Using the LOC just makes your finances more difficult to manage and theres no benefit to using one. I think that you guys have seriously messed up your logic somewhere, money in =money out and by adding an LOC you've just added more interest that steals from your money in.
I know this pretty method to repay home mortgage loan and it proved it works. The only problem is that no more people are aware of this possibility to save a lot of money. Thanks for this Hub, it contributes to solve this problem, especially in an economic crisis context.
Hey Mike,
I don't disagree with you at all. This does "fly in the face" of conventional thinking, and your are right about fractional reserve banking!!! The point of my blog is to get people thinking...There is a reason why most are broke and it doesn't take rocket science to understand how to change the momentum back into your favor.
Its a method of using credit float to your advantage. The average person can hardly balance their checkbook so this flies in the face of their ability to manage the scheme. But I can see the advantages. Same way with using credit card float. I can almost get a full 60 days out of my cards by using them in the first few days after paying off a balance.
Banks don't really have money. Fractional reserve banking will be the ultimate collapse of he American Economy. It's already happening. It's mortgages and banks that keep the people slaves to the wealthy. And so many people are so clueless as to how the "system" works that they could never pull your method off. But it's a very practical and smart way to manage mortgage payments for those who can.
Too bad the actual interest paid on accounts is so low these days. And the fees are getting crazy. My bank upped my checking fee on my business 5X unless I upped my balance to a ridiculous amount. I expect more of these fees to be introduced as the consolidation of the banking industry takes place.
Addison, you are right. I found out that I was very limited in trying to get things done when I limited myself to what I possessed. There is plenty of money out there and when you can use Other Peoples Money (OPM) then all the limits are taken off.
KCC, don't let the credit issue hinder you. If you only have a few years left on your mortgage then you should have equity in your home. You can get a secured line of credit. Your rate may be higher, which means you will want to pay closer attention, but I have ran numbers at 7% and 19% and the difference is minimal if you know what you are doing.
You have a lot of interesting concepts about using OPM - especially the banks - and it just makes sense once you've set it up right and feel comfortable with online banking.
Another great hub! I am sold on this method and have been for over year. I found a site that offers the software to calculate this for you that is free to play with the demo, but only $30 to buy. It's well worth it if you're going to do it yourself. I have emailed with this gentleman a number of times and he's super nice. http://hubpages.com/hub/Finally-Be-Debt-Free
Due to a number of life circumstances (divorce, death of a child, etc.) I allowed myself to let my finances become disorganized. I'm now going to find it difficult to get the line of credit, but I'm determined to do it. Someone out there will surely believe in me enough to set up a $5000-$10,000 line of credit. I'm only a couple of years away from paying off my 15 yr mortgage, but there are still tons of advantages to doing this system. I have tried to explain it to my friends with new mortgages and they just don't get it yet.
Jai Catalano 3 days ago
Sounds great but a lot of work and strategy.