I hate to pay more than you have to on your mortgage? Your monthly mortgage payments will include two components: principal and interest. The principal balance is the loan amount, which decreases over the repayment period of a traditional mortgage. However, the interest portion comprises the majority of the payment at the beginning of the loan and decreases during the term of a traditional mortgage. While the majority of the payment is principal at the end of the term.
If you have equity in your home, you could use a home equity line of credit (HELOC) instead of a traditional mortgage to pay off your house. HELOC stands for “home equity line.” It is a loan set up as a line of credit for some maximum draw, rather than for a fixed dollar amount. This differs from a home equity loan, which you receive the money you are borrowing in a lump sum payment and you usually have a fixed interest rate. Both a traditional mortgage and a HELOC are secured by your home. Some advantages of HELOCs are as follows:
- Unlike the traditional mortgage, a HELOC offers flexibility because you can access it right away. It essentially becomes a credit card.
- HELOCs often have lower interest rates than a traditional mortgage.
- Some HELOCs offer the option of paying interest only.
Some of the disadvantages of a HELOC are as follows:
- There might be a term limit (draw period) with the balance of any remaining debt required to be refinanced.
- There might be a limit on the draw periods (typically 5 to 25 years). Repayment is of the amount drawn plus interest.
- The variable interest rate might increase then than a fixed interest rate offered with a traditional mortgage.
- Might be too complicated for most people to keep control of the process.
Say you have a $200,000 mortgage, and your net paycheck is $5,000 per month. One month, you apply your whole paycheck to the mortgage. This immediately lowers the mortgage balance to $195,000. That month, you pay your non-housing living expenses, say $2,000, using your credit card.
Then, you pay your mortgage payment, say $1,000, using your HELOC. You also pay your credit card balance with your HELOC. At the end of the month, you owe $3,000 on the HELOC and $195,000 on the mortgage, but your credit card has a zero balance.
The next month, your $5,000 paycheck goes to paying $1,000 for the mortgage payment and $2,000 for living expenses. The remaining $2,000 reducing the HELOC to $1,000.
In the third month, your $5,000 paycheck goes to paying $1,000 for the mortgage payment, $2,000 for living expenses, and $1,000 to zero-out the HELOC.
That leaves you with an extra $1,000, which you carry over to the fourth month. And in the fourth month, you repeat the original cycle of paying your entire $5,000 paycheck toward the mortgage, lowering it to $190,000.
If you are successful in managing this strategy, you should be able to manage four $5,000 payments toward your mortgage each year, above and beyond your regular monthly mortgage payments. That means paying an extra $20,000 of mortgage principal each year.
At that rate, your mortgage will be paid in full after substantially less than 10 years (remembering that the regular mortgage payments that you are continuing to make will also reduce the mortgage balance in increasing increments).
In the Real Estate Market?
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