Why Use a HELOC to Pay Off Your Mortgage
Lin Ennis
July 02, 2009
If youīve been hearing about mortgage acceleration, or using the equity in your house to pay down the principal of your house, itīs no wonder. Programs designed to help you pay off your mortgage faster by recycling the equity in your house have been spreading, with one company having over 70,000 independent, commission-only sales representatives!
Vocabulary of Equity Cycling
First, letīs clarify a few terms so thereīs no misunderstanding what weīre talking about. Equity is the portion of the value of your property that is not mortgaged. Equity is built two ways: by paying down the home loan, or by increasing the propertyīs value.
How do you get equity (money) out of your house? If you arenīt selling or refinancing, the two ways to get money out of your house are to take out a loan against the equity (home equity loan, HEL), or to take out a revolving line of credit (home equity line, HELOC).
Essentially both are additional mortgages on your house, because the house secures your payback. The difference is that with a loan, you get a check from the bank, the entire amount all at once, spend it, and must pay both principal and interest on it immediately till the entire loan is repaid. A line works like a credit card. You charge (or write a HELOC check for) what you want this is called a draw and pay interest only, in most cases for 10 years. Principal is usually due in 15 years .
Why Use a HELOC to Accelerate Your Mortgage
If you were able to follow the somewhat circuitous logic of the last two paragraphs, you see that making an equity draw is like reborrowing the money you already paid back. But the payback on the second is interest-only for 10 years. That gives you a decent window to increase your income, buy income properties, and poison your rich uncle (discreetly of course).
Cir-cu-i-tous [ser-kyoo-i-tuh s]: roundabout; not direct: a circuitous route. Synonyms: circular, winding, indirect, meandering.
So it may not look simple! But itīs just as easy as recycling. In fact, it is recycling—also reusing the same dollars you once used to pay down your mortgage. Now, you withdraw those same dollars and "WHAT?" spend them paying down even more of your mortgage principal. Thatīs why itīs called equity cycling. Its purpose is mortgage acceleration ridding yourself of homeownerīs debt even decades sooner.
But this time, the recycled dollars are cheaper dollars because youīre repaying only interest. Sort of like getting a 10-year adjustable interest-only mortgage. You have 10, even 15, years to repay this.
Cheaper Debt
By now you can see the essence of using a home equity line of credit (HELOC) to pay off your home in about a third the time is that youīve traded:
> 1. Principal and interest debt for interest only (for a long time) debt
> 2. Long-term, possibly 30 year, debt for short-term 1-12-month debt
> 3. Fixed balance paid in arrears for fluctuating (revolving) balance paid in the future
Itīs really easier than it sounds. Especially if you choose to let one of the popular mortgage acceleration software programs prompt you through the cycle of recirculating your same dollars.
Vocabulary of Equity Cycling
First, letīs clarify a few terms so thereīs no misunderstanding what weīre talking about. Equity is the portion of the value of your property that is not mortgaged. Equity is built two ways: by paying down the home loan, or by increasing the propertyīs value.
How do you get equity (money) out of your house? If you arenīt selling or refinancing, the two ways to get money out of your house are to take out a loan against the equity (home equity loan, HEL), or to take out a revolving line of credit (home equity line, HELOC).
Essentially both are additional mortgages on your house, because the house secures your payback. The difference is that with a loan, you get a check from the bank, the entire amount all at once, spend it, and must pay both principal and interest on it immediately till the entire loan is repaid. A line works like a credit card. You charge (or write a HELOC check for) what you want this is called a draw and pay interest only, in most cases for 10 years. Principal is usually due in 15 years .
Why Use a HELOC to Accelerate Your Mortgage
If you were able to follow the somewhat circuitous logic of the last two paragraphs, you see that making an equity draw is like reborrowing the money you already paid back. But the payback on the second is interest-only for 10 years. That gives you a decent window to increase your income, buy income properties, and poison your rich uncle (discreetly of course).
Cir-cu-i-tous [ser-kyoo-i-tuh s]: roundabout; not direct: a circuitous route. Synonyms: circular, winding, indirect, meandering.
So it may not look simple! But itīs just as easy as recycling. In fact, it is recycling—also reusing the same dollars you once used to pay down your mortgage. Now, you withdraw those same dollars and "WHAT?" spend them paying down even more of your mortgage principal. Thatīs why itīs called equity cycling. Its purpose is mortgage acceleration ridding yourself of homeownerīs debt even decades sooner.
But this time, the recycled dollars are cheaper dollars because youīre repaying only interest. Sort of like getting a 10-year adjustable interest-only mortgage. You have 10, even 15, years to repay this.
Cheaper Debt
By now you can see the essence of using a home equity line of credit (HELOC) to pay off your home in about a third the time is that youīve traded:
> 1. Principal and interest debt for interest only (for a long time) debt
> 2. Long-term, possibly 30 year, debt for short-term 1-12-month debt
> 3. Fixed balance paid in arrears for fluctuating (revolving) balance paid in the future
Itīs really easier than it sounds. Especially if you choose to let one of the popular mortgage acceleration software programs prompt you through the cycle of recirculating your same dollars.
Print
Email
