Should You Pay Off Your Mortgage Early with a HELOC?

You can use the equity in your home to get a home equity line of credit. Subsequently, you can use the funds to pay of your mortgage early while then using the HELOC as a checking account. This arrangement will allow all funds that you have to not sit in an account to learn low or no amount of interest. Of course, doing so has some down sides. Watch to video to see what they are.

How’s it going everybody this is beat the bush today i’m gonna talk about that little trick where you use a home equity line of credit to pay off your mortgage faster the basic premise is this use the equity in your home in order to take out a loan at a pretty low rate this lower is typically a tiny bit higher than your 30-year fixed-rate mortgage however people

Talk about using your home equity line of credit like their checking account so as soon as you take out this credit line you use all of it to pay into your mortgage therefore paying it off now as an example let’s say you have a 40 percent loan to value ratio which means 40 percent of the value of your home is still in a mortgage when they look at this they may

Extend you another 40 percent of the value of the home which means you can take this 40 percent and pay off your mortgage immediately now when you take out this home equity line of credit you’re still gonna pay interest on it you’re probably gonna pay a little bit more interest than a 30-year fixed-rate mortgage the advantage here is that if you use your home

Equity line of credit as a checking account you take all that money that would have been sitting in your checking or savings account and you shove it all into this home equity line of credit so it’s kind of like getting paid the interest rate in your fixed-rate mortgage rather than the low percentage that you would get in the checking or a savings account i’m gonna

Do a simple interest calculation over here and it’s accurate enough for one year let’s say you have a 30-year fixed-rate mortgage and you have a pretty good credit score so you have a 4% interest rate on this mortgage a home equity line of credit is typically a variable rate plus a margin so you’re gonna see something like a 5% interest rate with the same type of

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Good credit here let’s say your home value is about $250,000 we still have a remainder of $100,000 in your mortgage balance you have a 4% interest rate on this which means roughly every single year you’re paying about 4,000 dollars of interest let’s say you walk into a bank and you ask for a home equity line of credit and then they issue you a hundred thousand

Dollars worth of credit line which brings your loan to value to roughly 80% here now it’ll only go up to 80% if you take this money and spend it elsewhere but instead you take this 100k and you pop it right back into your mortgage instead right now they charge you a 5% apy so every single year you’re gonna end up having to pay $5,000 of interest which is $1,000

More if you kept all this money in your regular mortgage the magic works here when you have cash sitting in a checking account and you put this to work for you instead by plopping it back into your home equity line of credit so all of a sudden now you have $80,000 in your home equity line of credit paying at 5% which also comes out to be four thousand dollars in

Interest every year this is the break-even point now let’s say you have a little bit more money let’s say $20,000 in a savings account at a high-yield online savings account right now you’re gonna get about 1.3 percent apy that’s not very much instead of leaving this in the savings account you put all of this in the home equity line of credit instead what happens

Is you have $60,000 remaining on the home equity line of credit now you’re still paying a five percent interest rate on this but now you only have to pay three thousand dollars of interest into this home equity line of credit the result is a difference of about seven hundred and forty dollars because if you left that money in your savings account you’re only gonna

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Gain about two hundred sixty dollars every single year in interest payments now there’s a danger to all this and there’s a reason why i personally have not done something like this the home equity line of credit is based on a prime rate which is a variable rate and we know that in the coming years they’re going to bump this up a little bit at a time and i estimate

About maybe a quarter percent every single year for the next three years depending on the home equity line of credit we’ll have a whole bunch of different restrictions such as maximum length of the loan draw period differs which means there’s a limited amount of time at which you can take money out of it so at some point you can put money in but you cannot take it

Out kind of like using it as a checking account so you have to shop for the correct kind of home equity line of credit where you can actually take money out anytime that you want sometimes at the end of the home equity line of credit they might require you to make a balloon payment which is one large sum that maybe at the end of it you may not have sometimes they

Also require minimum balance to be taken up but you probably won’t have this issue if you take a lot of it and put it into your mortgage there could be in activity fees this is also not too much of a problem if you used your home equity line of credit kind of like a checking account sometimes like with any other loan there might be a prepayment penalty so if you

Suddenly decide to sell your home and then you want to pay it all off you might have to pay a penalty on top of this the interest payments in your home equity line of credit is deductible just like in your mortgage so you do not have to worry about the difference of having being able to deduct on one case versus another having a home equity line of credit could

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Be quite dangerous for some people because you have access to i don’t know like $40,000 on tap that is not your money so some people might be tempted if they get in a little bit of trouble or something they might go and dig into their home equity line of credit this means that if you do not have a lot of self control like with credit cards you might get yourself

In a lot of trouble and in even more debt than actually paying your mortgage off instead in conclusion you can pay a little bit less of mortgage interest by utilizing that idle money that’s sitting in your checking account or savings account there are a little bit of risk here primarily in the adjustable rate portion of a home equity line of credit where at some

Time in the future it might increase by just enough where it would kind of break even no matter if you did this trick or not i hope you enjoyed this review of paying off your mortgage early using a home equity line of credit and my opinions on it don’t forget to give me a like on this video comment down below let me know if you’re already doing something like this

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Should You Pay Off Your Mortgage Early with a HELOC? By BeatTheBush

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