Adam Carroll joins us to discuss how to actually save thousands on your mortgage with home equity lines of credit.

 When we interviewed Adam for our new Rich Tips series, he mentioned how he is paying off his mortgage years ahead of schedule and saving thousands of dollars in interest. We were intrigued and asked him to join us to explain his strategy in greater detail.

 What Is A Home Equity Line Of Credit?

 A home equity line of credit, HELOC, is “An open ended line of credit extended to a homeowner that uses the borrower’s home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates.” Most institutions will lend up to about 90% of loan to value.

Strategy

Adam has an ingenious use for his HELOC and you can use his strategy too. The HELOC is used as a checking account. All of your income is deposited into it and all of your expenses are paid out of it.

Depositing your paycheck into the HELOC acts like a payment so you aren’t adding a monthly payment. The money left over at the end of the month gets sent to the mortgage. What this does is send a massive payment to your mortgage each month.

The trick to make this work though is that you have to make more than you spend. Let’s look at an example: You bought a home for $100,000 with a $20,000 down payment. You can immediately take out a HELOC for $10,000. You then put that toward your mortgage.

In order for this to work though, you must make more than you spend. You make $5,000, spend $4,000 and have $1,000 left. That $1,000 goes into the HELOC until it’s paid off, so for ten months. Let’s say your interest rate is 5%. So that’s $500 over 12 months, $41.33 the first month in interest but when the income goes in, you’re paying a little less each month because you’re slowly paying the loan down with that $1,000 a month.

Rather than taking ten months to pay off, it takes around 7. And because your mortgage went from $80,000 to $70,000, you will pay less interest not just over ten months but over the entire life of the loan.

What If You Don’t Own A Home?

You can still use a similar strategy if you don’t own a home. You can get a personal line of credit, PLOC. A PLOC is “A loan that you use like a credit card account that you access without using a card. Instead, you write special checks or request a transfer to your checking account by phone or online. You have a credit limit, receive a monthly bill, make at least a minimum payment, pay interest based on your outstanding balance, and possibly pay a fee each time you use the account. 

PLOC are unsecured, unlike HELOCs, which are backed by a mortgage on your home. PLOCs are offered by banks and credit unions and usually require that you also have a checking account with the same institution.”

PLOCs have their drawbacks. The interest rate is higher than a HELOC and the interest is not tax deductible. But if you have high-interest debt and don’t own a home, they can be beneficial.

What Keeps Us In Debt

It’s the way we bank and borrow. Taking out a 30 year mortgage is just SOP in the United States. Amortization is the process of paying off a debt, like a mortgage over time with regular payments. An amortization schedule is a table detailing each periodic payment on an that loan.

We borrowed $80,000 to buy our home above. With a 30 year mortgage at 3.5%, you will pay $50,000 in interest when it’s all over! Your first mortgage payment will be $359,

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