I purchased the current house in 2011. Placed lump sum amount of down payment and had about $170,000 loan balance. At the time of purchase, the house was one of those house under short sale and I purchased it for a bargain price. With 3.75% fixed interest rate, my payment is about $833/month. Not bad payment but I wanted to pay off early. It seemed better investment of not paying extra interest to the bank. So, I started to look into options for paying off early. I have been making at least $1000/month payment since the first payment and time to time I paid up to $1500. It has been just more than 6 years and balance did go down some amount but it wasn’t fast enough. I would be paying until 2035. That’s still another 18 years! So, I started to look out for other options. Out of all, using HELOC seemed very appealing, since HELOC interest is applied differently from a mortgage loan. (You can easily find this information on Youtube.)
I have seen a lot of postings about utilizing HELOC to pay off a mortgage early. I actually did some calculations using the vertex calculators.
Due to my ideology, I am trying to avoid any loan. Instead, I am using my own cash as a “HELOC” and did some calculations.
I am going to use one of my bank accounts as if it’s HELOC account and I am going to place $20,000 in it. Since I am using my own cash, my interest rate is 0%!
I am quite of a frugal person and between my wife and me, our monthly expense is below $2,000/month including my mortgage payment.
I am going to put my personal income to be $5,000/month after tax.
My current balance on the loan is just above $155,000.
Here is the layout.
As you can see my “credit limit” is $20,000 and interest is 0%.
So, I am adding $2,000 extra “borrow” for my monthly expenses and I am putting all of my $5,000 income for to pay off my “HELOC”. I set the monthly payment to “HELOC” to $1,000/month. Thus, extra $4,000 is going to be the extra payment. I repeat and deposit money to “HELOC” account until the balance becomes $20,000. By calculation, $20,000 replenishes every 8 months.
Now, let’s look at the mortgage.
My first “HELOC” loan from my bank account will be paid to my mortgage. Earlier, $20,000 is saved up every 8 months. I will keep applying that $20,000 to the mortgage. By keep doing it, I can pay off my mortgage in 3 years and 8 months!
I will be saving about $70.000 from interest and that’s a Porsche for me!!!
I did the calculation again. What if I did this from the beginning of the purchase. My mortgage would have been paid off 4 years and 2 months since the starting of the mortgage! OMG! Why didn’t I do this earlier! I would have paid this house off about 2 years ago!!!!!