Pay off mortgage HELOC? Banking yourself? How about credit card!!!

Yes, credit card. You probably heard the legend of “pay off your mortgage 5 to 7 years with HELOC”. I once wrote paying off a mortgage with your own money with even shorter time and less interest paid. The whole idea behind the paying off a mortgage with your own money is to not paying a penny more of interest than the interest from a mortgage, which is the biggest positive side. Not only you are paying faster but probably the lowest cost (in terms of paying interest) on an individual.

I just got another idea that can be utilized that I think it would be still lower cost than utilization of HELOC. As you see the title, utilization of credit cards! Yes, credit cards! Generally, a credit card interest rate is somewhere between 20% to 30%. How is that lower cost? Well, I am not talking about the “cashing out” credit card. I am referring to balance transfer with 0% balance transfer interest. Most of the balance transfer with introductory 0% interest involves with a one-time fee of 3%. Sometimes, 2%. I checked several credit cards and many offers 3 to 5% fees. And most of the balance transfer is 10 to 18 months no-interest. Here is the scenario.

Once again, the basic concept of paying down mortgage is nothing different from HELOC and using your own money. You do the balance transfer of $10,000 to your mortgage for the 1st month then you pay off your credit card before the credit card charge interest. For my own example, Discover Card offers 0% Promo APR for 12 months with 3% transfer fee. So, if I transfer balance $10,000, Discover Card will charge $300 flat. That $300 is not a compound interest but simple interest. As long as I pay it off within 12 months, I am paying no more than $10,300.

How is this a saving?

I looked at my payment schedule. My 1st payment’s interest is whopping $1738.75!!! When I apply the $10,000 balance transfer to the mortgage on my 1st mortgage payment that amount applies to the 2nd month’s payment. The 2nd month’s interest is $1736.61 and once the $10,000 is applied, it decreases to $1,695.99. That’s $40.62. Eh? That’s all? Well, hold your chair tight! It’s about to get excited!

Without $10K	With $10K	Savings
$           1,738.75	$   1,738.75	$                      –
$           1,736.61	$   1,695.99	$               40.62
$           1,734.47	$   1,693.68	$               40.79
$           1,732.31	$   1,691.35	$               40.96
$           1,730.15	$   1,689.02	$               41.13
$           1,727.97	$   1,689.68	$               38.29
$           1,725.79	$   1,684.33	$               41.46
$           1,723.60	$   1,681.98	$               41.62
$           1,721.40	$   1,679.61	$               41.79
$           1,719.19	$   1,677.23	$               41.96
Total		$             368.62
Saving	Card Fee	Total savings
$              368.62	$       300.00	$               68.62

Above table is the 1st 10 month of payment with and without $10,000 balance transfer. After the credit card fee of $300, I save $68.62 of the mortgage interest saving. That’s it?! Well… let me forward this to 5th year.

Without $10K	With $10K	Savings
$           1,596.54	$   1,318.31	$             278.23
$           1,593.82	$   1,314.46	$             279.36
$           1,591.09	$   1,236.97	$             354.12
$           1,588.36	$   1,262.93	$             325.43
$           1,585.61	$   1,261.87	$             323.74
$           1,582.85	$   1,257.80	$             325.05
$           1,580.08	$   1,253.71	$             326.37
$           1,577.29	$   1,249.60	$             327.69
$           1,574.50	$   1,245.47	$             329.03
$           1,571.69	$   1,241.33	$             330.36
Total		$         3,199.38
Saving	Card Fee	Total savings
$           3,199.38	$       300.00	$         2,899.38

Starting from the 5th year’s payment, I am saving almost $3000 even with the balance transfer fee! As the payment goes further, savings compounds!!!

My aim is to do the balance transfer every 10 months or less.

If I pay the mortgage as the schedule is showing, I would end up paying $387,404.61 of interest. If I follow the balance transfer, I only pay $186,570.84. That’s $197,833.77 saving of interest and payment will end on the last month of the 16th year!

Here is the catch. If I don’t pay off the credit card within 12 months, there will be the interest charge of 22%! Thus, I am forced to pay this off within the promotion 0% interest period. However, if I pay off the $10,000 balance transfer faster than 10 months, the savings will be greater and I will be able to pay off the mortgage even earlier.

What is the benefit? I am saving about $200,000 interest and whatever cash I have, I can invest in stock market or crypto. So, this frees my cash savings for higher interest. As long as I am getting higher interest than 4.875%, I win!

Note!!!

I would suggest for you to have $10,000 cash that can be easily accessible to pay off the credit card any time you need to. Put away in a very safe stock or anything that you can maximize benefit from. You can only benefit from this if you pay off the $10,000 within the 0% interest rate.

Pay off a mortgage early (Less than 5 years!)

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.

• http://www.vertex42.com/Calculators/line-of-credit.html
• https://www.vertex42.com/Calculators/home-mortgage-calculator.html

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!!!!!