Thank you to Stephanie in WA for asking some great questions in my Mortgage Elimination IV entry. 

So, I'm wondering - does the calculation actually assume extra principal payment, even after what would be needed to offset the higher variable interest rate? 

Say I have an average of $4000 to deposit and sit during the month, a new interest rate that is 8% instead of 6%, and enough money to equal one extra mortgage payment of $1200 per year on a $150,000 loan. 

Are you SURE that I'd save that much more money as opposed to having the smaller 6% interest rate, paying one extra payment a year and doing bi-weekly mortgage payments?   Seems a little shaky to me especially since the HELOC rate is variable, and most likely continually rising.  Have YOU personally used the method?

Thanks in advance for your time. 

Stephanie, WA 

To answer Stephanies questions and yours, I am going to illustrate an example of how Option 2 - the HELOC method works with the following facts (remember, everyones case is different, so results will also differ).   I also use the same method myself and based upon my situation and numbers, I will reduce my term by 18 years and save about $122,000. 

Here are some facts regarding Homeowner X in this example.

Net income of $5,200 month and Expenses of $2,800 month

First mortgage, 30 year fixed with a balance of $150,000 at 6.00%, therefore PI payments would be $899.32

Let's further assume a HELOC with a limit of $25,000 and a ZERO balance, currently at Prime plus 2% (Prime 7.75% and 2% = 9.75%). Remember, if the HELOC has a zero balance there is no interest paid.

Using the HELOC method we want to inject $4,000 from the HELOC into the 30 year mortgage and on October 1, 2007 we do so.  We pay our usual payment in October 2007 of $899.32 plus a principal paymet of $4,000.  This will increase the HELOC balance from zero to $4,000.

During the next month, November 2007, your goal is to pay OFF the HELOC as quickly as possible and bring the balance down to ZERO.  How many months will it take to do so based on the facts listed above?

Therefore by January 2008, the HELOC balance is paid in full since the December 2007 HELOC balance was only $1,027.10.   A new injection at the beginning of February 2008 will be applied to the First mortgage balance and the same cycle repeats over and over.  The unused funds from the homeowners income is applied directly to the HELOC and if the homeowner needs extra money for "emergencies" they have access to a $25,000 HELOC as cash. 

At the end of 2008, the First mortgage will have a balance of $125,141.34 and the HELOC will have a balance of $2,519.35 at that time. 

By using the method listed, this homeowner in the example would PAY OFF their First Mortgage in January 2014, just over 6 years later by using this method. 

The total amount of interest paid on the HELOC during these 6 years and 3 months is $745.80 and the amount of Interest Saved on the First Mortgage is almost $139,000!

A 30 year mortgage of $150,000 with a rate of 6.00 would have regular interest payments totaling $169,746.58 during the holding period. 

Bi-weekly payments of $449.67 paid 26 times a year, which is like making ONE extra payment of $899.33 per year would shorten the loan term by 65.5 months and save $37,221.30 in interest.

A lump sum payment of $1,200 each year for the same type of loan would shorten the loan term by 83 months and save $47,240.35 in interest.

In my opinion, if one desires to payoff their mortgage sooner they must first have the characteristics I mentioned earlier in this article, they are desire, consistency, and discipline.  Once a homeowner posses those items, they must have a plan that suits them. 

Perhaps the plan for someone is to make bi-weekly payments or lump sum payments, but why can't we all take advantage of the Key Banking Principle and ALL apply the powerful benefits to our own lives? 

Would you rather pay your mortgage off in 23 years or in 6 years?  Would you rather save $47,000 in interest or almost $139,000 in interest?  What would it be like for you to have NO More Mortgage Payments after only 6 years?  That's almost $11,000 a year...

One last comment.  The facts and assumptions made above are made on the premise that the homeowner has no "consumer debt".  They have no credit cards, personal loans, finance company loans, store cards, etc.  The expense may include a "vehicle or installment loan". 

If the homeowner HAS consumer debt, I would recommend they WAIT before applying mortgage elimination strategies and concentrate on their consumer debt elimination first.  The homeowner in the example could have used their HELOC to payoff the consumer debt and would have worked to PAY OFF the HELOC first before injecting money into their first mortgage. 

Again, each case is different and analysis needs to be performed before one can make a determination which mortgage elimination plan is best for them.   Questions?  You can go to http://www.homeloans.cc/ to contact me at your earliest convenience. 

Thank you, Frederic A Din

Here is an overview of the loan comparison, the regular 30 year loan and the same loan with HELOC injections: