The Old Homestead
Warm Cancun greetings to all! Over the last few months I have received comments and questions regarding my ridiculously high 5.875% mortgage rate. Currently, I owe $59,568 on the mortgage; I also owe around $21,500 on our HELOC (home equity line of credit). Many people recommended that I refinance the balance to a lower rate; others suggested that I pay off the mortgage by making additional payments to the principal. These are great suggestions, but I have my own plan to slay the beast. Here is a brief look at my financial ball and chain in financial calculator format:
- PV = $59,568 (originally borrowed $125,000 on $157,000 home)
- I = 5.875%
- PMT = $811 (including additional principal payment)
- N = 7.5 years / 90 months (originally a 30 year loan)
- FV = $0 (that’s the goal of every homeowner, right?)
I have looked into refinancing my mortgage, but I have not been impressed with the options. Sure, I could get a lower rate, BUT I do not want to pay points and closing costs. At this point I simply don’t want to pay anymore fees to the banks; I’m tired of paying these guys. Moreover, I do not want to extend the term of the loan. Presently, I am on pace to pay off the mortgage in about 7.5 years, so the last thing I want to do is “upgrade” to a 10- or 15-year mortgage. Refinancing looks like a classic “heads-you-lose-tails-I-win” scenario to me.
I have also looked at refinancing our mortgage and HELOC balances together. Last fall Alliant Credit Union had an enticing offer to consolidate both loans into at 10-year loan at 3.375% for only $300 in fees. The idea of paying off both loans in 10 years or less appealed to me, so I applied for the loan. Fortunately, I failed to get my tax return information back to them in time to qualify for the rate. I say fortunately because I believe I can do better by not locking myself into 10 years of payments.
What’s my devious and clever plan? Actually, it’s incredibly boring and pedestrian. First, I plan on making additional mortgage payments to get my mortgage balance down to $45,000. Once I get my mortgage down to $45,000, I can then use my USAA HELOC to pay off the rest of my mortgage. Paying off the mortgage would eliminate a monthly payment of $811, but it would also swell my HELOC balance to its maximum credit limit. In that event, I would pay a rate of 2.89% on my HELOC balance…roughly $110 a month. In other words, my monthly payment obligation would be only $110, not the $811 I’m currently paying.
Over time I would drive down my HELOC balance with my other sources of income. For example, every January my wife and I deposit our IRA and 457 distributions into the HELOC and then slowly withdraw them as needed. We could also deposit rent payments into the HELOC if we decided to rent our home again. I feel confident that we could have our HELOC under control within 2 to 3 years.
- your low 2.89% HELOC rate suddenly rises? In that case, I would go to USAA’s website and lock in a fixed rate on the balance (or part of the balance). Even if my HELOC rate doubled, I would still be paying less than my current 5.875% mortgage rate. (2.89% * 2 = 5.78%)
- you can’t hit your $45,000 mortgage balance goal in time? In that case, I might have to postpone this magnificent plan a year or two. At my current payment schedule, my mortgage balance should hit $45,000 around January of 2016. However, if I just couldn’t help myself, I guess I could use a 0% credit card to drive down the balance. Obviously, I’d be playing with fire, but I’m certain I could pay off $5,000 to $7,000 over the course of 18 months. I get such credit card offers (0% for 18 months!) in the mail every month, so maybe I’ll use their money to help me. Of course, this would be an impulsive last resort, and I wouldn’t recommend it to most people. Credit cards coupled with humans usually lead to disaster.
When will this financial coupe take place? It depends on my extra principal payments and HELOC interest rates, but I would love to pull this off in January of 2015 or 2016. Of course, a lot can change between now and then, but I’ll be ready if a good situation presents itself.
What do you think about using a HELOC to pay off a mortgage? How about my incredibly awesome idea of using a credit card to pay off a mortgage?