Here’s an email I received about something that has been making the rounds for years and is still apparently out there. It concerns a system for shuffling debts to pay off a mortgage early.
Subject: Using HELOC for mortgage payment?
Message: I have seen this on TV news shows, used to pay off mortgage in five to seven years. Is it a scam? Does it work? Thanks. — Jerry
I’ll give you an answer, Jerry, along with some sources you can read yourself. But first, check out a recent video with tips for paying off your mortgage early.
Now, on to Jerry’s question.
When I first researched this years ago, I started by doing a web search for exactly what Jerry used as the subject of his email: “Using HELOC for mortgage payment.”
One of the links returned was to an article on wikiHow called “How to Follow the Mortgage Accelerator Plus Program.” The article starts like this:
We were taught to pay our mortgage payment entirely the wrong way. Using mortgage acceleration strategies, you can save thousands of dollars in interest and pay off your mortgage in a third [of] the time using the money you already make and not changing your lifestyle.
Sounds good so far. But after four convoluted steps, here’s how the author summarized the “system.” It assumes that you have a $200,000 mortgage, a $5,000 monthly paycheck, a mortgage payment of $1,000 a month, and other expenses of $2,000 a month.
- You put your entire $5,000 paycheck into your mortgage of $200,000.
- Your new mortgage balance is now $195,000.
- You put all your $2,000 of monthly “spendings” on a credit card.
- You have a $1,000 mortgage payment for a total of $3,000/month in payments.
- You use your HELOC to pay the credit card bill and the mortgage payment.
Your new TOTAL mortgage balances are:
- First lien of $195,000.
- Second lien HELOC of $3,000.
- Total = $198,000.
- Pay off the balance of the HELOC.
- In February, you get your paycheck again, but this time, put it entirely into your HELOC while keeping the balance of your first mortgage at $195,000 which is already saving you interest. With our balance of $3,000 and our positive cash flow of $2,000, the HELOC will be paid back to $0 in, technically, a month and [a] half. Then you can continue the process of putting your paycheck into your mortgage.
Get it? If not, don’t feel bad. It makes no sense to me, either.
Let’s stop and look at the big picture: What this person is telling us to do is use our entire paycheck to pay down our mortgage, then borrow the money to pay our bills. If we do that, at the end of the month we’ll owe $3,000 on our credit line and $195,000 on our mortgage for a total of $198,000. Which is the exact same amount we’d owe if we took our $2,000 positive cash flow and applied it to our mortgage balance.
These programs are supposed to work by exploiting subtle differences regarding how interest is computed between home equity lines of credit and traditional mortgages. The sales blather insists that exploiting that difference can pay off your mortgage magically early.
Of course, the magic isn’t free. From the tips section of the wiki post:
Talk to a professional! There are certified mortgage acceleration specialists that can show you the right way and the wrong way of doing things. There are multiple sources out there and they will tell the benefits and drawbacks of all of them.
In other words, there are people who sell programs — often for thousands of dollars — that are supposed to help you unlock the “secret” of using debt to accelerate the repayment of your debts.
Certified mortgage acceleration specialist? Please.
And in case you don’t believe me, here’s some similar advice from financial expert Dave Ramsey:
… [S]ome companies will try to sell you a $3,500-piece of software tied in with a home equity line of credit, or HELOC. These things are often called money merge accounts. In this situation, you pay your bills out of the HELOC, and your paychecks are deposited against the HELOC. Then, they’ll apply whatever’s left against your mortgage, and it “magically” pays off your mortgage faster. The problem is that no matter how many times you move the shell, the pea is still underneath.
So there you have it, Jerry. Another silly idea debunked by the knowledgeable and championed by people too lazy to make an honest living.
If you really want to pay off your mortgage early, do the same thing you’d do to pay off any debt early: Make extra principal payments as often as you can. And don’t ever pay for the privilege of paying more than you owe or more often than monthly.
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I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you’ve got some time to kill, you can learn more about me here.