Extra Payment vs. HELOC to Pay Off Your Mortgage

Wednesday, July 24, 2024

Accelerated Banking Blog/HELOC to Pay Off Your Mortgage/Extra Payment vs. HELOC to Pay Off Your Mortgage

Extra Payment vs. HELOC to Pay Off Your Mortgage

Many homeowners are now discovering a new method of paying off a mortgage faster. A concept that uses a Home Equity Line of Credit (HELOC) to pay off a 30-year mortgage faster. But this concept isn't new. A bank in Australia first introduced it to the United States in the early 2000s. In fact, this concept is widely used in Australia. Australian homeowners are using it to pay off their mortgages faster. So much so that there’s even a different type of mortgage called an “offset mortgage”. Here in the United States, the offset mortgage doesn’t exist - but a similar method can be replicated using a HELOC.

But how does using a HELOC to pay off a mortgage help? And how is it different from sending an extra principal payment to your mortgage? Which method helps save more money and time?

First, let’s explore the possibility of simply sending extra principal payments.

Extra Principal Payments

Sending extra principal payments is a great way to reduce your mortgage balance. It can certainly help save time and interest on a mortgage. Borrowers can pay off their mortgages faster and save money in the long run. Here's what the borrower needs to know when sending extra payments to the mortgage. The borrower must inform the bank or the mortgage company that the extra payment is applied to the principal only. If the borrower does not let the bank or the mortgage company know, the bank may apply the extra payment as scheduled payments. That has no extra effect on the principal balance reduction.

There's another popular version of sending extra principal payments. It's making payments on a “bi-weekly” schedule. In this version of sending extra payments to the mortgage, the borrower sends a total of 26 half payments per year. Instead of a traditional way of sending one payment per month, the borrower may choose to divide the monthly payments into two. Then, the borrower sends in half of the monthly payments every two weeks.

For example, if a borrower’s payment is $1000 a month. Rather than making twelve $1000 payments, the borrower will make $500 every other week. By doing this, the borrower has made a total payment of $13,000 instead of $12,000. In the end, the borrower has made an extra $1000 payment to the mortgage at the end of the year.

However, there are some drawbacks to this method. For one, a mortgage is a closed-ended loan. That means any extra principal payment made to the mortgage cannot be withdrawn unless the borrower refinances. This can be limiting if the borrower needs cash for emergencies or even an investment opportunity.

But Isn’t That What a Savings Account Is For?​

It’s widely recommended that U.S. households should have at least 6 months of expenses saved. The 6 months of expenses are for a financial emergency or a crisis. So many homeowners may not imagine needing to withdraw funds from their equity. But, few homeowners have 6 months of expenses saved. Also, there are instances where a household may need more than 6 months’ worth of expenses for dire and unexpected expenses. Even if the borrower has 6 months of savings, the yield on the interest is almost always lower than the cost of today’s mortgage rates.

That’s where a HELOC can come in handy.

Using a HELOC to Pay Off Your Mortgage Faster

Using a HELOC to pay off your mortgage could be a better alternative. This concept has many names from Velocity Banking, Accelerated Banking, and, mortgage acceleration. For the sake of this article, we will call it Accelerated Banking. Accelerated Banking is not for everyone. Like any financial concept, borrowers should understand how it works and its potential risks.

Accelerated Banking suggests that a HELOC is used to pay off a mortgage faster. As a quick summary, here’s how it works. A homeowner would get a HELOC either in a 1st lien or a 2nd lien position. Using the HELOC, the homeowner would make a lump sum principal payment from the HELOC to the mortgage. By doing so, the homeowner accelerates the amortization of the mortgage. This would save time and money on the mortgage. This results in the homeowner having a balance on the HELOC equal to the extra principal payment.

Yet, the HELOC offers a unique mathematical advantage if used properly. Because a HELOC is an open-ended loan, the borrower can pay back and withdraw any principal part of the loan again. This mechanism offers an advantage that’s not found in a traditional mortgage.

HELOC interests are calculated using the daily balance and the daily interest rate. The banking institution takes the annual interest rate and divides it by 365 days. This represents the daily interest rate. Daily balance is the balance of the HELOC on a given day. This is important because if the balance were to change, so does the interest cost.

Users of Accelerated Banking can take advantage of this calculation. They “deposit” their entire paycheck into the HELOC to reduce their daily balance. Subsequently, the borrower pays less interest. However, the borrower can make draws at any time for life expenses due to the revolving nature of the HELOC. Between the deposits and withdrawals, the balance of the HELOC remains low. Possibly even lower than just making extra payments. By doing so, the borrower can keep the daily balance relatively low and thus, keep the interest low.

So here’s an illustration that demonstrates how a simple extra payment can affect the interest cost:


What this illustration is demonstrating is a one time $1,000 principal payment on this line of credit. At 6%, the borrower can expect to pay a total interest of $46.48. The illustration also demonstrates the daily interest cost based on the balance of that specific day. As soon as the balance is decreased by the payment, the interest is also decreased substantially.

Now let’s illustrate the process of using a HELOC to pay off the mortgage. As prescribed by Accelerated Banking, this illustration demonstrates the process:


Instead of making a $1,000 extra payment to the line of credit, the borrower “deposits” their entire paycheck of $5,000 to the balance, as an example. The borrower can now expect to pay significantly less interest each day due to the reduction of balance. And because of the revolving nature with the line of credit, the borrower can withdrawal $4,000 for life expenses. By doing so, the borrower has effectively delayed the interest accrual for nearly 4 weeks.

The end result? The borrower has only accrued $26.55 of total interest using the Accelerated Banking concept. Compared to $46.48 of interest, the borrower could pay only $26.55 according to this illustration.

Now, a question remain. How is it possible to delay the living expenses into one lump sum payment at the end of the month? Is it realistic? While it can’t be done perfectly, Accelerated Banking users can use a credit card to make it possible. Instead of making multiple draws from the line credit, the user can make everyday purchases on their credit cards. Charges on credit cards don’t accrue interest right away. Typically, the interest on a credit card isn’t charged until the next billing cyclce. So before the statement period ends, the user pays off their credit card balance to zero to avoid interest. This is one way to “consolidate” all of the life expenses to one single draw from the line of credit.

​So with a HELOC, a homeowner can take advantage of the unique mechanism to save both time and interest. Even better, the homeowner has the flexibility to draw funds in case of dire emergencies.

The Conclusion

If the homeowner qualifies for Accelerated Banking, using a HELOC could help! It can pay off their mortgage with even more advantages than just simple extra payments. Accelerated Banking concept can also provide liquidity and flexibility. Additionally, it’s very comparable and competitive when it comes to savings as well.

Accelerated Banking is also a company that provides education, consulting, and software. They also help determine whether a homeowner qualifies to use the concept. To learn more, please visit https://acceleratedbanking.com/free-virtual-class. Accelerated Banking offers a free webinar on how the concept works.

*Accelerated Banking is not affiliated or endorsed by CBS, Fox News, Market Watch, Business Insiders, Money Magazine, and Yahoo Finance.

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