re: Replacing mortgage with HELOC to pay house off quicker

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The “method” of paying off your mortgage early using a HELOC is more than a little complicated. You can read the full version of the strategy here, but here’s a summary of how it works:

You must have a positive cash flow—that is, your monthly income exceeds your expenses—the more the better.

In select months, you put your entire paycheck towards your mortgage.

You need a credit card, one that will give you “free money” (a grace period) for up to 45 days.

In the months when you put your entire paycheck towards your mortgage, you put the rest of your expenses on your credit card.

You add a HELOC to your home, preferably one with a debit card.

After the end of the credit card grace period, you transfer your entire credit card balance to the HELOC.

With your next paycheck, you pay off your HELOC balance, instead of your mortgage.

The next paycheck—after the one that pays off the HELOC—is once again applied to your mortgage.

Repeat the cycle again and again.

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Confused? Let’s work out an example.

Say you have a $200,000 mortgage, and your net paycheck is $5,000 per month. One month, you apply your whole paycheck to the mortgage. This immediately lowers the mortgage balance to $195,000. That month, you pay your non-housing living expenses, say $2,000, using your credit card.

Then, you pay your mortgage payment, say $1,000, using your HELOC. You also pay your credit card balance with your HELOC. At the end of the month, you owe $3,000 on the HELOC and $195,000 on the mortgage, but your credit card has a zero balance.

The next month, your $5,000 paycheck goes to paying $1,000 for the mortgage payment and $2,000 for living expenses. The remaining $2,000 reducing the HELOC to $1,000.

In the third month, your $5,000 paycheck goes to paying $1,000 for the mortgage payment, $2,000 for living expenses, and $1,000 to zero-out the HELOC.

That leaves you with an extra $1,000, which you carry over to the fourth month. And in the fourth month, you repeat the original cycle of paying your entire $5,000 paycheck toward the mortgage, lowering it to $190,000.

If you are successful in managing this strategy, you should be able to manage four $5,000 payments toward your mortgage each year, above and beyond your regular monthly mortgage payments. That means paying an extra $20,000 of mortgage principal each year.

At that rate, your mortgage will be paid in full after substantially less than 10 years (remembering that the regular mortgage payments that you are continuing to make will also reduce the mortgage balance in increasing increments).

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