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.
We’ll explore both methods and assess which method could yield better savings.
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 a 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.
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 That means any extra principal payment made to the mortgage cannot be withdrawn unless the borrower refinances.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.
HELOC to pay off a mortgage Faster.
Using a HELOC to pay off a 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.
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 making extra payments.
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.
Sam Kwak, the founder of Accelerated Banking, provides an excellent video analysis of why this concept can be more advantageous than just paying extra into the existing mortgage:
https://www.youtube.com/watch?v=UWwqDaIYeR8
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.
Media Contact
Company Name: Accelerated Banking
Contact Person: Sam Kwak
Email: Send Email
Country: United States
Website: https://acceleratedbanking.com
