Ok, get this one. Most mortgages are set up so that you make a monthly payment to the mortgage every month and it slowly gets whittled away until you have paid off the loan. So, to throw out some hypothetical numbers, it would look something like this:
Loan Amount: $200,000
Total Payments: $479,018
Total Interest: $279,018
Tax Savings: $83,705
Out of Pocket: $395,312
Years until paid: 30 Years
Well, most of us have our dumb little checking accounts that we use to buy groceries with, use the ATM machine, etc. What if we could open a Home Equity line against our homes that is large enough to pay off the entire mortgage on the homes; and then convince the bank to open a checking account that would automatically sweep against the line? Sweep, meaning that if we wrote a check it would add to the loan balance and if we made a deposit it would lower the loan balance. Then, you could close that dumb little checking account and deposit the money in the sweep account. Assuming that you have an average checking account balance of $5,000, the new numbers would look like this:
Loan Amount: $200,000
Total Payments: $441,761
Total Interest: $246,559
Tax Savings: $73,968
Out of Pocket: $367,793
Years until paid: 27.6
So nothing would really change in your daily spending habits, but you would save $27,519 and pay your mortgage off in over 2 years less time. Now, we all have that dumb rainy day fund as well (or we should). Why not apply that to the sweep account also? You could draw on the line if that rainy day ever did show up, so why not? So let’s say we apply that $5,000 checking account and another $10,000 from our rainy day fund. Then the new numbers would look like this:
Loan Amount: $200,000
Total Payments: $381,884
Total Interest: $196,173
Tax Savings: $58,852
Out of Pocket: $323,032
Years until paid: 23.92
So, you would save $72,281 and pay off the loan six years faster. And you wouldn’t have to change any spending habits or anything. Those dumb little accounts we hold are just getting chewed up by inflation anyway. Why not put them to work?
"Borrowing money is like wetting your bed in the middle of the night. At first all you feel is warmth and release. But very, very quickly comes the awful, cold discomfort of reality." – Elizabeth Gilbert
3 comments:
What's the savings on the first hypothetical?
I assume the banks don't let you sweep because they're making a killing off the float?
where do I sign up? really.
I can not tell you how wonderful it is NOT to have a house payment! It went really slow until we started doubling up on the principle each month. Wish we had thought of the home eq.loan!
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