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Good Debt, Bad Debt, and a Faster Way to Pay Off a Mortgage

house sitting on money with...
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There is a big misconception in the financial world and among consumers today that all interest is the same: that, for example, a 6 percent mortgage is the same as a 6 percent line of credit. That's not true, because the type of interest you are paying and how it is calculated are just as important.

Most U.S. mortgages are financed with fully amortizing loans. This means that a monthly payment to pay off the loan is based on the interest rate, the amount and the term. For example, if you borrow $200,000 using this kind of loan, your payment based on a 6 percent rate and 30-year amortization schedule is $1,075.

You may have heard that just one extra payment a year toward the principal of such a loan will pay it off about 10 years sooner. Homeowners have many reasons not to do this. They don't want to tie up that extra $1,075 in their house. They receive no immediate benefit. They would rather keep their $1,075. They want to spend it on something they probably don't need and won't want three months after they buy it. They reason that they will sell their home in eight years anyway, so it doesn't matter. Or they believe interest rates are so low now that they should borrow as much as they can, and invest all of their money rather than paying down debt, because they will come out ahead that way.

That last argument is seriously flawed.

Reduce the Finance Charge

In home equity lines of credit -- also called HELOCs -- the interest rate is less important than the finance charge. Finance charges on lines of credit are figured on average daily balance for the month. For example, when the 30-day finance period closes, your bank calculates that you had an average daily balance of $50,000 and the interest was 6 percent, so you will pay $8.22 per day in finance charges. Your interest charges for the month total $247, so your total payment might be around $325 because the bank will also require some money toward the principal. Simple enough, right?

What happens if on the first day you pay $5,000 on the principal? Your balance is now $45,000, so your 6 percent rate now produces a finance charge of $7.40 per day or $222 for the month. You consider that $5,000 as a pay-down, but your bank considers that $5,000 as your payment for the month.

Where do we get the $5,000? How about if you used your paycheck? Too many Americans let their pay sit in checking accounts until they pay bills. Why let that money sit there earning zero (or very little) interest? Let that income sit in your revolving line of credit to reduce or cancel finance charges.

If the line of credit is properly set up, would you be able to access your funds by writing a check? Absolutely! Would you have immediate access to any extra loan pay-downs, such as the $5,000 in the example above? Absolutely! Would the time that your money sat inside the line of credit affect your finance charge to your favor? Absolutely!

Make Every Penny Count

Let's go back to that example. You pay down $5,000 on your line of credit -- but only for 20 days, until you need most of the money to pay bills. The money then gets withdrawn (borrowed again). Your average daily balance and finance charge have been reduced. This is making every penny count by earning or canceling interest every day.

The next step is to leave some discretionary income in the line of credit. Over time, your line of credit will fall dramatically and seemingly without effort. When you balance goes down to $40,000 and all the bills are paid for the month, you can borrow $10,000 from the line of credit and send it to your first mortgage as loan pay-down? You should and do it as often as possible.

You are systematically transferring your debt from front-end-loaded amortized debt to average daily balance debt. Every time you do this, your will increase the port of your regular mortgage payment that goes towards the principal and reduce how much goes toward interest. In this was, you can use the principles of interest cancellation (and some of your discretionary income) to pay off mortgages, cars and any other amortized loan in a fraction of the scheduled time. I've had many clients take almost-new 30-year mortgages, and using this program, put themselves on pace to pay them off in six to 12 years without it affecting their lifestyle.

Many Australians open big lines of credit to buy their homes and pay their mortgages off in a fraction of the time it takes most Americans.

John Jamieson is the best-selling author of "The Perpetual Wealth System" and each week promotes a free training video of the week.

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Can you explain further this part, "If the line of credit is properly set up..." -- what is necessary for the account to be set up properly to work the best in our favor? Thank you!

April 23 2015 at 7:54 PM Report abuse rate up rate down Reply
Shapna Patel

Before applying for a mortgage, you need to find the right type of home loan depends on your financial backup. Else, it may lead you to various financial issues include Short sale, foreclosure or bankruptcy.

July 05 2014 at 1:37 AM Report abuse rate up rate down Reply

You can pay your debt by following some thing
1. Reduce your spending
2. Save your money
3. Put some extra money in your installments for debt and don't wait for the next installment. just pay as more as you can
4. The final thing is that. Look for a good reputable lender who can take your debt but it is not good way. You have to deal it using common sense and reducing your extra spending. Thanks!

May 21 2014 at 7:30 AM Report abuse rate up rate down Reply
La'Dae Hickem is a nice way to get extra income

May 11 2014 at 1:54 AM Report abuse rate up rate down Reply

It's pretty simple (in theory) to get out of debt - just spend less than you make for a long, long time. Unfortunately, in practice, it's pretty hard. I know from experience...
I just paid off a $300k + mortgage (at age 28). My tips -
1) Start by selling everything you don't need.
2) Cut eating out as much as possible.. aim for eating on less than $2/day (definitely possible).
3) Cut back on transportation costs. Drive a cheap car (Honda Civic), get cheap $25/month insurance (check Insurance Panda), use GasBuddy for gas.
4) Don't bite off more than you can chew with rent/mortgage or whatever house cost you have.
5) Pay off all your debts one by one. Start with the highest interest ones.

May 07 2014 at 1:58 PM Report abuse rate up rate down Reply