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Thread: Using LOC to pay off Mortgage Faster ( Lump sum Pre Payment ). Is it worth it ?

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    This is NOT for me , but someone else.

    They have a 5 year fixed term closed mortgage @ 3.2 %. They have 3 yrs left in the 5 yr term, so they are 2 yrs into the Mtg.

    They have a 30 yr amortization . They are paying about $ 700/month in mtg , but $ 400 of it is interest only & only $ 300 is going to the principle, due to this ridiculous 30 yr amortization.

    The outstanding balance as of today is around $ 150,000 .

    They can make 20 % lump sum prepayment without any penalty charges.

    They are planning to take a HELOC at 3.65 % of $ 20,000 , and use this $ 20,000 to make a lump sum payment towards the $ 150,000 outstanding balance. I think the HELOC might be for 5 - 10 yrs not like the 30 yr amortization for the Mtg

    Will they come out ahead ?

    Sure they will be paying 3.65 % ( HELOC ) on this $ 20,000 , but over the period (amortization) of the Mortgage they might save tons in interest charges on the Mortgage itself. As the lump sum pre payment is immediately applied to the Outstanding balance

    So more of the monthly payment will go towards the priciple & less towards interst of the Mtg.

    HELOC = Home Equity Line Of Credit .

    Is it a straight NO , bcoz the HELOC is higher at 3.65 % and Mtg is lower at only at 3.2 % , or is it more complicated than that.

    I am assuming the 30 yr amortization comes into play into the equation and the whole in the initial stages of the mtg most of the payment goes towards the interest & less to the principle , and in the later stages just the opposite is true.
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    Last edited by tjthemanto; Sat, Oct 18th, 2014 at 07:44 AM.


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    Junior Canuck
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    Great question. Looking forward to responses (sorry, I have no idea)
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    Smart Canuck
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    Interesting, we're in a much shorter term mortgage but have a similar rate for both LOC and mortgage, would like to hear response too.
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    I'm in similar situation, waiting for answer too.

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    Luv Saving People Money MortgageQueen's Avatar
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    CORRECTED INFO:

    If they were to put $20k down on the mortgage it would reduce the mortgage amortization to 24 years, 1 month with a "potential" savings of $25,730 . . .OR interest savings of $5,730.
    Ok, so if your friends were to use a line if credit, the question would be how long are they planning to take to pay it off? That would be the only way to calculate their interest cost for the LOC.

    If they were to pay it off in 2 years, payment would be aprox $867/mo. - TOTAL Interest cost $ 808

    3 years- $589/mo.- Interest $1,204
    4 years- $450/mo - Interest $1,600
    5 years- $367/mo - Interest $2,020
    6 years- $311./mo- Interest $2,392

    I ended at 6 years because that equals the amortization time they'd save.

    So depending on the amount of time they take to Pay Off the LOC, is what the savings are.

    JUST TO MAKE IT MORE COMPLICATED. . .don't forget that 3.5% LOC interest rate WILL fluctuate with Prime, so you can be guaranteed those figures will change. . . probably even a year from now- the rate will go up, at least slightly.

    Personally, unless they could pay off the LOC in 2 to 2 1/2 yrs., I would just put those monthly payments aside and put the total amount of them down on a lump sum payment once a year
    Last edited by MortgageQueen; Tue, Oct 21st, 2014 at 01:34 AM. Reason: incorrect info.

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    Quote Originally Posted by MortgageQueen View Post
    If they were to put $20k down on the mortgage it would reduce the mortgage amortization to 24 years, 1 month with a "potential" savings of $25,730 . . .OR interest savings of $5,730.
    Ok, so if your friends were to use a line if credit, the question would be how long are they planning to take to pay it off? That would be the only way to calculate their interest cost for the LOC.

    If they were to pay it off in 2 years, payment would be aprox $867/mo. - TOTAL Interest cost $ 808

    3 years- $589/mo.- Interest $1,204
    4 years- $450/mo - Interest $1,600
    5 years- $367/mo - Interest $2,020
    6 years- $311./mo- Interest $2,392

    I ended at 6 years because that equals the amortization time they'd save.

    So depending on the amount of time they take to Pay Off the LOC, is what the savings are.

    JUST TO MAKE IT MORE COMPLICATED. . .don't forget that 3.5% LOC interest rate WILL fluctuate with Prime, so you can be guaranteed those figures will change. . . probably even a year from now- the rate will go up, at least slightly.

    Personally, unless they could pay off the LOC in 2 to 2 1/2 yrs., I would just put those monthly payments aside and put the total amount of them down on a lump sum payment once a year
    Thanks
    Last edited by tjthemanto; Tue, Oct 21st, 2014 at 08:34 AM.

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    I had asked them to go for a 20 - 25 yr MTG. amortization.

    But 2-3 yrs back , they could only qualify for 30 yr amortization, and not less. Plus I think their MTG is uninsured as CMHC would only insure upto 25 yr amotization.

    I think 30 yr amotization is now banned ( not sure ) , and the largest is 25 yrs . I remember the late finance minister Jim Flaherty doing something like that.

    Its crazy how much interest charges you pay and very little goes towards the principle in th intial stages of a 30 yr MTG , people just don't get that ..all they want is low monthly payments
    Last edited by tjthemanto; Sat, Oct 18th, 2014 at 08:11 AM.

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    In regards to their mortgage being insured, trust me . . it's insured.
    The 30 year amortization is not banned, but it's very restricted as to who can qualify for it.

    Last edited by MortgageQueen; Tue, Oct 21st, 2014 at 12:39 AM.
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    Makes no sense.

    Do not take out a higher interest loan to pay off a lower interest loan. There are some circumstances where this can be better - such as one being deductable, and the other not. By the sounds of this particular case, it does not appear to be so.

    The amortization period does not really enter the equation - it's a case of which one has the lower interest rate, period.

    Better off to stockpile money in an interest bearing account, then the once per year (or however often you are able to), pay down a chunk.

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    Quote Originally Posted by tjthemanto View Post
    Is it a straight NO , bcoz the HELOC is higher at 3.65 % and Mtg is lower at only at 3.2 % , or is it more complicated than that.

    I am assuming the 30 yr amortization comes into play into the equation and the whole in the initial stages of the mtg most of the payment goes towards the interest & less to the principle , and in the later stages just the opposite is true.
    I am not a mortgage expert. Just thinking out loud...

    If something happened to their job, they would have
    1) original mortgage to pay
    2) HELOC to pay

    This sound stressful and it's a gamble.

    Can they do a short term part-time job and put the extra money to the principal.
    Some people work at elections, work Christmas retail jobs, work summer jobs or deliver pizza.Only for a short time.

    Tell the mortgage company that any extra payment goes to the principal payment, not a regular payment not the regular payment. This would make a difference, small payment but still helpful.

    It's hard to sleep when you add a second debt to pay off a first debt

    Just my thoughts

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    I don't see how this helpful unless this person enjoys paying bills in lue of prepayments. I think over the long term just pay as much as you can early in your prepayment.

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    Quote Originally Posted by MortgageQueen View Post
    f they were to put $20k down on the mortgage it would reduce the mortgage amortization to 24 years, 1 month with a "potential" savings of $25,730 . . .OR interest savings of $5,730.
    Ok, so if your friends were to use a line if credit, the question would be how long are they planning to take to pay it off? That would be the only way to calculate their interest cost for the LOC.

    If they were to pay it off in 2 years, payment would be aprox $867/mo. - TOTAL Interest cost $ 808

    3 years- $589/mo.- Interest $1,204
    4 years- $450/mo - Interest $1,600
    5 years- $367/mo - Interest $2,020
    6 years- $311./mo- Interest $2,392

    I ended at 6 years because that equals the amortization time they'd save.

    So depending on the amount of time they take to Pay Off the LOC, is what the savings are.

    JUST TO MAKE IT MORE COMPLICATED. . .don't forget that 3.5% LOC interest rate WILL fluctuate with Prime, so you can be guaranteed those figures will change. . . probably even a year from now- the rate will go up, at least slightly.

    Personally, unless they could pay off the LOC in 2 to 2 1/2 yrs., I would just put those monthly payments aside and put the total amount of them down on a lump sum payment once a year


    Thanks.
    Last edited by tjthemanto; Tue, Oct 21st, 2014 at 08:28 AM.

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    Removed
    Last edited by MortgageQueen; Tue, Oct 21st, 2014 at 12:40 AM.

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    Quote Originally Posted by MortgageQueen View Post
    If they were to put $20k down on the mortgage it would reduce the mortgage amortization to 24 years, 1 month with a "potential" savings of $25,730 . . .OR interest savings of $5,730.
    Ok, so if your friends were to use a line if credit, the question would be how long are they planning to take to pay it off? That would be the only way to calculate their interest cost for the LOC.

    If they were to pay it off in 2 years, payment would be aprox $867/mo. - TOTAL Interest cost $ 808

    3 years- $589/mo.- Interest $1,204
    4 years- $450/mo - Interest $1,600
    5 years- $367/mo - Interest $2,020
    6 years- $311./mo- Interest $2,392

    I ended at 6 years because that equals the amortization time they'd save.

    So depending on the amount of time they take to Pay Off the LOC, is what the savings are.

    JUST TO MAKE IT MORE COMPLICATED. . .don't forget that 3.5% LOC interest rate WILL fluctuate with Prime, so you can be guaranteed those figures will change. . . probably even a year from now- the rate will go up, at least slightly.

    Personally, unless they could pay off the LOC in 2 to 2 1/2 yrs., I would just put those monthly payments aside and put the total amount of them down on a lump sum payment once a year
    Thanks
    Last edited by tjthemanto; Tue, Oct 21st, 2014 at 08:29 AM.

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    Interest only payments on a $20,000 line of credit would be approx $63 a month.... not over $700. That would be an interest AND principal payment, and would pay off the HELOC in approximately 3 years.
    However, instead of increasing your debt again by $20,000 you would still be further ahead to set money aside until you had enough to pay a lump sum towards the mortgage. Another option to look for when you are deciding on a mortgage is to make sure you have the option to make a double payment whenever you want. The "second" payment is applied directly to the principal.

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