Take years off the life of your mortgage.

I’m a firm believer that real estate is a good investment, but I still want to maximize my dollars as they travel from my pocket to the bank’s balance sheet.  Earlier this month I wrote about some credit card programs that offer rebates and award incentives that are pretty darn attractive to the disciplined consumer – and I know we’re all looking for all the help we can get.  Everyone wants to get in the game, regardless of their mortgage balance, but there is also the fact that the larger the mortgage the greater the potential gain.

Even in a generally declining market Marin County real estate is still pretty solid, but there is no disputing that it is expensive.  With the hefty mortgages that many of my clients shoulder, I hear all sorts of conversations about creative financing and ways to make every dollar count.  A plan that I think has been around a while, but I only recently became aware of, is a tactic that can reduce your first mortgage by using an equity line of credit in conjunction with the grace period allowed on credit cards.

Simplified, the way it works is this:

• Take out a home equity line of credit.  The interest rate must be lower than that on your first mortgage.

• Use the line of credit to pay down the first mortgage by the maximum limit on the line of credit.

• Deposit the bulk of your monthly income into the line of credit account so the interest due each month will be calculated on a lower average balance.

• Pay as many expenses as possible with a credit card, taking advantage of the grace period and leaving your money in the equity account as long as possible.  When the credit card bill comes due each month, pay it in full from the equity line.

The idea is to pay down the first mortgage so more of the monthly payment goes towards the principal instead of interest, reducing the life of the mortgage.  At the same time, as much money as possible needs to sit in the equity account.  Depending on how much money you typically have left over at the end of each month, you can have your equity loan repaid within a year or two, then begin the process over again.

For this to work, several things must happen:

• The home equity line of credit interest rate must be lower than your mortgage interest rate.

• There must be a strong positive cash flow.  The more cash left over at the end of each month that stays in the equity account the better, as the balance will be paid down faster.  Your money will be in the equity account instead of a savings account.

• The credit card used for living expenses is paid in full every month.

• The house payment remains the same and is paid every month.

This process doesn’t make sense for people who carry credit card balances or aren’t disciplined in their spending habits.  The temptation to take advantage of available credit is always there.  You also need to have enough of a positive cash flow that there will be hundreds, if not thousands, of dollars left at the end of each month to pay down the line of credit account.  As always, common-sense is an important regulator – but thinking out of the box and being bold enough to implement strategies that will maximize your wealth is key to gaining financial independence – or at least stretching the dollar!

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