HELOC shuffle can trip up other opportunities

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In a weakening housing market and a mortgage mess like the one we have now with spiked payment rates and negative amortization, it comes as no surprise that borrowers are becoming more eager to pay off their loans early and companies are willing to show them how, for a price, of course.

One strategy increasingly discussed online is referred to as the HELOC shuffle. Money is moved in and out of a home equity line of credit to accelerate mortgage payments. You use the credit to make principal payments and replenish the loan with your paychecks.

But before falling prey to one more mortgage-related route to increased debt or reduced savings, consider what we learned. For starters, much of the push is coming from developers of software that prompts an individual as to when to make principal-only payments. The software reportedly costs as much as $3,500. Even if one were to forego the use of the software, paying off a mortgage in this way can cost consumers by lost tax benefits and lost investment opportunities that would have resulted from application of their monthly income in other ways.

Take the case of Lin Ennis, co-author of “Let Your Mortgage Make You Rich!” She says she paid just $208 in interest on the HELOC and cut $69,542 of future projected interest from her 30-year fixed-rate loan of $200,000 at 5.875 percent by making a $5,000 HELOC withdrawal four times in 2 years. (Her HELOC rate started at about 8.25 percent.)

The problem with the sales pitch for these programs is that they put your focus on numbers that have no meaning. The bulk of Ennis’ “savings” came from paying down the principal, says mortgage planner Jay Dacey. But had she invested the $20,000 from the four HELOC withdrawals at 7 percent, she would have reaped $152,245 in 30 years, he says.

The software programs are about timing—making payments at the beginning instead of the end of the month, Dacey says.

Disciplined savers can do away with the HELOC software programs and their expenses, not to mention the danger it poses on using their home as collateral.

S. Berg