How To Use Your New Home Equity Line Of Credit
To Create An "Interest Offset" Account.

The whole reason we are using the Home Equity Line Of Credit is to offset Mortgage Interest by holding the money that would normally reside in a low interest checking or savings account against the mortgage balance.  By transferring part of your mortgage balance to the HELOC and then depositing the money from your checking account into the HELOC, you have effectively created an "Interest Offset" account.  The money in your checking or savings account generally earns much less than you are paying on your fixed mortgage, so this is referred to as "Lazy Money".  The biggest source of Lazy Money for most people is found in their checking account, so that is where we will begin.

If you have monthly net income of $5000 that normally goes into your checking account, we will instead transfer that money to your HELOC.  First however, you will make a $5,000 payment ( or a bit more ) from your HELOC to your home mortgage.  This will reduce the balance of your mortgage by that amount and now the balance will be in your HELOC. 

You can see the initial transaction reduces your monthly interest cost from $781.25 to $755.21, so more of your payment will be going to principal and less to interest.  It doesn't make a big difference in the first few months, but compounded over time grows to $24,730.82 in this example.  Small changes make big differences over time.

Interest on your primary mortgage is calculated at the end of each month for the following month.  So when you make a pre-payment, you want to make sure you do it on about the 27th to make sure it's in there before the calculation is made (ask your banker).  Then your interest charge the following month will be lower.

Once your $5000 has gone to your mortgage, now you can deposit the money from your checking account into the HELOC.  Since your "Lazy Money" is offsetting the balance in the HELOC, you will pay very little interest on that account.  That's why the interest rate is unimportant.  Once you have done this a few times you will find it literally takes you a few minutes per month.

Use Float As Much As Possible

The key to making this work well for you is to keep your money working for you as long as possible.  Contact any company that you need to send a monthly check to and see if you can change your payment to the end of the month.  Make all of your small purchases such as groceries, the cable bill, hair cuts etc on a credit card that has a 1 month grace period.   Then pay the whole credit card balance when it's due, so you don't pay any interest charges.  You should be able to automatically pay the full balance of the credit card out of your HELOC.   The more you can utilize "float" on your money, the more interest you will save.

Simply by using a cash back reward card such as these to pay your everyday expenses you could earn several hundred dollars in rebates or a free vacation!  Read the terms at the bottom of each application page to choose the one that is right for you.  Based on our spending habits Chase Freedome is the best choice for my wife and I as it offers the 3% cash rewards in the areas we purchase the most ( Groceries, Gas & Restaurants ).  The overall interest rates are higher, but we will not carry a balance on this card whenever possible.  The Discover More Card and American Express Blue Cash offer up to 5% cash back but there are higher spending requirements on Blue Cash and the 5% categories on Discover More change 4 times per year.  No one card is right for everyone, so choose the one that's best for you.

Accelerating Your Progress

When it comes to paying down debt, you are in total control of how fast the process occurs.  If you leave a few bucks in the account at the end of each month and then add that to your mortgage payment the following month, it will make a dramatic difference. 

By using the Payment Spreadsheet, you will be able to see how much money you will save under various scenarios.  Here are a few examples based on our $150,000 loan: 

As you can see, painless changes in your spending can create huge savings over time.  By simply leaving $25 per month in your account ( & adding it to the next month's mortgage payment ) will save you an additional $12,129 and reduce the length of your mortgage by nearly 2 years.  It makes sense to make your mortgage and HELOC the foundation of your financial plan.  Once you have substantial equity in your home, you can ask your bank to raise the limit on your HELOC and use it as a source of funds for major purchases or even college tuition.  When you aren't using the money for anything it is offsetting your mortgage principal and saving you a substantial amount of interest.

Summary:

1. Once your HELOC is set up, pay the amount of your monthly income from the HELOC to your mortgage.

2. Transfer your money from your checking account into your HELOC.  See if you can set up your HELOC as a "overdraft protection" account for your checking account.

3. Pay your bills using a credit card (that has an "interest free" grace period) or pay them as late in the month as possible, to maximize the amount of time your money sits in your HELOC.

4. At the end of the month, see how much money is left in your account and pay that to your mortgage or add it to your next mortgage payment.

By taking a few minutes per month to do a couple money transfers you can save thousands of dollars over the coming years.  Click Here to see how much money you can save in your situation.