Be careful when you sign documents allowing you to receive a 12 months "same as cash" loan. Although it could take some time to explain, let me keep this very simple by just saying "same as cash" only equals "same as cash" as long as you pay your loan off in the "same as cash" period.
For example if you sign a 12 month "same as cash" loan make sure it's paid off in 12 months. The reason is simple yet severe. If you don't pay off the loan in the 12 month period, in some cases, the interest not paid during the 12 months will be applied to your loan after the 12 month grace period is over. For example, and to keep the numbers simple, if you were to borrow $2000 at 25% with a 12 months "same as cash" loan and you failed to pay the entire amount of $2000 within the 12 months the 25% would be added to your loan.
Here's a hypothetical situation, but a real one.
John, applies for a $2000 same as cash loan at 25%. John now has one year to pay off the $2000 at no interest so john pays $100 per month for those 12 months. At the end of 12 months, John owes $800. Now at 13 months, or one month after the 12 month grace period has ended there is still a balance owing on the John's loan meaning the loan was not paid in full. This means the "same as cash" terms were not met, so the 25% of the $2000 will now be added to the balance and John will now owes $1300 on his account.
If you have signed a "same as cash" agreement, you may want to check to make sure you are not going to have all the back interest added upon failure to pay off the balance in time. Your other option is to pay off your balance by the end of the grace period.
Wednesday, April 16, 2008
Saturday, April 12, 2008
Using a HELOC to pay off a mortgage.
There are many companies out there right now promoting the use of a second mortgage, or a Home Equity Line of Credit (HELOC) as a tool to payoff your mortgage faster. However, the secret to paying off your mortgage faster has little to do with the HELOC, and a lot to do with paying more each month toward your principle.
I could go into great detail about this, but to save time, I'll simply tell you the facts. The fact is, using a HELOC as a tool to pay off your mortgage only works to save you time and interest if you have extra income each month to pay toward your mortgage principle.
If you were to borrow say $5000 from from a second mortgage at 8% to save 6% by paying that $5000 to your first mortgage, that would only cost you more money in the long run. It's never a good idea to borrow at a higher interest rate to pay off a lower one. The problem is, that's what some mortgage acceleration companies are telling you to do. Why?
Well, if I borrow $5000 from a second mortgage, or HELCO at 8% a year and then use that money to pay $5000 toward a 6% a year loan, but then pay back that $5000 in just a few months, then I would save money. This is only, if I pay it back quickly enough that I pay less interest.
Again though, this savings doesn't have as much to do with the HELOC, as it does with the extra money I used to pay off the $5000 quickly. The extra income you could use to pay back the $5000 quickly, is called discretionary income, or income left over after all your other bills.
This discretionary income is the real mortgage accelerator, not the HELOC. In order to make this as simple as possible, I'll just put it this way, if you have an extra say $200 a month you wanted to use to pay your house off more quickly, and your mortgage balance was $150,000, paying that extra $200 per month on your mortgage would save you 11 years and about $71,000 in interest.
The best part is, I didn't even need a HELOC. If I had used a HELOC, borrowed the money from it to pay on the first mortgage, and then paid it back quickly using the extra $200 each month, I would only save about 9 more months. The point is, you don't need a HELOC, or any software to save yourself thousands of dollars on your mortgage. Just apply some additional money each month to your mortgage, and you can save thousands of dollars and many years.
For more information check out this link: http://www.kiplinger.com/magazine/archives/2008/05/prepay_mortgage.html
I could go into great detail about this, but to save time, I'll simply tell you the facts. The fact is, using a HELOC as a tool to pay off your mortgage only works to save you time and interest if you have extra income each month to pay toward your mortgage principle.
If you were to borrow say $5000 from from a second mortgage at 8% to save 6% by paying that $5000 to your first mortgage, that would only cost you more money in the long run. It's never a good idea to borrow at a higher interest rate to pay off a lower one. The problem is, that's what some mortgage acceleration companies are telling you to do. Why?
Well, if I borrow $5000 from a second mortgage, or HELCO at 8% a year and then use that money to pay $5000 toward a 6% a year loan, but then pay back that $5000 in just a few months, then I would save money. This is only, if I pay it back quickly enough that I pay less interest.
Again though, this savings doesn't have as much to do with the HELOC, as it does with the extra money I used to pay off the $5000 quickly. The extra income you could use to pay back the $5000 quickly, is called discretionary income, or income left over after all your other bills.
This discretionary income is the real mortgage accelerator, not the HELOC. In order to make this as simple as possible, I'll just put it this way, if you have an extra say $200 a month you wanted to use to pay your house off more quickly, and your mortgage balance was $150,000, paying that extra $200 per month on your mortgage would save you 11 years and about $71,000 in interest.
The best part is, I didn't even need a HELOC. If I had used a HELOC, borrowed the money from it to pay on the first mortgage, and then paid it back quickly using the extra $200 each month, I would only save about 9 more months. The point is, you don't need a HELOC, or any software to save yourself thousands of dollars on your mortgage. Just apply some additional money each month to your mortgage, and you can save thousands of dollars and many years.
For more information check out this link: http://www.kiplinger.com/magazine/archives/2008/05/prepay_mortgage.html
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