Savvy Borrowers Can Capitalize on Interest Rate Float
The concept is relatively simple. The borrower purchases or refinances a property using a special home equity line of credit (HELOC) that allows one to reduce the principal or advance cash at any time, something that can’t be done with a conventional loan. The borrower then directly deposits his/her entire paycheck each pay period into the HELOC thereby reducing the principal balance. Regular monthly expenses, other than the mortgage payment, are paid for by draws against the line of credit via cash withdrawal, check, credit card or online automatic bill pay. The positive cash flow (any money above and beyond regular monthly expenses) continues to push the principal balance lower. The end result is that the borrower captures the interest savings because the average daily balance is less than it would be on a normal loan. It is important to note that the money from additional principal payments on a conventional loan cannot be pulled back out without getting a HELOC or refinancing. The home ownership accelerator gives the borrower the confidence to pay the balance down aggressively to save interest, but provides liquidity in the event of an emergency or investment opportunity.
Many people are sitting on large sums of liquid cash in the form of low interest bearing checking and savings accounts that might be earning an average of 2 percent to 4 percent per year. To take full advantage, compound the interest you save by taking that cash and depositing against the balance of the HELOC, further reducing the amount of interest paid on the mortgage. By doing this, the borrower in effect is earning the mortgage rate of interest on the idle cash instead of the low rates being paid on checking and savings accounts. Again, the borrower can confidently deposit cash reserves into this account because of the ability to draw it back out if needed.
Finally, there is a real opportunity to focus on paying debt off efficiently and with no change to lifestyle. This new loan simply takes the interest spread commonly known as “the float” and gives it to the consumer. If you have excellent credit and positive monthly cash flow, this loan may the perfect fit.
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John Waugh is sales manager and a referral-based mortgage planner at Pacesetter Mortgage Company, a division of The Centennial Group. He offers a consultative approach to residential mortgage lending with a focus on debt management and wealth accumulation. His focus has been in banking and mortgage lending in the Greater Lansing area since 1999.