Is Mortgage Cycling the Best Way to Repay your Loan?
By Sadiya Anjum
Mortgage Cycling promises what every person burdened with loans wants – interest chopped down and loans repaid faster. This method is true to its every word – it will bring down the interest on your primary mortgage and in fact you will be able to pay off a thirty year loan in about ten years. But like every other proposition it is not a complete win-win situation.
Mortgage Cycling is relatively simple to understand just slightly difficult to put into practice. It involves paying a lump sum about twice a year towards your principal. As your principal loan balance reduces, interest (charged on the outstanding loan amount) also comes down. This could save you thousands of dollars in the end which would have otherwise gone to the lender’s pocket as interest. In addition, paying down your principal means you pay off your loan faster.
No matter the principal amount, the interest rates or the term of a loan, mortgage cycling will shrink extra costs and help you pay your loan faster. Depending on the principal, the lump sum required to be paid will be decided. This is all very well if you do actually have the extra income flowing in. But unfortunately this is not an option for many people. This is where a Home Equity Loan or a Home Equity Line Of Credit (HELOC) comes into play.
By borrowing money against the equity on your home, you will be able to make payments towards the principal balance. This obviously means that you have added on another debt. But using a revolving HELOC means that you can use just the right amount of money required to make the lump sum payments. Over the course of 6 months you can repay the money on your HELOC and in this case the interest is usually tax deductible. Simultaneously you will be paying your monthly mortgage payments. If you look at the bigger picture, you are paying back your mortgage quickly and saving on interest.
But borrowing against your equity has its own disadvantages. It costs quite a bit to set up the loan in the first place. This may include shelling out for an application fee, appraisal, attorney fees, points, closing costs etc. Next you will have to bear the fluctuating interest rates as interest rates on such loans are gauged against an index. Last but certainly not the least, if the money becomes tight and you are unable to repay your home equity loan, you stand the risk of losing your home.
The concept of Mortgage Cycling in itself is brilliant. But the catch lies in your ability to make those huge payments twice a year. If you think you can do it, first check if your agreement has any clauses with regard to prepayment penalties. Ask your lender for more details on this.
The truth is that mortgage cycling is not the smartest option for everyone. If you are even slightly unsure of being able to make huge payments, try other ways to shrink your mortgage interest and terms. Since it really is not worth risking your home! But for those who can handle it, mortgage cycling can save you money and make you debt free in no
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