Q: I saw someone on television talking about a way to pay off your mortgage in five to ten years by using a home equity loan. Do you know how this works and is it a rip-off or a real possibility?
A: Several years ago, a guy from Australia promised that if you put all of your income into a home equity line of credit, and then paid all of your bills from this same account, you’d pay off your loan in five or six years. This Australian wrote a book about the program, which he sent to us because he wanted us to review it in our column.
Since then, several other enterprising folks have created these programs, which are often referred to as “money merge mortgages.” The premise is the same except you’re asked to pay $3,500 as an upfront fee.
Is it possible to pay off a 30-year mortgage in 5 years? Absolutely. We ran the numbers in an online mortgage calculator. Let’s say you have a $200,000 30-year fixed rate loan at 6.5 percent. The monthly payment would be about $1,260. If you wanted to pay off the same loan in 5 years, you’d have to pay about $3,915 per month, or an extra $2,655 each time you make a loan payment.
Early Mortgage Payoff May Not Make Sense
The idea that you’re making up all this extra cash on the float may or may not work to your advantage. But the truth is, if you’re not spending much less than you earn each month, the numbers aren’t going to work out.
There are a lot of people who are earning big fat commissions selling these programs. (What do you think the $3,500 upfront fee is for?) But a better idea is to take the $3,500 and simply make a payment toward your unpaid principal balance. That alone will certainly help you pay down your loan a lot faster.
Our best advice: Take a pass.
Dec. 2, 2008.