Mortgage cycling is a repayment strategy that promises to pay off your entire mortgage in ten years or less. To do this you need to make large payments to your lender twice a year. This means a $5,000 payment approximately every six months. This is all well and good if you have the cash; however, dropping $10,000 a year into your mortgage isnt easy to swallow for the average homeowner. There is a way to make the $5,000 easier to manage that involves home equity loans. First, an explanation as to why mortgage cycling works. Mortgage loans are front-loaded with interest. This means at the beginning of the loan the majority of your monthly payment is applied to interest. The amount of interest paid each month is calculated based on the remaining balance of the loan. As the principal balance shrinks, the amount of your payment going to interest decreases as well. By making large equity payments you are reducing the amount of principal used to calculate the interest payment. As a result, more of your monthly payment is applied to the principal balance, reducing the interest applied even more. The end result is your mortgage is paid down at a much faster rate. If coming up with $5,000 is difficult there is an option using home equity. By taking out a home equity loan you will have six months to pay the money back before the next installment is due. This is a more expensive method of making the equity payments; home equity loans cost money to get started and you are paying interest on the loan. This may seem like robbing Peter to pay Paul; however, by paying off the home equity loan every six months you are making a significant dent in your principal mortgage balance. By paying down the mortgage principal you save yourself money in the long run by paying less in interest for your primary mortgage. The risk in using a home equity loan to cycle your mortgage is that the home equity loan is secured by your property. If you fall behind on the home equity payments you risk losing the home. If youre serious about paying down your mortgage as quickly as possible mortgage cycling could be right for you. Carefully weigh the risks of using home equity to repay your mortgage; if your cash flow cannot support the payments do not attempt this repayment strategy. |
