How to Reduce overall Mortgage Cost

Balance Transfer Cards

If you shop around, you will usually come across companies providing you balance transfer cards that will have a $0 transfer fees and 0% interest for 18 months or 24 months. This can be a great option for you to reduce the interest that you pay on your mortgage if implemented properly. You can use the balance transfer card to pay off and keep a credit balance with your credit cards. This will relieve you of the burden of making payments on your credit cards as they would have a credit balance for about 3 to 6 months. Certain banks will credit your bank account if you carry a negative balance on your credit card for 3 consecutive cycles. Either ways, you will get this money in your bank account and you can use the same to pay off your mortgage.

You will be able to divert these savings and prepay your mortgage. For your balance transfer card, start paying off your balance in equal monthly installments and ensure that it becomes $0 before the month it becomes interest bearing. This will ensure that you use the money you received at 0% interest and paid off mortgage principal thereby reducing the interest payments on your loan.

Note that you should not opt for balance transfer cards even if they are 0% if the issuing bank will charge you a transfer fee. Usually, these transfer fees are 2% of the amount that you transferred.

Do not use the balance transfer card for any other purchases as the minimum payment and interest-bearing calculations become complicated. Once the utility of your balance transfer card is over and it is fully paid off, you can close the card and never use it again.

Line of Credit

A line of credit is a loan against an asset that you would lien to your bank. You can overdraw funds from your line of credit whenever you have a payment that cannot be fulfilled by the minimum balances required in your current or savings account. When you draw money from LOC and then pay it back, the bank will charge you simple interest only on the amount withdrawn and the time for which you had withdrawn it. This makes it a very powerful tool to manage your cash flows and is especially beneficial for those of you who have a variable income source.

HELOC

Usually, the line of credit carries a promotional interest rate for the first year after you open an account and then they move to a rate that is a few basis points above the bank rate. If LOC is purchased with your home as a security (it can be first or second lien then it is called HELOC. It is like the variable mortgage except for one fundamental difference – if you decide to carry forward your balance to the next statement, you will not be required to pay EMI like a mortgage rather you will be required to pay just the minimum payment (like your credit card minimum payment but with significantly lower interest rate compared to that charged by the credit card companies).

Making the most of your HELOC

Usually, the introductory rate for LOC is lower than home mortgage rate and after this period is over, it would be about 0.5% to 1% higher than the mortgage rate. This is especially attractive if you are planning to pay off your loan quickly in the initial years. The reason for this is that you will exhaust principal faster and the remaining principal is low enough so even if it has a higher interest, your overall interest outgo will be lesser compared to a traditional mortgage.

Waiver of Closing Costs

Your bank also offers you waiver of closing costs if you keep the HELOC account open for 3 years. This is a big advantage compared to Traditional Mortgage refinancing where you may need to spend on closing costs during your refinancing and can result in substantial savings.

Better Liquidity with Minimum Balances in Bank Accounts

Your liquidity management becomes efficient with a HELOC. You can technically keep only minimum balances in your savings and current accounts and fall back on HELOC to fund regular or emergency expenses. Whenever your accounts get income, transfer that to your HELOC account and reduce the balance so the simple interest will be applicable on lower balances. This feature will take a bit of acclimatization in the initial few months but once you master the art, you will be able to optimize your investments.

Better cash flow due to no escrow

Another benefit of HELOC over a traditional mortgage is that you do not have to deposit any money in an escrow account. This means that your cash will be withdrawn when the property tax or insurance is due rather than paying monthly installments and blocking your money. Note that your mortgage lender does not pay you interest for the balance money in your escrow account.