Mortgage Cycling – Brilliant or Risky
With mortgage rates hovering around 20-year lows, competition in the mortgage industry is fierce. It seems like every day a new mortgage loan strategy comes out that is suppose to be the best thing since sliced bread. Whether it’s a mortgage with no closing costs or an interest only mortgage, everyone is claiming they can save you a ton of money. Now someone has come out with something called Mortgage Cycling. Mortgage Cycling could save you thousands of dollars or it could cost you your home.
Mortgage cycling is a program that advertises itself as a method to payoff your mortgage in 10 years or less without making biweekly mortgage payments or changing your current mortgage. Does mortgage cycling work as advertised? The answer is unequivocally yes – with a few caveats. I’m going to let you in on the secret to mortgage cycling.
Mortgage cycling is based on making huge lump sum principal payments every 6-10 months. What this means is mortgage cycling works well for those who have at least a few hundred dollars in extra cash at the end of each month. The problem is most people don’t have that kind of cash available.
For most people, Mortgage Cycling relies on using a Home Equity Line of Credit to make huge lump sum payments against their original mortgage principal balance. When you take out a home equity line of credit, you pay for many of the same expenses as when you financed your original mortgage such as an application fee, title search, appraisal, attorney fees, and points. You also may find most loans have large one-time upfront fees, others have closing costs, and some have continuing costs, such as annual fees. Home Equity Line of Credit interest rates are also higher than a typical mortgage loan interest rate.
While Mortgage Cycling does have some additional costs for most people, that is not what makes this mortgage reduction strategy risky. If you use a Home Equity Line of Credit and money gets tight, you could lose your home. Home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. And if you sell your home, most lines of credit require you to pay off your credit line at that time.
Prepaying your mortgage is smart. You can save tens of thousands of dollars in mortgage interest. For most people, mortgage cycling is risky way to payoff a mortgage. Be sure and look at your all of your alternatives before choosing Mortgage Cycling as a mortgage reduction strategy.
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