Use caution when using HELOC to pay off home

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Real Estate

Having a Home Equity Line of Credit on your home can be a safety net, but it is one that you must use with caution. After all, this is your home we’re talking about.

Recently I came across a new effort to use your HELOC to pay off your home faster than with a traditional mortgage. The principle behind this method is simple and one used in Australia and some European countries. The concept is that your mortgage and your bank account are the same account. Actually, this concept has been around at least 20 years in this country.

So every time you deposit your paycheck or other funds into your account, the amount of interest you are paying on your home, in dollars, goes down. Folks in those countries pay far less interest on home ownership than we do in this country.

The simple fact is that you are not paying interest on the money you just deposited, just on what you owe. Of course you still pay interest every time you dip into your account to pay a bill or spend it on anything, because you are spending borrowed money. Also to do this you must have good credit and cash flow.

The most recent pitch, however, is to convert your entire mortgage to a HELOC. The argument is that you will pay your home off faster because you are paying less interest over time. I ran this idea past the mortgage lender I recommend for my clients and her immediate response is that you should never trade a fixed rate mortgage for a HELOC, which carries a variable rate.

But you can still use a HELOC to pay off your mortgage faster if you’re careful and well disciplined. One way is to pull several thousand dollars out of your HELOC and put it on your principal. That potentially avoids years of interest on the first trust deed, but now you need to pay off the HELOC as quickly as you can so you can repeat the process.

So every dime you make, then, goes into the HELOC and you live on a credit card until the card comes due. (Nickel and diming your HELOC can really cost you. After all, a HELOC is a revolving account.)

Then you pull out just what you need to pay off the card and nothing more. So you never pay interest on the card, which of course, is much higher than the interest on your HELOC. Also, the HELOC interest is tax deductible because it’s based on real estate. Keep in mind you never borrow more than you deposit, in fact, you should leave a wide margin between what you deposit and what you withdraw.

By repeating this process, those who advocate it say, you can pay off a 30-year mortgage in half the time or less. For others, including those who advise never using debt to pay off debt, it can be pretty scary.

Meanwhile, in Utah County real estate, 609 single-family homes sold in September, a decline from the 680 that sold in August, according to the Wasatch Front Multiple Listing System. The median price also dropped from $303,250 in August to $285,000 in September. Yet prices have risen over the past year by 3 percent, comparing September 2015 to September 2016. A year ago the median sold home price in September was $266,000.

Most home sales in Utah County are in the range of  $250,000 to $299,000, followed by $300,000 to $349,000. A broader brush shows the bulk of Utah County sales between $200,000 to $499,999.

Utah County Realtors continue experience a shortage of listings, about 10 percent fewer now than last year at this time. And while listings are down, sales are up 10 percent over last year, leaving an inventory between four and five months.