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Using a credit card to pay down the mortgage?

 

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Question:

I frequently get credit card offers with 0% interest or low interest balance transfers. Does it make sense to use these to pay down my home's mortgage?

Answer:

It depends. If the home's mortgage is at a fixed 5% and the credit card offer is $20,000 at 0% for 6 months, then - unless you can pay off the $20k at the end of the 6 months completely, stay away from this offer.

In the following situation it does make sense:
Home's mortgage is a HELOC (Home Equity Line of Credit) which adjusts every month. At the time of writing (June 2006) now it probably would be 7.75%
The credit card offer is 0% for 12 months and adjusting after that.
In this situation I recommend moving as much onto the credit card as you estimate to be able to pay off at the end of the 12 months.

I personally had a $35k HELOC balance approaching 7% interest last year. I paid off $5k right away. I moved $15k onto a 0% credit card for 12 months and the remaining $15k onto a 3.99% credit card (3.99% for the life of the balance).

There are several pitfalls with credit cards:
  • if you are ever late on a payment, forget the low rate, it will jump to 20% or whatever they feel like

  • if you make any payment to credit cards, it typically gets applied towards the lowest interest part of the balance first. So do not use this credit card for any other purchases which would incur the regular interest rate! For that reason, I cut up those 2 cards where I transferred my balances. See also my article 'Citibanks Dirty Tricks..' (link is on the left)
    Remember to check carefully that you do not have any payments set up automatically to be billed against this credit card (cell phone service, trash service, etc). The card must be fully paid off at the time that you accept this low-interest balance transfer offer!

  • suddenly you have now some maxxed out (or nearly maxxed out) credit cards. Your credit rating will probably suffer a little from this. After all, you turn secured debt (mortgage, HELOC) into unsecured debt (credit card).

Is it worth it?

On a $30k HELOC at 8% the monthly interest payment is 30,000 * 0.08 / 12 = $200

After my transfer to the two cards, I pay 0 on the first and around $49 on the second card. So it does save around $150 a month. Or approximately $1000 over a year. (The savings get smaller as you pay off the balance.)

To avoid late payments, I suggest setting up automatic payments.


Once again, the credit card that you use to pay down your HELOC or high-interest mortgage must not carry any other balance while you do this. Otherwise you will end up paying regular (high) credit card interest rates on a portion of your balance. The card should show a balance of 0 before you do the transfer and you must not charge anything else to the card while you make use of the low interest offer.


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Comments:

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2006-07-10, 11:30:11
anonymous from United States  
great article...thankyou!!!
2006-10-16, 09:24:44
anonymous from United States  
The article doesn't analyze the impact on cash-flow that this change can have. Assuming the HELOC payments get re-amortized, it shouldn't be a problem; but since credit card repayment terms are often 2% or more of the outstanding balance, they may require more cash than the HELOC. Of course some CC's now charge interest + some minimum, making teaser offers a better deal from a cash-flow perspective.

Still, the best choice is to try to pay off the HELOC entirely with a balance transfer, assuming you're still within your draw period. In the example's case, you could save most or all of the $200/month during the promo period. After the promo period is over, simply pay off the credit card with cash from the HELOC. That puts you back where you started.

HELs and other Fixed Rate Mortgages (FRMs) require a different strategy since you can't borrow against them once the promo period expires. Also, reducing the principal of an FRM doesn't lower the payment, so cash-flow issues may make it impossible to use a balance transfer offer to accelerate repayment.

- Joel
2006-11-29, 21:16:17
[hidden] from United States  
rating
I was thinking about doing this very thing and wondered if it was possible. My question is How do you get your HELOC on to your CC in the first place. Then do you have to transfer to another CC ? In my case this will help enormously.
Thanks

-Bryan
2006-12-05, 18:30:50
anonymous from United States  
Bryan,

you can just use the convenience checks (aka SPAM) that you get from your CC company to pay the HELOC.
2007-02-27, 00:35:39
anonymous from United States  
rating
If this is a route youre thinking about going, there is a huge risk involved in this. If the credit card that are going to transfer funds on to is in your personal name and not your business, it could have a dramatic affect on your fico score if you put on and keep a balance of over 50% of that cards limit. If your fico is important you right now, dont do it. but, if you dont plan on making any purchases involving your credit, getting any insurance, or a new job, then all the other aguements make sence.
2007-05-15, 12:13:40
Administrator from United States  
To anonymous, dated 2007-02-27, 00:35:39

It is true that the FICO score will be affected by the maxxed out credit card, but I think it is not as dramatic as you make it sound. The score may drop 10 points only, as in my case:

http://www.delphifa..708.shtml

I am nearing the end of the promotional period and I will see how much my score goes up after I pay off that card. Current balance is $11k of $15k limit.
2007-07-23, 20:42:11
anonymous from Kingston, Canada  
I found this site, and wanted to ask. When it comes to closing costs, the bank told me that I could borrow money from someone to pay them, but that I am not allowed to use my credit card. What I want to know is can I use my credit card to pay back the person that loaned me the money for closing, after the closing date. Or can the bank forfeit my mortgage?? Can they even look at my credit card balance after closing since my credit card is with a different bank??? Please help, I have so many questions, as I am a first time home buyer!!
2007-08-19, 03:48:33
dennisfredricksen@yahoo.com  
rating
Forget the credit cards!!!!! You need to go to this web site and see flash presentation on the Money Merge Account. You will be glad you did. Don't get your self in a mess with credit cards. The web page is www.u1stfinancial.net/DennisJ and click on flash presentation. Or call me and i will explain in detail. You can turn a 30 year mortgage into 8 to 11 years!!!!! I'm an agent for this company! THIS IS THE REAL DEAL! mY # IS 1-435-215-1624 or go to the web page and we can help you there.Looking forward to helping everyone out there. its your money! Use it to make your home yours.Not to pay doulbe the cost of your home in interest!!! When you understand interest! You dont pay anymore than you have too!
2007-10-24, 12:12:42
[hidden] from Menlo Park, United States  
I've been using 0% cards for as long as I remember to pay my mortgage down. I used to use cash advance on one card and balance transfer to a 0% introductory card. The rules made it a bit too much for me to do on a regular basis, but I've just found a company http://cardit.com/ that makes it easier... mortgage payments direct via credit card. There is a fee, but it's comparable to my lender's check by phone fees and now I get the miles.
2007-11-13, 01:43:36
scribbler1960 from Mililani, United States  
Is any familiar with how the TARDUS company teaches people to lower their mortgages from 30 years to 10 years or less?
2007-11-26, 10:45:42
anonymous from United States  
Check out the link below which will give you an idea how TARDUS works but without pay the $495 fee.


http://www.sfgate.c..7G65K1.DTL
2007-11-26, 10:46:14
anonymous from United States  
2008-02-19, 13:08:55
anonymous from United States  
Be careful about the 0% rate. I was talking with Amex and paying off a mortgage goes down as a cash transfer, meaning interest starts accruing immediately AND the introductory rates don't apply - they only apply to purchases through a merchant.
2008-07-07, 05:28:15
anonymous from United Kingdom  
i use my morganstley card all the time to pay off 2 years in advance and they give me 0.5% back
then i do a balance transfer to my HSBC account with intrest free for two years ok they charge me 2.9% for doing this but i only pay them the min amount each month till end of term
so i start of with my mortage rate at 4.75 which i have paid for in advance so no intrest for the two years then i get 0.5% back form morganstanley card brings down to -0.5% so i am 0.5% up then deduct the 0.5% from the 2.9% for the transfer now down to 2.4%
then i set up a standing order to my mortgage for £1 every month to keep the account active
then i open up a high intrest saving account now 10.1% for two years and at the end of the two years all the payments that i have paid in to my high intrest account will pay off my hsbc account
so i do not pay any intrest on my two years of mortgage and still make money at the same time and with the intrest growing on my high intrest account this all goes back in to my mortgage saving even more money

i have saved thousands
2008-08-02, 01:46:58
Craig from China  
I'm an American living overseas who purchased a rental property in '04.

About a year from now (July of '09) I'll have a mortgage balance of 36K. My plan is to do as described in the story above: to have my credit card company transfer that amount to my checking account (a one-time $75.00 fee) and then pay off the principal owed to the bank with those funds. This will result in no interest charges for the final year of paying off my home loan.

During the following year, here's the plan in order to make things work:
1) Each month, I'll put $2500.00 toward the payoff, including
A) minimum payments to the credit card company (2%) on auto-pay to avoid any
missed/late payments there
B) the remainder of that $2500 going into an interest-bearing savings acct (~3%)

2) I will not use the credit card for any other purchases; doing so will be a nighmare, as I will not be able to pay off those new, 'regular' purchase until after the interest-free cash is paid off.

3) I receive a decent bonus in June of each year, which will be the final 'balloon' payment to finish off the loan in June. The terms of the case advance are that I pay everything off by July, or else interest will start to accumulate--so no problem there.

Voila! I figure a savings of about $1400.00 in interest during that last year of the loan. Add in the interest from the savings account (I expect around $200), which will more than make up for the fees associated with the loan (one-time, $75.00 fee).
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