Mortgage payoff pitch is no panacea

Someone recently sent WalletPop a press release detailing what claimed to be one of those "eliminate your debt" strategies.

This one hinges on something called a "mortgage checking account." It's similar to a mortgage elimination scheme that proliferated in Australia a few years back and hopped onto our shores under a different name.

In this 2007 article, the Boston Globe explored what was then being called a "line-of-credit" mortgage and concluded that the scheme was more about marketing than merit.

The plan pitched to us by a company called MoneyDesktop purports to let you pay off your mortgage via a home equity line of credit (HELOC). In theory, you take out a home equity line of credit, deposit your paychecks into that line of credit instead of a checking account, and write a check paying down your mortgage in the amount you've just deposited.
Of course, if you want to avoid paying interest on that loan, this only works if that paycheck money stays in the account rather than being used to pay bills. To address this, MoneyDesktop suggests using credit cards for day-to-day expenses and pay those off in full at the end of the month. (This, of course, will reduce the amount of money you have that you can put toward paying off your mortgage.)

In an interview with Walletpop, MoneyDesktop president Seth Risenmay calls this a strategy of repositioning debt, but experts aren't sold on the idea.

"Generally we tell people not to tap into their home equity for everyday expenses," Norma Garcia, senior attorney for Consumers Union, told Walletpop.

Using credit cards, which carry an interest rate of up to 30% or so, just to fund your day-to-day existence is even dicier. Make a late payment or miscalculate how much you've charged, and you'll be stuck paying hefty fees that far outweigh any interest savings you're accruing.

Garcia also pointed out that if you already have a mortgage, no bank in the world is going to let you take out a second loan in the amount of your mortgage. When banks extend HELOCs to borrowers, the limit is based on how much equity you already have -- in other words, the amount of your mortgage that's already been paid off.

Also keep in mind that HELOCs have fluctuating interest rates, meaning that they can zoom up without warning, and that those rates are generally higher than conventional mortgage rates in the first place.

While a big part of MoneyDesktop's pitch is that a homeowner can manage their mortgage checking account at no cost, you have to pay $20 per month to access its budgeting software. (For what it's worth, several big banks and credit card companies now offer personal finance tools similar to this for their account-holders -- for free.)

In addition, taking out a home equity loan is going to involve origination costs including an appraisal and other fees. If you have that spare cash laying around, do yourself a favor and just make an additional mortgage principal payment or two.

The bottom line is that shuffling around your money might help you pay off your mortgage faster, but so will making extra principal payments, and you don't have to take out a second loan or rely on credit cards to do that.
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