SO WHAT DO I DO WITH MY CREDIT LINE AND CREDIT CARDS?
So now you should have your line of credit and your credit card. If you’re still confused about your line of credit, don’t fret. In the next couple of pages we’ll spend a minute talking about what to consider with your line of credit. First, however, we want to give you a good sense of the process.
The power of Mortgage Cycling comes from the ability to place large “lump” payments against the principal balance of your mortgage. This in turn reduces the principal which in turn reduces the calculated interest on your loan. When you can reduce the calculated interest in this manner…equity is easily built into your home mortgage.
This is something a bi-weekly mortgage does not have the ability too.
Using a simple example, we’ll start in the month of January with a $10,000 line of credit and assume you will keep $4,000 in reserve. In this model, you have $3,600 in take-home pay per month and expenses of $3000 per month, including your regular mortgage payment.
So here we go:
1. Your $10,000 credit line is established.
2. Send $6,000 from your credit line to pay against your mortgage. This is the “lump” payment that gives your cycling plan the power to build equity. This “lump” payment reduces the calculated interest on your principal balance. This is much more powerful than just making an extra pre-payment towards principal.
3. Keep $4,000 in your credit line for emergencies (real emergencies only)!
4. Pay for all of your monthly expenses with your credit card (including your regular monthly mortgage payment).
5. Use your monthly income to pay $3,600 into your credit line.
6. This would leave a $2,400 balance owed on your credit line.
This concept works because you are making large “lump” payments at once. This effectively eats away at your mortgage principal faster than any other technique out there. And when you eat away at your mortgage principal at a rapid pace, you are also building equity at a rapid pace. This is where the value of Mortgage Cycling begins to build.
Sound complicated? It really isn’t! Some people will understand right away. Some won’t. That’s because some of us understand written instructions easily and some of us are better at learning through visual diagrams. Here is a simple visual to help make things as clear as possible.
JANUARY
So in January you have:
1) Established a $10,000 line of credit
2) Sent $6,000 from your credit line to your mortgage (Your Power “Lump” Payment)
3) Paid for all of your monthly expenses of $3,000 with your credit card. This includes your regular mortgage payment.
4) Used your monthly income to pay $3,600 into your credit line
February
5) In the month of February you will have a $2,400 credit line balance carried over from January.
6) You will also have a $3,000 credit card balance carried over from January.
To avoid any interest charges on your credit card you must now pay the $3,000 credit card balance fully by the due date by paying $3,000 from your line of credit to you credit card.
This leaves a zero balance on your credit card at the end of February, but also leaves a new balance of $5,400 on your line of credit. The $5,400 balance owed on your credit line comes from the $3,000 used to pay off your credit card and the $2,400 credit line balance that was carried over from January.
Also in February you will have your new monthly bills and expenses of $3,000. Remember you have already placed your monthly income of $3,600 into your credit line and pay your monthly expenses ($3,000) on your credit card again. After your expenses are fully paid, there will be an extra $600 left over from your income. Send this extra $600 in as the monthly payment towards your $10,000 credit line.
Now you will continue to repeat the month of February for the next 9 months.
By paying your $600 surplus to line of credit every month, you should have the $5,400 paid off in 9 months.
Note: You could just pay your monthly expenses directly from your monthly income without running it through your credit line first…but the idea is to keep as much money possible in your credit line at all times in order to keep the daily balance as low as possible which saves money paid to interest.
Payoff time frame also depends on the interest rate of your credit line. The lower it is, the faster you will be able to pay it off. So in roughly 9 months, when your credit line is back to zero, you’ll send another $6,000 to your mortgage to start the cycle all over again.
Now take a minute and realize what you’ve just done. In just 9 short months, the powerful cycle you created has paid $6,000 against the principal balance on your mortgage.
If this particular mortgage principal were $150,000 at 7% interest…it would be completely paid off in 10 years using this cycle.
This is a huge accomplishment!
Compare the outcome of this cycle against a bi-weekly plan. Let’s just say your monthly mortgage payment is $1,000. Using this example, a bi-weekly plan would have only paid an extra $1,000 against the principal balance on your mortgage over the course of 12 months.
Instead, you’ve just paid $6,000 in 9 months and have hardly had to sacrifice any money out of your pocket. Remember, it’s the powerful lump payment that makes this work by effectively reducing the principal which in turn reduces the calculated interest on your loan.
This is something a regular bi-weekly cannot do.
Also, the entire time during the cycle you have access to emergency funds should you really need them. This example clearly shows how Mortgage Cycling outperforms a bi-weekly payment plan.
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