Mortgage Reduction and Lines of Credit

There's a number of ways of setting this structure up. On a $500,000 loan you would have a $50,000 line of credit, with a $450,000 principle and interest loan at the lowest rate possible, and a credit card. These three pieces would form the jigsaw puzzle. Your salary goes directly into the loan each month, and the crumbs remaining after each month's expenditure (on the line of credit) would be captured into the loan. This reduces the loan amount and the interest you are paying. The line of credit would start at $50,000 and go down, and one or two years later you write a check (redrawn from the line of credit) and make a lump sum reduction of your home loan and you then continue to wash your income through the line of credit again.

This structure can work wonders and has the potential to wipe off a mortgage. In some cases it can turn a 25-year mortgage into eight or nine years, because the ?crumb? isn't a dollar. In many households, after the essentials are paid for, it's two or three thousand dollars a month, and the impact is profound.

Buyer beware though! This debt-based structure requires divine diligence and therefore only works for a small number of people. A knowledgeable, responsible financial adviser would only recommend it with a lot of care. Even so, it is only a structure which should be implemented on a trial basis, and then continued if it is proven to be suitable.

It's a fact of life that it's simply too hard for most people to resist finally renovating the bathroom or buying a ski boat, or going on a fabulous holiday when there is extra money on the line of credit available to them for spending.

There also needs to be a substantial difference between what you earn and what you spend, and if you have a job where you're not around to spend it - such as a pilot - then even better.

If you happened to be one of those rare animals that has a huge gap between what you earn and what you spend and can contain your expenditure for just what you need while having access to all this credit around you, then we commend you. The reality is that most people are not in this situation, and the line of credit system is therefore only fantastic in theory.

It's also worth mentioning that lines of credit can also allow you to take advantage of your reduced mortgage and have your funds available for other purposes such as investment. It provides a lot of planning power, so it can be used effectively in the right situation.