In our last blog we began discussing how higher interest pays off lower interest as it does in the HELOC cycling technique. A factor, besides the difference between daily and monthly compounding, is the revolving nature of the HELOC balance.

Do you remember when credit cards were all called "revolving credit" cards, or revolving accounts? The balance goes up and down as charges and payments are entered. One way to reduce interest is to put "extra" money into the account for a matter of days or weeks until it is needed, thus reducing the balance.

On a conventional credit card, taking the money back out as cash would be called a cash advance and would probably carry a fee of 3%, minimum $5, maximum $75, etc.

But on a Home Equity Line of Credit (HELOC), it is possible to write a check (to anyone, even to yourself) or to make a cash withdrawal or cash transfer to another account of yours. Therefore, it is feasible to put money into it and take the same money out of it a few days later. While the cash was in the account, it lowered the balance due, and therefore the interest accrual.

It is not possible to withdraw money from your primary mortgage, put it back, and take it out again. That is why HELOCs are so popular. Take out the cash, pay for the new roof, and pay back the HELOC over the next few months at a rate cheaper than a conventional consumer loan.

It can be dangerous playing with a HELOC, because it is secured by your house. That is, if you don't pay back the loan, the bank can put a lien on your house, or ultimately take the whole thing from you if pushed. Using a HELOC to purchase consumable items is, therefore, unwise.

It is the revolving nature of the HELOC that allows an 8% loan to save you money on a 6% loan. Plus the smaller amount of the loan. Plus the shorter duration till it is repaid. Principal, times Time times Interest Rate.

If you have comments or more questions, please enter them in the comments form at the bottom of this web page.

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