Do It Yourself Refinancing



I originally bought my duplex on an ARM with no money down. Knowing that rates would eventually go up, after a year I had enough equity to refinance for a reasonable rate — I got a 30 year fixed mortgage for 80% of the value of the house, and a home equity line of credit (HELOC) for the rest of what I owed on the original mortgage (about $20,000). I got a 6% rate on the fixed mortgage, and started out at 4% on the HELOC, with very low payments.

However, short term rates quickly started to jump upwards, and within 9 months or so I found my HELOC rate pushing 9% — my monthly payments had doubled, and I wasn’t even paying off any of the balance on the HELOC! I looked into refinancing everything (again), but long-term rates weren’t really good enough to justify that, given the expense of closing costs, etc. I also looked into refinancing the HELOC to a fixed rate Home Equity Loan or similar, but still, rates weren’t going to get much better — I would just be guaranteed that they wouldn’t continue to climb.

So, given this dilemma, for a couple of months I simply did nothing.

Then, one day when I was paying my credit card bill online, I had an idea…. a complicated idea, but ultimately a good one.

One of my credit cards had recently sent me some balance transfer checks in the mail, which I could use for cash, write as normal checks, or use for paying off other credit cards. I had a generous credit line on this card (and no current balance) which meant that I could write one of these checks for up to $25,000. There was a fee for writing the checks, but only of 3% (capped at $75 — only 0.3% of the full $25,000). They weren’t offering a low promotional rate on these checks, however, I also received another credit card offer in the mail from another card — 2.99% on balance transfers for the life of the balance (also no current balance on this card, and a credit line of $30,000). The wheels were turning…

THE PLAN
First, I called the bank that I had the HELOC through and verified that if I paid off the balance that it would remain open — just in case something were to happen with the credit card balance transfer (if you’re late on a payment, they kick you off of the low promotional rate). I also asked them to send me some checks for the account in case I would have to access that credit line (again, just in case).

Then, I wrote one of the balance transfer/cash advance checks out to myself, in the amount of $25,000, and deposited it into my checking account. After calling the bank to verify that the check had cleared and funds were available, I made an online payment to my HELOC, paying off the entire balance. I checked my credit card account balance online every day until the $25,000 advance showed up, and then logged into my account for the other card — and transferred the $25,000 balance, on the low 2.99% rate for the life of the balance. There was also a 3% fee for this transaction, but it was capped at $60, which is only 0.2% of the full $25,000.

So, I “refinanced” my 9% variable rate HELOC to 2.99% (fixed) for $135. Nice. What are the catches?

Well, on my HELOC, I was making interest-only payments for the first 5 years. So even though my rate was high, my payments were only about $150/month. The monthly credit card payments are for 2% of the balance — so my payments went up to $350/month. HOWEVER — I was now actually making payments on the principal. I went from paying $150/month in interest to $50/month in interest.

To account for these higher payments, I took out the full amount I had available on my credit line — $25,000 even though the HELOC that I was paying off was only $20,000. I put this extra $5,000 into my Emigrant Direct savings account (where it earns 5% interest) and use that money to make up the difference between my old $150/month payments and my new $350/month payments.

What about taxes? It’s true that the interest I was paying on my HELOC was tax-deductible, where the interest that I pay on my credit card balance transfer is not. However, if you figure that I was able to get 1/3 of the interest paid back, that essentially drops my HELOC rate to about 6% — still twice what I’m paying now on the credit card.

CALCULATION OF SAVINGS
Immediately after refinancing, I started saving $100/month in interest — that’s $1200/year. Several months later, after having paid down a couple thousand dollars of principal (and the HELOC rate having gone up to 10%), my monthly interest is $125/month ($1500/year) less than what it would otherwise have been. And the extra money that I took out to cover the higher monthly payments earns 5% annually, lowering the costs even more. The savings and interest earnings easily cover the $135 spent to do this “refinance.”

BIG FAT DISCLAIMER
Note, that I am certainly not (by any stretch of the imagination) a financial planner, advisor, or anything of the sort. So don’t try this at home unless you’ve thoroughly thought it through and know it will work for you. For this plan to work, you need to get the right credit card offers (from cards that you don’t use for purchases or carry balances on), have generous credit lines, and be able to count on NEVER missing a payment once the balance is on the credit card — otherwise you’ll lose our fantastic rate. Also, after paying off your HELOC be sure to keep logging in to check the balance (and payment due) for a few months — there will still be some small residual interest charges for the first couple of statements after you’ve paid off the balance. If you take out extra money on your cash advance to cover the increased payments, you have to be very disciplined in not spending it for other purposes (and ideally have a separate account to keep it in, helping to prevent you from accidentally using it for another purpose).


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4 thoughts on “Do It Yourself Refinancing

  1. Nice post. Definitely a nice way to take advantage of low CC rates. You are actually saving alot more because you haven’t counted your principal paydown.

    To make it apples to apples, imagine you were paying $350 on your HELOC before the switch.

  2. Beautiful! I’d love to do this but my HELOC balance is $150,000, so my credit card limit isn’t high enough 🙂 Although I suppose I could do smaller amounts, multiple times..

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