Using a First Position Line of Credit – Part 2

27 Apr Using a First Position Line of Credit – Part 2

The Psychological Benefit of a First Position Line of Credit

A first position line of credit gives makes cash management easy and ensures you are keeping your dollars working 24/7. Your first position line of credit gives you the flexibility of a checking account. When you can have your income deposited as a loan payment you’ll see your loan balance drop dramatically. Your focus will now be on keeping your balance as low as possible all month long. How do you do this? Create and stick to your budget and schedule the payment dates for your living expenses to the end of your line of credit’s billing cycle. This also lowers your interest payments.

Using a first position line of credit does not mean abandoning on-going savings. Maintaining an ongoing savings program ensures you won’t need to use your line of credit for an unexpected emergency. You are using debt for one reason: to build your financial wealth. Your credit cards are tools enabling you to keep minimize your mortgage interest cost. You’ve been given an additional 25 days. Each month you pay off your credit card balance in full.

First Position Line of Credit Example

After all your bills are paid, you have a positive cash flow of $1,000. Your original mortgage balance is $240,000. Using a traditional 30-year amortization schedule at 4.09 percent your monthly mortgage payment will be $1158.28. Your current balance is $238,975.

Line of Credit Strategy Comparison Over Twelve Months

If you don’t make any additional mortgage payments, at the end of one year you will pay $9,700 in interest and your mortgage balance will be $234,776.

Using a first position line of credit , you will pay $9,314 in interest and your mortgage balance will be $221,667.

Using CashMap’s line of credit strategy you are also borrowing the bank’s dollars to pay down debt. At the end of the first year, you will pay $9,371 in interest and your mortgage balance will be $219,439. To achieve this, I can treat the first position line of credit like a traditional mortgage and use a small second position line of credit draw $5,225 and accelerate paying down the first position line of credit. For a difference of $2,000, this is probably not worth the effort. With interest rates so low, what if I used the second position line of credit more aggressively.

Use the second position line of credit and draw $20,000 and accelerate paying down the first position line of credit. At the end of the first year, you will pay $9,418 in interest and your mortgage balance will be $ 214,009. For paying an additional $100 in interest, you have reduced your mortgage balance an additional $7,000.

All three strategies are attractive alternatives. Your solution will be based on preference. Using ‘Create Your Own Scenario’ enables you to create a solution and see the impact before using your line of credit. I anticipate it will be ready for purchase within the next couple of weeks.