How to refinance a HELOC without involving the bank.

OK, so the obvious answer here is to pay off the balance. Not all of us have $20,000 or so just sitting around to do that with, however. When I refinanced my house a few years ago, I put 80% on a fixed rate mortgage, and the remaining $20,000 on a Home Equity Line of Credit. I didn’t realize that the rate was adjustable until I was at the closing (thank you to the mortgage broker for giving me all of the facts). But at the time, the rate was only 4%, I was paying interest-only for the first 5 years, and my payments were pretty low.

Adjustable rates will adjust, though, and adjust they did. Within less than a year, my 4% had gone up to 10%, and my payments had doubled, and I wasn’t even touching the principle. I looked into doing another refinance, but it hardly seemed worth it, to pay for several thousand dollars worth of closing costs all over again. I could refinance just the HELOC to a fixed Home Equity loan, but the rates weren’t significantly better than what I was paying on my HELOC.

Then, one day, when I was about to shred some balance transfer checks from one of my many credit cards, I had an idea. And I turned off the shredder.

My credit card number 1 (CC1) had sent me checks that I could write to myself, for cash. There was only a 3% fee for this, which was capped at $75 (only .3% of $20,000). My another credit card (CC2) was offering me 2,99% on balance transfers for the life of the balance, with the balance transfer fee capped at $60. I wasn’t currently using either card, and had credit lines of at least $25,000 on each. I had everything I needed to refinance this thing myself.

Step 1
I called the bank that held my HELOC and made sure that the account would remain open after I paid off the balance — just in case something went awry with the whole balance transfer plan.

Step 2
I wrote a check from CC1 to myself, in the amount of $20,000, and deposited it in my checking account.

Step 3
When that check cleared (and I called the bank to make sure that the funds were available), I logged into my HELOC account, and paid off the entire balance.

Step 4
I checked CC1 account online every day until the transfer showed up. When it did…

Step 5
I logged into my account for CC2 and did an online balance transfer of $20,000 from CC1 to CC2.

Step 6
I promptly set up automatic payments for CC2 — missing a payment could kick me out of this sweet 2.99% deal altogether.

And that’s it. I “refinanced” my 9% variable rate HELOC to 2.99% (fixed) for a total of $135.

What are the catches?

My payments got higher. With the HELOC, I was paying interest-only for the first five years. After that, my payments would go up and I’d start paying off the principle too. So, even though my interest rate was high, my payment was only about $150/month. The monthly credit card payments were calculated at 2% of the balance — about $300/month. However, I was paying down the principal - and saving a little over $100/month in interest.

Taxes. The interest I was paying on my Home Equity Line of Credit was tax-deductible. The interest only credit card balance transfer isn’t. However, even if you assume that you’d get a third of the interest back in a tax refund, that only drops my effective HELOC rate to 6% — twice what I’m paying now on the credit card.

I feel like I have so much credit card debt now! I do have balances on a few other credit cards (also at 2.99% for the life of the balance), and its hard not to group this one in with those, as “debt that I need to pay off ASAP, so I can get out of the red!” Mortgage debt isn’t debt that people really feel they need to make excuses for, however. As long as I keep telling myself how much money I’m saving, I can avoid falling into the “all credit card debt is bad” mindset.

[Disclaimer - I’m not a financial planner of any sort, so don’t try this at home unless you’ve worked through all the math yourself, and can promise that you’ll never miss a payment. That said, it’s worked out pretty well for me. ]

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