Use home equity line to pay bills?

Q:
Dear Dr. Don,
I've heard of a mortgage strategy that involves getting an equity line on the house and using that money to pay bills you know you would have to pay anyway, along with the mortgage payment. The end result is that you can pay off all your debt faster. Fact or fiction?
-- Chris Conundrum

A:
Dear Chris,
Fiction. I don't like writing about this topic, because when I come out against it, every sales representative pushing this product writes in to tell me how I just don't get it. I get it just fine. I just don't think the typical homeowner benefits from this type of mortgage loan.

Compare home equity rates
Bankrate can help you find the best home equity rates in your area.

Some of these programs even sell you software packages to manage the process. I have a loan program you can use for free. Enter your mortgage particulars on Bankrate's mortgage calculator, then add an additional monthly principal payment each month and see how it changes your payoff date and total interest expense.

Yes, if you put every penny you can into paying down your mortgage, you will pay the loan off faster and own your home free and clear sooner. You don't need a home equity line to do this, just make additional principal payments on your conventional mortgage loan.

The premise of the equity line program is that you deposit your paycheck into your home equity line and then write checks against the credit line to pay your bills. As long as your income is greater than your expenses, you're paying down the credit line and reducing your mortgage interest expense.

The fallacy is that by depositing your entire paycheck into the home equity line, you substantially reduce the intramonth interest expense. You do reduce that expense, but the amount isn't substantial. Let's say that your loan balance is $200,000 at a 5 percent annual interest rate. Depositing a $4,000 paycheck at the beginning of the month and then drawing down $4,000 on the line during the month, if you do it equally over the month, it reduces your average mortgage balance during the month by about $2,000. One month's interest on $2,000 at 5 percent is $8.33.

The real interest savings comes from making additional principal payments on your loan. You don't need a home equity line of credit to make additional principal payments on your loan. Just do it.

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Lloyds reports first annual profit since bailout

Banking giant Lloyds has today reported it has returned to profit – its first since the bank had to be rescued by the Government at the height of the financial crisis in autumn 2008.

Lloyds Banking Group, which is 41% owned by the taxpayer, posted pre-tax profits of £2.2 billion, compared with a £6.3 billion loss in 2009.

The results beat expectations and come just a day after the Royal Bank of Scotland (RBS), which is 84% owned by the taxpayer, reported a net attributable loss of £1.13 billion for the 2010 year.

While RBS’ loss was down from the £3.6 billion reported for 2009, it was higher than analysts had expected.

Last week, Barclays reported profits of £6.1 billion for the 2010 year.

Returning to Lloyds, bad debt losses fell to £13 billion in 2010, from £23 billion in the 2009 year.

Outgoing chief executive Eric Daniels comments: “2010 was an important year for Lloyds Banking Group, marking our return to profitability, and a further reduction in risk in our business.

“Our significant progress in the year has positioned the group well to become the best bank in the UK for all our stakeholders, including our customers, shareholders and employees.”

In related news, yesterday Lloyds revealed a rise in customer complaints in the second half of 2010.

The bank, which runs the Halifax and Bank of Scotland, received 329,761 complaints in the six month period – a 14% rise compared with the same period a year earlier.

According to the bank, the rise in complaints was attributed to the sale of payment protection insurance policies – which the bank ceased selling in July 2010.