Bank Strategies 1/6 - Cancel Interest Charges

If you could walk into your bank and hand them $5 and in return they would hand you $23 through the teller window, how many times a year would you want to do that?

This is not possible, surely?, you ask.

Yes it is.

How is this possible?

This can happen when you cancel interest charges on amortized loans, be they mortgages, car loans, student loans, boat loans, airplane loans.

It is really a very simple strategy. There are two ways to achieve this, depending on your financial circumstances.

One scenerio will require the amortized loan/s as well as a HELOC, (Home Equity Line of Credit), a Personal Line of Credit, a secured line of credit or a Business Line of Credit.

The second scenerio will require the amortized loan/s along with all three of the following types of accounts: a chequing/checking account, a savings account, and a credit card with a minimum $300 limit. (I will go over this scenerio in 3/6 - Interest Accumulation) 

You must also spend less than you earn under most circumstances.

Mr. Homeowner has a $200,000 mortgage @6% for 360 months (30 years) with a $1199.10 monthly payment.

If you go to bankrate.com and enter this loan information you will see that Mr. Homeowner has agreed to pay $231,677 of interest charges over the 360 month term of the loan.

If Mr. Homeowner gets an inheritance of $5,000 and he decides to apply that $5,000 to pay back some of the principal portion of his mortgage with his very first mortgage payment, what effect will that have? Do you know?

To understand the next section we must notice, on the amortization schedule above, how the very first monthly payment is divided into $199.10 towards paying back the principal and $1,000 is interest profit for the bank.

(by the way, does $1,000 = 6% of $1,199.10c? I guess that is bankers math.)

By adding an extra $5,000 to the first monthly payment the result is as follows:

#1 - the amount borrowed ($200,000) take away the 199.10 + the $5,000 and your principal owing is now reduced to $194,800.90c

#2 - the interest rate stays the same - 6%

#3 - the monthly payment stays the same $1,199.10

#4 - BUT - after one monthly payment with an extra $5,000 towards principal, the number of months owing, instead of being 360 - 1 = 359, it has been reduced to 337. That means 23 minus the 1 months payment = 22 months of $1199.10 monthly payments has just been knocked off the back end of Mr. Homeowners mortgage. That is 22 months x $1,199.10 = $26,380.20 that will never have to be paid.

#5 - Also, the amount of interest that Mr. Homeowner agreed to pay the lender was $231,677. Now that amount has been reduced to $203,373.

That is a reduction of $28,304. Take off the $5,000 and Mr. Homeowner added from his inheritance himself and he is left with $23,304 of interest charges that he will no longer be required to pay the bank.

So, I will ask you again, if you went to a bank and gave them $5 and they gave you back $23, how many times would you like to do that?

Mr. Homeowner gave the bank an extra $5,000 and the bank is saying, you no longer have to pay me $23,304. Isn't that the same thing?

This first bank strategy is called Interest Cancellation.

The next question to ask yourself though is if you are not receiving an inheritance, "Where am I going to get $5,000 or any other amount of money to make a principal only payment to any one of my loans/debts?"

And also "If I have enough to do this once, where will the next and the next and the next payments come from, if I want to continue to do this until I am all paid off?"

Albert Einstein said " Those who understand interest, earn it, those that do not, pay it." This is very true. He also said that trying to solve a problem using the same type of thinking that created the problem is insanity. So let us look more closely at the way interest is calculated and how we can use this bank strategy to our benefit while taking advantage of commonly available, existing bank accounts .

First, we have to understand that a 6% interest rate on a mortgage cannot be compared to a 10% interest rate on a HELOC. Why not?

To answer the question, 'where can I get money from to pay down my mortgage principal?' we need to understand the differences between loans and lines of credit.

Where you can get the money from, in scenerio one is, from your line of credit. If you use it properly this will not cost you very much at all. Most people do not use their lines of credit to their best advantage though.

First let's look at the five differences between a loan and a line of credit and then in my next hub we will look at how to use them to make a huge difference in your financial future.

#1 - A mortgage/amortized loan is called a closed-end loan. That means you can deposit money into it, but you cannot withdraw money back out of it.

#1 - A HELOC or other form of line-of-credit is called an open-end loan. You can deposit and withdraw money from this type of loan.

#2 - Banks will only apply mortgage/amortized loan deposits once a month.Even bi-weekly 1/2 payments are not applied until both 1/2's have been received by the bank.

#2 - Banks apply line-of-credit deposits and withdrawals multiple times a month .

#3 - Banks only apply deposits to your mortgage/amortized loan at the end of the month, no matter when they receive your money. Even if they receive it on the 1st day of the month. (They invest it for the time difference)

#3 - Banks apply L.O.C. deposits on the day they are received, just like a chequing or savings account.

#4 - Unless you have an interest-only or negative amortized mortgage/, the bank will require a payment consisting of principle as well as interest. Car, student loans etc require principle & interest monthly payments.

#4 - HELOC's and other lines-of-credit usually require an interest only payment each month. We can use this to our advantage. 

#5 - Mortgages, Car loans, Student loans etc. have interest calculated using an Amortized Schedule. (See Bankrate.com) That is why on the amortization schedule diagram above you see the distribution of the 1st months payment between principal and interest favours the bank. 

#5 - Lines of Credit are calculated using an Average-Daily-Balance.

So one is an apple and one is an orange. They are both fruit but completely different in their make-up.

Now let us look at Arbitrage. This bank strategy is all about paying a little bit of interest to customers on their savings,CD, accounts while earning higher interest profits on the money they lend. (Which, by the way, is the money you have sitting in your chequing and savings accounts that is being lent back to you)

The way we can take advantage of this bank strategy is by paying low amounts of interest charges on borrowed money while eliminating higher amounts of scheduled interest payments.

In essence, we will be borrowing cheap money to pay back expensive money.

You have to understand though that if you only look at the interst rate of a loan you will not understand how borrowing money from a Home Equity Line of Credit or a Personal LIne of Credit etc.that charges 10% interest, if used correctly is cheap money compared to the mortgage, which say charges 6%. Here we are looking at the cost of the borrowed money, versus the rate being charged for the borrowed money.

This HUB covers a small amount of information about one way of cancelling interest charges.

My next HUB will be specific to how to actually utilize current bank systems that have been in place and available to us all this time, but we have not been educated about how to properly use them for our advantage.

The HUBS that will follow in this series will cover five more bank strategies.

Get an instant savings quote here, right now.

To learn more about an award winning system that has been built to implement all 6 bank strategies at one time and is personalized to your financial circumstances, go to a demonstration video right here - Where you will learn about a system that guides, and educates you in the fastest way to pay off all your debts while building your wealth.

My next HUB in this series is Bank Strategies 2/6 - Interest Float.

(Jennifer Bhala Hansen is new to social internet networking. But, if this hub article has been interesting or helpful to you, a thumbs up rating would be much appreciated!) Thanks.

This hub post holds the intention of helping all who read it to learn, research, grow, and love our fellow humans/animals.

Information provided here is for EDUCATIONAL PURPOSES ONLY and is in NO WAY intended to replace proper financial advice. IT IS NOT to be construed as instruction on how to pay-off debt or overcome any financial situation the reader may be in.

Every individual is different, thus what may work for one may not work for another person. The writer of this hub post will not be held accountable in anyway if and when the recipients of this hub post choose to apply the information they read for their own personal use. Consult with the professional financial authorities of your choice.

Remember, taking responsibility for your own wealth is your own personal decision: do your research and choose wisely. I commend you!