Offset Mortgages

[Bean]

Always been interested in the idea of an offset mortgage like they have in the UK, but there isn't really any provider in the US that does it.

Anyone here ever set their own version of this?

I was thinking of using my primary checking account as a sinking fund, where when it hits a set cap money transfer over to a muni bond fund.  Then the muni bond funds interest pays back into the checking.  Slowly offsetting the cashflow that goes to the mortgage.  Finally once they are equal, they wipe each other out.  (The investment vehicle would probably be Vanguard's Intermediate Muni Bond Fund)

http://en.wikipedia.org/wiki/Flexible_mortgage

[Bean]

Bueller... 

[D1984]

Maybe a stupid question but any particular reason to choose an offset mortgage (including of the DIY type with a muni bond fund) instead of a flexible mortgage (kind of like U1st did but using a HELOC you yourself set up so as to avoid paying U1st's $3500 fee) where you use the combined HELOC/mortgage as your checking account to pay the loan off faster?

Also, what kind of muni fund would you be using? Short-term, intermediate-term, long-term, or leveraged CEF?

[Bean]

Maybe a stupid question but any particular reason to choose an offset mortgage (including of the DIY type with a muni bond fund) instead of a flexible mortgage (kind of like U1st did but using a HELOC you yourself set up so as to avoid paying U1st's $3500 fee) where you use the combined HELOC/mortgage as your checking account to pay the loan off faster?

I think the HELOC route works if interest is calculated on a daily basis.  I believe my mortgage is actually calculated on a daily basis, so this could work.

However, I have some aversion to HELOCs since it is another debt and control is really at the whim of the bank.  So I came up with the idea of having a cap on my checking, with overages going to the muni-bond fund.  Then once they equal, I clear out the mortgage debt with the bond fund.  Similar rates, low credit risk, and I keep liquidity.

Also, what kind of muni fund would you be using? Short-term, intermediate-term, long-term, or leveraged CEF?

Would be an intermediate-term, VWITX

[Bean]

Pulled the trigger on this.  For overall investment tracking, I am counting it as part of VP. 

However, adding to it at the same amount I would like to pay down the mortgage.  Then, once the mortgage and the fund equal each other, I will take a trip to the bank to purchase my freedom.

[sophie]

Interesting...I actually also did this, in full knowledge that in the long term it makes more sense just to sink the money into the PP.  But  it feels nice to be generating some tax-free income that I can set against the mortgage payment.  It makes sense only if the muni fund (after taxes, if any) pays more in interest than the interest rate on your mortgage after the tax benefit.  I also like that the muni fund doubles as a source of funds for home improvements, instead of borrowing, leaving the PP to cover true emergencies only.

Definitely beware HELOCs and flexible mortgages.  HELOCs can be cancelled at any time, and they function like an adjustable rate mortgage with far fewer controls on how fast & how far interest rates can increase.  And flexible mortgage rates tend to be higher, in addition to that upfront fee.

[Bean]

My thought process exactly Sophie.  Thanks for the comment