Should You Use Credit Cards To Reduce Your Mortgage?

by JT on August 31, 2008

use credit cards to reduce mortgage

While financial experts everywhere warn against the use of credit cards because of the amount of interest most people pay over time, there is actually a great way to benefit from the use of certain credit cards — if you’re careful with their use. It’s true that you can earn a small percentage of cash back with most cash back credit card rewards programs these days, but even better is the creation of the rewards program that allows you to reduce your mortgage by using the credit card.

For individuals who don’t have a home loan, some credit cards with mortgage rewards programs also allow you to apply your mortgage rewards when you DO eventually purchase a home. The Citi Home Rebate Platinum Select MasterCard is an example of a credit card that gives cardholders a statement of the credits they’ve earned from using the card, that can later be applied to their mortgage. The purchases you make through your card contribute to some percentage of rewards to the program. Specifically, using the card to pay for home related expenses, like utility and internet bills, will provide between 1% to 6% of your purchases towards your mortgage principal balance (6% for the first 12 months, 1% thereafter).

With some credit card mortgage rewards programs, including the Bank of America’s Home Advantage Card, you earn reward points based on your purchases that can be redeemed for cash which you can subsequently apply to your mortgage.

How Much Can a Credit Card Contribute to Paying Off Your Mortgage?

If you consider the fact that the majority of consumers spend the first several years of mortgage repayments simply paying the interest on the loan, you can understand how even a small additional payment made on a regular basis towards the principal amount owed on your mortgage will significantly reduce the total amount of money you owe. Take a look at your mortgage amortization schedule, (or use this online calculator to figure yours out if you don’t know where it is). The first payment made is almost completely interest, with only a few dollars actually paid towards the total amount borrowed. If you make an additional principal payment every single month when sending in your mortgage payment, you’ll end up paying off your mortgage in half the time.

For example, let’s say you have a 30 year mortgage with a total monthly payment of $1,250 a month, with $1,050 being applied to interest and $200 being applied to the principal: if you could send an additional $200 that month, you would shrink the term of your mortgage by a full month. Pay an extra principal payment every single month, and you’ll reduce the time it would take to pay it off — by half.

You’ll thus be able to reduce your mortgage principal by using credit card rewards programs that work by sending regular, small payments towards your principal payment. This will end up saving you several months of payments and several thousand dollars of interest over the life of the home loan. Beats the 1% cash back credit card rewards program, don’t you think?

Image by Frontdoor.

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