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Truth in Equity - HELOCs

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Ryan D

Real Estate Investor from Pittsburgh, Pennsylvania

May 13 '10, 10:14 AM


Does anyone have experience using a HELOC to pay off a mortgage early? I just bought my first property and had never heard of such a concept until I was recently listening to the Real Estate Guys Podcast. I've been listening to them for years and have a decent amount of trust/respect for them. This company and the concept seems legit. Any thoughts?

http://www.truthinequity.com/


Edited Jun 26 2010, 12:49


Eddie Ziv

Real Estate Investor from Studio City, California

May 13 '10, 10:28 AM


BE AFRAID!!! BE VERY AFRAID!! I was wondering about it to and after I investigate it I came to the conclusion that it is very dangrous. The interest rate is variable and in case of extensive inflation, you won't be able to keep up with the payments.


Edited Jun 26 2010, 12:49


Ryan D

Real Estate Investor from Pittsburgh, Pennsylvania

May 13 '10, 10:37 AM


yeah that is a concern of mine too. at the same time, the interest rate is based on the loan balance which is being depleted very quickly. i'm really exploring my options and trying my best to think differently during these turbulent times.


Edited Jun 26 2010, 12:49


Josh Green

Banker from Tampa Area, Florida

May 13 '10, 10:38 AM
1 vote


just pay extra on your mortgage by yourself. it's free and safe!


Edited Jun 26 2010, 12:49


Eddie Ziv

Real Estate Investor from Studio City, California

May 13 '10, 11:03 AM


Josh is right. If you, for instance have a $100,000 30 years mortgage fixed rate at 6%, aditional $200 a month toward the principal, would pay off that loan in 16.5 years. and you'll save $58,117 in interest. The only draw back is that it requires discipline.

I've been doing it for a while on one of my rentals, putting all my positive cashflow (Which was about $150 a month) against the principal. I have a 30 years loan but I plan to retire in 15 so it should have worked perfectly, however, recent property tax increase, put me in the red, so that cash flow is gone... for a while.


Edited Jun 26 2010, 12:49


Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

May 14 '10, 04:03 AM


Here are some other BP threads with more detailed discussion of this concept:

http://www.biggerpockets.com/forums/50/topics/11432-money-merge-account-

http://www.biggerpockets.com/forums/110/topics/32854-payoff-mortgage-5-7-yrs

http://www.biggerpockets.com/forums/92/topics/29914-those-pay-it-off-fast-schemes-

http://www.biggerpockets.com/forums/110/topics/47193-use-line-of-credit-to-pay-down-mortgage-


Edited Jun 26 2010, 12:49


Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

May 14 '10, 07:12 AM
1 vote


Originally posted by Josh Green:
just pay extra on your mortgage by yourself. it's free and safe!

I think that's really all this deal amounts to. Its done as a HELOC so you can take the money whenever you want. You dump your entire paycheck into the HELOC, the pay all your bills using the HELOC.

As far as I can tell, the real trick is simply that you pay more than the scheduled payment. If your budget is cash flow positive by $200 each month, that $200 would normally set in your checking account. After a year, you'd end up with $2400 more in your checking account when you started. By using a HELOC as your checking account, that $2400 ends up as extra payments on the HELOC rather than in your checking account. If you take that $2400 and spend it, though, you're at the exact same point you'd be if you were just paying the scheduled payment.

There's a claim that by having your money in the HELOC for all your bills until the last minute, you'll pay less interest. If you're talking 15 days interest not paid on $2000 of bills vs. the interest on the $200,000 balance, this doesn't amount to very much savings.

Another flaw is every HELOC I've every seen has only a limited time "draw" period. Five years seems typical. After than your balance is locked down and you can't take anything out. So, the whole process breaks down at that point. If you dump your entire paycheck in you've just made a nice big payment. But you can't pay the rest of your bills. So, then what? I guess the plan is to refinance into a new HELOC.


Edited Jun 26 2010, 12:49


Jon Holdman, Flying Phoenix LLC


Ryan D

Real Estate Investor from Pittsburgh, Pennsylvania

May 17 '10, 05:53 AM


Thanks everyone for the feedback and related articles. Jon, thanks for the info on the draw period. I wasn't quite sure how that worked as the company selling the idea of the HELOC didn't get into too much detail. Seems like the 3K they want to get everything started might not be worth it.

This is slightly off topic, but aside from throwing extra cash at the mortgage, does anyone have any opinions on life insurance? Similar to a HELOC the extra cash would be liquid. Not to mention tax free and would earn more than cash in a traditional savings account.


Edited Jun 26 2010, 12:51


Bill G.

Real Estate Investor from Springfield, Missouri

May 17 '10, 09:05 AM
1 vote


Hi HELOCs, very unstable and full of pitfalls.Life insurance? Like a single pay policy, modified life, etc...that's nut's, IMO. Ther is the cost of the insurance, every dime you put in is not a saving account, it pays for coverage as well. Life insurance is a very poor performing savings/investment, but not according to those who sell it! Use insurance for the purpose it was originally intended for, to fund losses arising from the unexpected death of an insured! That's all, a mutual fund of government securities won't earn much, but it's better than the wildest universal policy after costs. Life insurance is only a good investment when you know when you're going to drop dead....and you don't get any of it!!
There are creative uses for financial products, but using them to kite checks, living expenses or other investments is not a creative use, more like mismanagement. If you have a specific idea or use, run it by....not saying there is not a ligit use for some product, but if it has been presented as a new "system" beware, nothing is new! It's always based off of tried and true money management techniques. Bill


Edited Jun 26 2010, 12:51


Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

May 17 '10, 11:16 AM
1 vote


If you took out a brand new $200K loan at 6% for 30 years, then paid $3000 on it right away, you'd knock a whole year off the loan. And save $13K in payments.

As Bill says, life insurance is to provide for those you depend on you. Its to replace the loss of your income. Since the usually retirement guideline is that you should take 4% of your next egg out each year if you want it to last forever, you need 25 times your annual salary in cash to replace your paycheck.

OTOH, life insurance death benefits aren't taxable, unlike your paycheck. If you're paying 28% federal, 4% state, and 7.5% FICA & SSI, you're only taking home 60% of your gross pay. So, if you had 60% of 25X, or 15X your annual salary, you could still take the 4% and have the equivalent of your after tax pay. Now, the earnings on the nest egg would be taxable. So, perhaps somewhere in between those two figures.

That assumes two things:
1) There is someone who's totally reliant on your paycheck, and
2) They're going to spend the rest of their life living off the insurance.

If you're young and single, the first doesn't apply. Nobody's dependent on your paycheck, so nobody but you gets hurt if you step in front of a bus. If you retired and living off your nest egg, even if you do have dependents, there's no paycheck to replace. So, in those two cases, you don't really need life insurance, either.

When it matters is if you have a young family, your spouse is staying at home while you work, and you want to provide for them if you bite the big one. Even then, do you want to provide for him or her to live off the live insurance for the rest of your live? If so, then 15X, 20X or even 25X is not the right number. If you're 25 years old now, you would have some expectation of an increasing paycheck for many years to come. The 4% guideline really says take 4% of the nest egg the first year, and then increase the draw by inflation each year. That's not bad, but may not put your spouse where they hoped to be.

More realistically, IMHO, you want to provide your spouse the ability to adapt to the situation. That might mean paying off all your debt, buying a house free and clear, and providing baby setting money while your spouse gets a degree or skill.

Now, the other half of this story is proper savings and spending. If you're not saving at least 10% of your pay, you're slacking off. If you're spending more than you make (i.e., running up credit card bills), you're REALLY slacking off. I don't care if you make $10 an hour or $100 or even more, if you let them, your expenses will ALWAYS be 110% of what you make. If you're like most people, including me, you have to fight that every moment of every day.

So, buy cheap term life insurance, when you need it. If you're staring a family, buy more. Another member made an argument the other day to buy insurance when you're young and healthy to avoid exorbitant rates when you're older or especially if you end up with some nasty disease. I don't entirely buy the idea of buying a product you don't need on the chance that you will need it later and have to pay more, but there's something to consider. If you have a family history of cancer, diabetes, heart disease or the like, maybe buying sooner rather than later is a good idea. But being diligent about controlling the spending and saving is even more important. If you're 50, smoke and have had a heart attack you're going to pay through the nose for life insurance. If you have a $1 million nest egg (a reasonable goal), then that life insurance isn't so essential.


Edited Jun 26 2010, 12:51


Jon Holdman, Flying Phoenix LLC


Jon Klaus Verified Moderator Donor

Real Estate Investor from Garland, Texas

May 17 '10, 11:25 AM


Is it your primary residence? Is your credit good? If so, why not refinance now to a 15 year mortgage at 4.25%. If you are flush and want to accelerate, do it when you have the extra $$. You could pay it off in less than 10 years without inflationary risk.


Edited Jun 26 2010, 12:51


Jon Klaus, SellPropertyFast
E-Mail: [email protected]
Telephone: 214-929-6545
Website: http://www.sellpropertyfast.com


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