It's a dumb idea that pops up from time to time from some BS guru types. The basic reality is.....instead of using your extra Monday each month to pay back a heloc loan you borrowed to pay down your mortgage.....simply use that extra money each month to directly pay down your mortgage. All the other hype about simple verses compounded interest gobbledygook is just total BS.
Here's another way to look at it...
Let's say you have a HELOC and a 30-year fixed 1st mortgage.
Take the entire available balance of your HELOC and apply it to your first. Then, pay down the HELOC while keeping up your payments on the 1st.
Everytime you get a big chunk available in your HELOC, throw it at the 1st.
Why it works:
The 1st mortgage is amortized. That means the early payments are mostly interest while the principal balance is high. The payment is fixed and not dependent on the balance owing - the payment always stays the same unless the interest rate adjusts. (Yes, this works for ARM's, also.)
The HELOC, on the other hand, is like any other revolving credit. The payment is determined by the balance owing or the average daily balance - check the terms of your HELOC to determine what it is in your specific case - plus the interest on that balance for the payment period.
If you can manage your HELOC payments so you're throwing big chunks at your 1st on a regular schedule you'll payoff your 1st much faster than making double payments or any of that.
I don't have the numbers or the charts right at hand, but yes - using this technique, you CAN payoff a 30-year fixed in as little as seven years ... nine to ten is more likely, however.
Note, however, that every time you take a big chunk out on your HELOC your credit will take a hit: the spike in utilization will lower your score and impact your credit profile. Sorry - no free rides.
David J Dachtera
This is your first post where you start establishing the idea that paying lump sums through a HELOC is better than making extra payments directly on your mortgage. You continue down this logic in later posts in an effort to establish the idea that financing a lump sum through a HELOC is better than just applying the smaller payments directly to the mortgage. Everyone tries to prove to you that mathematically it is the same or better to just apply smaller payments than to finance a lump sum payment through your HELOC. Today I even used your preferred Vertex42 spreadsheet to prove that fact.
You keep referring to a HELOC as an accumulator for the lump sums, but that is not what it is. The definition of accumulate is to gather together an increasing quantity or build up. A savings account would be an accumulator. Payments do not accumulate in the HELOC, the payments decrease your debt liability.
When you take on debt through a HELOC to pay off mortgage debt, you are simply transferring debt from the mortgage to the HELOC.
It is better to take the amount you would be paying towards the HELOC and instead pay it directly to your mortgage. You will spend less money paying off your mortgage as I proved in the Vertex42 spreadsheets.
So, it would be true to say you can use a HELOC to pay off your mortgage faster than making minimum monthly payments. BUT what you said is, "If you can manage your HELOC payments so you're throwing big chunks at your 1st on a regular schedule you'll payoff your 1st much faster than making double payments or any of that." That is not true. Assuming your extra payments on your first mortgage match what you would have paid on your HELOC payment, you will not pay off the loan "much faster". In the specific example you argued, it is not payed off much faster and you end up paying more money with a HELOC.
Here's another way to look at it...
Let's say you have a HELOC and a 30-year fixed 1st mortgage.
Take the entire available balance of your HELOC and apply it to your first. Then, pay down the HELOC while keeping up your payments on the 1st.
Everytime you get a big chunk available in your HELOC, throw it at the 1st.
Why it works:
The 1st mortgage is amortized. That means the early payments are mostly interest while the principal balance is high. The payment is fixed and not dependent on the balance owing - the payment always stays the same unless the interest rate adjusts. (Yes, this works for ARM's, also.)
The HELOC, on the other hand, is like any other revolving credit. The payment is determined by the balance owing or the average daily balance - check the terms of your HELOC to determine what it is in your specific case - plus the interest on that balance for the payment period.
If you can manage your HELOC payments so you're throwing big chunks at your 1st on a regular schedule you'll payoff your 1st much faster than making double payments or any of that.
I don't have the numbers or the charts right at hand, but yes - using this technique, you CAN payoff a 30-year fixed in as little as seven years ... nine to ten is more likely, however.
Note, however, that every time you take a big chunk out on your HELOC your credit will take a hit: the spike in utilization will lower your score and impact your credit profile. Sorry - no free rides.
David J Dachtera
This is your first post where you start establishing the idea that paying lump sums through a HELOC is better than making extra payments directly on your mortgage. You continue down this logic in later posts in an effort to establish the idea that financing a lump sum through a HELOC is better than just applying the smaller payments directly to the mortgage. Everyone tries to prove to you that mathematically it is the same or better to just apply smaller payments than to finance a lump sum payment through your HELOC. Today I even used your preferred Vertex42 spreadsheet to prove that fact.
You keep referring to a HELOC as an accumulator for the lump sums, but that is not what it is. The definition of accumulate is to gather together an increasing quantity or build up. A savings account would be an accumulator. Payments do not accumulate in the HELOC, the payments decrease your debt liability.
When you take on debt through a HELOC to pay off mortgage debt, you are simply transferring debt from the mortgage to the HELOC.
It is better to take the amount you would be paying towards the HELOC and instead pay it directly to your mortgage. You will spend less money paying off your mortgage as I proved in the Vertex42 spreadsheets.
So, it would be true to say you can use a HELOC to pay off your mortgage faster than making minimum monthly payments. BUT what you said is, "If you can manage your HELOC payments so you're throwing big chunks at your 1st on a regular schedule you'll payoff your 1st much faster than making double payments or any of that." That is not true. Assuming your extra payments on your first mortgage match what you would have paid on your HELOC payment, you will not pay off the loan "much faster". In the specific example you argued, it is not payed off much faster and you end up paying more money with a HELOC.
Thank you..... this whole discussion has been like the Twilight Zone haha.
Appreciate you recounting the way this played out.
Thanks again Joe.
No, I'm NOT saying "that it works due to something unique and intrinsic of the HELOC itself". The ONLY difference is that between amortization and compound interest. Period - end of statement.
Please review the video in its entirety. Follow the host's suggestion to set aside what you think you already know - it just confuses you, as we have seen here.
It will be boring and you may fall asleep multiple times listening to him drone on in mostly monotone, but bear with it. It will be worth it in the end.
In this earlier post you state, "The ONLY difference is that between amortization and compound interest. Period - end of statement." The premise of your argument has been that trading compound interest debt through a HELOC (or similar) will save you money over a conventional mortgage with amortized payments. It was proved to you that a HELOC and conventional mortgage compound interest at a similar rate. Amortization is just a fixed payment amount for a period of time. The interest is calculated based on the outstanding principal similar to a HELOC. On a conventional mortgage since the payment is fixed, accelerating principal payment decreases term. Using a HELOC you are just trading one debt for another. Both loan types use compounding interest. Amortization is not a type of interest.
What rate is your HELOC is rate as against the mortgage? That is the determination you need to make.
What rate is your HELOC is rate as against the mortgage? That is the determination you need to make.
In the example discussed throughout the thread it is 3% for primary mortgage and 3.75% for the HELOC so in this example it costs more to use the HELOC than to pay down directly.
I think we're all agreeing to some extent, it's a matter of how significant the savings are. With interest rates as low as they are right now, the difference is fairly small (depending on what you consider small).
I believe instead of keeping a lower monthly payment on a 30 year, and strapping on an additional payment of a HELOC, you might as well be just as happy with a refi at a 15 year loan and making an additional $50-100 per month payment on top of that. Compounded with the interest savings on a 15 versus a 30 and the additional $600-1,200 per year in principle reduction, you'd probably come out about the same with much less attention to the detail (set it to autopay and then just go about your business).
meh, there are lots of schemes to utilize your money and frankly, I'd trade the HELOC for investing in other positive cash flow properties and use them to pay off the principle. That way you're not only reducing your daily balance on your principle, but you're also building equity in another investment at the same time.
then, of course, there's the life insurance option...
lol.
I think we're all agreeing to some extent, it's a matter of how significant the savings are. With interest rates as low as they are right now, the difference is fairly small (depending on what you consider small).
I believe instead of keeping a lower monthly payment on a 30 year, and strapping on an additional payment of a HELOC, you might as well be just as happy with a refi at a 15 year loan and making an additional $50-100 per month payment on top of that. Compounded with the interest savings on a 15 versus a 30 and the additional $600-1,200 per year in principle reduction, you'd probably come out about the same with much less attention to the detail (set it to autopay and then just go about your business).
meh, there are lots of schemes to utilize your money and frankly, I'd trade the HELOC for investing in other positive cash flow properties and use them to pay off the principle. That way you're not only reducing your daily balance on your principle, but you're also building equity in another investment at the same time.
then, of course, there's the life insurance option...
lol.
You may be better refinancing, but then you have closing costs and you are forced to always make the higher payment. I took out a 15 year on one of my rentals because I had been paying my 30 year mortgages down so fast. Then a couple months ago my escrow adjusted due to increase property taxes and now my payment went up $150. I sure wish I had it on a 30 year loan. Anyway I agree there are lots of methods. Bottom line is paying more towards principal.
Life insurance, don't get me started, haha.
@Joe Splitrock - personally, I have no problem with 30 year mortgages on my investment properties right now...because interest rates are so low, I feel like I'm stealing money...plus it makes cash flow much easier month to month.
I saw posted in here one time, that rich people get rich because they find ways to have other people pay off their debts. It's worth it for me to keep my income generating properties at the highest possible margin to keep my debts covered by my tenants. The ONLY reason I might consider a different strategy for paying off/building equity in my rentals is for the use of that equity as a tax-free vehicle for more investments. THAT is the greatest "scheme" I've learned in this business, and I love, love, love how that works. Even then, we've been blessed to buy at such a good cost to value ratio, our leverage is strong and our positions in each property is comfortable against potential market fluctuations, so I just plod merrily along scooping up a deal here and there when it presents itself.
On my personal property, I did refi to a 15 because it saved me nearly $135k. That was 6 years ago, and it will be done in another 7 years because I pay an extra $125 each month to push that principle down.
I'm not looking to become a bazillionaire, I just want to have an honest business and provide a comfortable (secure) living for my family. I was also told one time, "don't learn the tricks of the trade, learn the trade."
it's not rocket surgery...it's just numbers.
Blessings!
Full disclosure, I haven't read through all of the comments as we seemed to be going in circles a bit.
From a bank sales perspective, I would only recommend this if there was a dramatic difference in rate. As often happens with a HELOC vs a traditional mortgage.
For example, if you mortgage rate is 5%, most instances your HELOC (assuming you are using it to replace your mortgage in 1st position) rate will be in the neighborhood of 3%.
Continuing to make your mortgage payment (based off 5% interest) towards the HELOC would allow you to pay it off dramatically faster - relative to a 30yr note (the impact is greatly decreased on shorter notes).
However, I would not move someone from a 5% MTG to a 5% HELOC to pay it faster. The only instance in which that would be appropriate would be if they need payment flexibility, as most HELOCS only require a interest only payment. But again, this is to pay less when needed not pay it super fast.
You also need to be mindful that most HELOCs are variable rates, so you need to be confidant in your cash flow to make sure it's paid on schedule to avoid getting shafted in the future.
Lastly, a final benefit to the HELOC is because they only require an interest only payment, that is all they report to the CB. So if your DTI is an issue in getting additional loans, you can "beat the system" by putting your mortgage on a HELOC and reducing you reporting monthly obligations.
Full disclosure, I haven't read through all of the comments as we seemed to be going in circles a bit.
From a bank sales perspective, I would only recommend this if there was a dramatic difference in rate. As often happens with a HELOC vs a traditional mortgage.
For example, if you mortgage rate is 5%, most instances your HELOC (assuming you are using it to replace your mortgage in 1st position) rate will be in the neighborhood of 3%.
Continuing to make your mortgage payment (based off 5% interest) towards the HELOC would allow you to pay it off dramatically faster - relative to a 30yr note (the impact is greatly decreased on shorter notes).
However, I would not move someone from a 5% MTG to a 5% HELOC to pay it faster. The only instance in which that would be appropriate would be if they need payment flexibility, as most HELOCS only require a interest only payment. But again, this is to pay less when needed not pay it super fast.
You also need to be mindful that most HELOCs are variable rates, so you need to be confidant in your cash flow to make sure it's paid on schedule to avoid getting shafted in the future.
Lastly, a final benefit to the HELOC is because they only require an interest only payment, that is all they report to the CB. So if your DTI is an issue in getting additional loans, you can "beat the system" by putting your mortgage on a HELOC and reducing you reporting monthly obligations.
Now THAT is probably the first "trick" that's been discussed! I hadn't even thought about it from a credit/DTI perspective.
Thanks for pointing that out. Seems obvious but I hadn't ever thought about it.
BP members don't need a post to know that mortgage prepayment reduces the loan life and that was never the topic.
This post began with ignorance and then extended itself due to pride and will mostly end with exasperation.
Full disclosure, I haven't read through all of the comments as we seemed to be going in circles a bit.
From a bank sales perspective, I would only recommend this if there was a dramatic difference in rate. As often happens with a HELOC vs a traditional mortgage.
For example, if you mortgage rate is 5%, most instances your HELOC (assuming you are using it to replace your mortgage in 1st position) rate will be in the neighborhood of 3%.
Continuing to make your mortgage payment (based off 5% interest) towards the HELOC would allow you to pay it off dramatically faster - relative to a 30yr note (the impact is greatly decreased on shorter notes).
However, I would not move someone from a 5% MTG to a 5% HELOC to pay it faster. The only instance in which that would be appropriate would be if they need payment flexibility, as most HELOCS only require a interest only payment. But again, this is to pay less when needed not pay it super fast.
You also need to be mindful that most HELOCs are variable rates, so you need to be confidant in your cash flow to make sure it's paid on schedule to avoid getting shafted in the future.
Lastly, a final benefit to the HELOC is because they only require an interest only payment, that is all they report to the CB. So if your DTI is an issue in getting additional loans, you can "beat the system" by putting your mortgage on a HELOC and reducing you reporting monthly obligations.
One thing to be careful of: Sometimes, banks will report a HELOC as a revolving line, not RE related (BMO Harris, for example).
Check your own credit report and verify how the HELOC is being reported. If it's reported incorrectly your revolving credit utilization ratio can be massively skewed in the wrong direction.
A couple of homes ago, I was able to refi my 1st mortgage into a HELOC.
I have been using this system for the past 2 years and it has been absolute game changer for me! It has helped me pay down CC debt and a car loan. I think the biggest benefit of it though is having access to the LOC. It has helped us purchase 3 properties this past year also. It can be a very powerful tool if used correctly.
I was directed here from a very similar thread that is currently ongoing so I too haven't read all the posts, but I can attest to the loophole in DTI using a HELOC, especially here in Hawaii where we have introductory promo rates as low as 1%. However, as @David Dachteracautioned, banks sometimes look at the HELOC differently. One bank here only look at my interest only payment to calculate my DTI and another used a calculated interest only payment on a maxed out HELOC balance. This can drastically affect your DTI if you are trying to run the numbers in advance.
Definitely something to consider before applying! At the financial institution I used to work at they qualified you at an interest only payment, assuming a maxed our line amount, and the interest rate used in the qualification process is +5% of what the actual rate will be.
This could be higher than a traditional mortgage payment in a lot of cases. However, if you can get through that qualification, you can still reap the benefit on future financing options.
@ Brent Boltz I'd love to know which bank you used for your First Lien HELOC. I'm asking on behalf of a fellow investor friend, and we're also curious for ourselves. Anyone else out there have any good bank recs for something like this? I looked through the threads and saw one person used First Citizens. Would love to have a few options at my fingertips. Thanks!
@Eva Croasdale - Fairport Savings Bank in Rochester NY is currently offering first lien HELOCs > $50K for Prime + 0... so 3.5%! I have a mortgage and heloc with them and they are great. I can provide a reference there if you're interested.
Hi @ Eric Jones , thanks for the hot tip! I'd love the contact name and number.
I think the idea about using the HELOC to payoff mortgage faster is that instead of paying on an installment loan once a month, having the HELOC in first position, so it can be used as collatoral for the debt, you have all your income going to the account...say for example you get paid every two weeks, then every two weeks your entire paycheck gets deposited into your HELOC account. If you have rental income, have that applied to the HELOC account as well, dividends, SS, VAdisability, whatever...then instead of putting the money into a bank and getting a very small if any interest on that, you have it taking your average daily balance down on your revolving HELOC....and if your diligent with your monthly bills, the ones besides your mortgage, you can have them deducted once a month...preferably over longer periods of time...utilize grace periods for credit cards and pay them off before they incur any interest charges....if your diligent and utilize this strategy wisely, you can indeed payoff your mortgage much quicker....I am looking at finding a HELOC to replace my 30 year mortgage here in the near future...and the APR on my mortgage is 3.25%.
I think the idea about using the HELOC to payoff mortgage faster is that instead of paying on an installment loan once a month, having the HELOC in first position, so it can be used as collatoral for the debt, you have all your income going to the account...say for example you get paid every two weeks, then every two weeks your entire paycheck gets deposited into your HELOC account. If you have rental income, have that applied to the HELOC account as well, dividends, SS, VAdisability, whatever...then instead of putting the money into a bank and getting a very small if any interest on that, you have it taking your average daily balance down on your revolving HELOC....and if your diligent with your monthly bills, the ones besides your mortgage, you can have them deducted once a month...preferably over longer periods of time...utilize grace periods for credit cards and pay them off before they incur any interest charges....if your diligent and utilize this strategy wisely, you can indeed payoff your mortgage much quicker....I am looking at finding a HELOC to replace my 30 year mortgage here in the near future...and the APR on my mortgage is 3.25%.
Mike, the theory you're discussing is one of a few people have already floated for why this HELOC mortgage scheme works. This is the only argument floated by the pro-HELOC-as-mortgage folks that isn't flat out wrong. While it's technically correct, we modeled the savings over the life of a loan and it was peanuts. In fact it looked like once you factored in yearly fees, etc it actually leaves you in the red.
So not exactly wrong, but not worth the effort.
@Michael Smith, you wrote: "I am looking at finding a HELOC to replace my 30 year mortgage here in the near future...and the APR on my mortgage is 3.25%".
Replacing your fixed 3.25%, with a variable HELOC seems to me: a TERRIBLE idea!
There, I got that off my chest...
@Michael Smith, you wrote: "I am looking at finding a HELOC to replace my 30 year mortgage here in the near future...and the APR on my mortgage is 3.25%".
Replacing your fixed 3.25%, with a variable HELOC seems to me: a TERRIBLE idea!
There, I got that off my chest...
I totally missed the interest rate Mike is paying. Agreed. Getting out of a historically low fixed rate mortgage is not financially sound... Not even remotely.
Im actually not going to do that quite yet...but I suggest you both take a look at all the options available for financing, and using debt as leverage, and how to optimize them for investing and paying off mortgage debt...there are some really good strategies for using a HELOC to leverage towards real estate investments and paying down mortgages as well as other installment and revolving accounts (secured and unsecured) and I suggest you do your research before coming to any conclusions on this.
I gotta say, I've been scratching my head trying to figure out what to do with the $10k I HAVE to spend on my HELOC in order to get a deal on closing...
Putting it onto my 1st mortgage seems like a no brainer. 1st mortgage is 2.5% 5/1 ARM. HELOC is 1.99%.
So I'll just put $10k of HELOC towards principal on my 1st mortgage ($220k remaining). This should save me interest... I used this calculator that allows a prepayment option: http://www.hsh.com/mortgage-calculator.html
1) My figures with regular payments (I pay more, but to keep it simple I'll just figure it at minimum payments):
a) Total Interest Paid: $102,229.33
b) Total of 360 payments: $344,229.33
c) Payoff date: Aug 2046
2) My figures with regular payments PLUS HELOC prepayment of $10k on month #11:
a) Total Interest Paid: $91,944.58
b) Total of 360 payments: $333,944.58
c) Payoff date: Nov 2044
So it seems like a no brainer... By using $10k of my HELOC to pay off $10k of my mortgage, I'll save pretty big:
102,229.33 - 91,944.58 = $10,284.75 saved in total INTEREST paid.
344,229.33 - 333,944.58 = $10,284.75 saved in total PAYMENTS paid.
Paid off almost 2 years sooner. All from a one time prepayment of $10k from a HELOC.
Here's the downside: I now would owe $842/mo for 12 months to payoff my HELOC in a year. Interest paid on my HELOC for the next year to payoff the $10k = $104 (not including any fees). That's $842 * 12 = $10,104 I'm paying towards my HELOC each month, instead of my mortgage. BUT, this seems better to me than just slowly putting an extra $842 towards principal each month. The sooner it goes towards principal, the more interest I'll save each time it gets calculated, right?
So to recap: I spend some money getting a HELOC (closing fees) and interest to pay it off ($108). I save myself $10,284.75 in INTEREST, $10,284.75 in total PAYMENTS, and payoff my 1st mortgage 2 years sooner!
Now let me be clear, I'm a total rookie at all of this and am still trying to determine if I'm making any errors here in my logic. If I'm wrong, PLEASE tell me before I follow through on this.
I know it's an old thread, but the issue doesn't seem fully resolved. Everything @David Dachtera has said makes sense to me. Yet he has fewer votes than his counterparts in this thread. Let's get to the bottom of this instead of leaving it unresolved :)
Thanks,
Cliff
Everything David said was financial illiteracy.
What you're saying isn't exactly wrong--obviously moving debt to a lower interest vehicle will save you money. I lost track of all the different reasons people claimed this strategy worked, so it's hard to say which one strategy you're following.
The heart of the argument from people like me (the naysayers) is that 1. The difference of .5% interest on 10k is peanuts compared to the additional risk (in most situations) and 2. The reason your mortgage gets paid off faster is because you're now making two loan payments (original mortgage monthly payment plus HELOC). If you just diverted the money you will be spending on the HELOC to the mortgage directly, the end result is the same (aside from the immaterial difference in rate).
People did come up with some unique examples where you save serious money, but they are all due to great HELOC rates that doesn't seem very common.
Trust me, it's resolved. I debunked literally every version of this hocus pocus strategy in a shared Google Sheet. The most savings over the life of a $300k loan was like $600 if I remember correctly.