Use HELOC to paydown mortgage fast
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Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
10yIt'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.
420 Replies
- Rental Property Investor · San Francisco, CA · Member since 2017 · 206 posts · 138 votes9y
Clayton Morris just wrote a book on this. check it out! He has weekly You tube videos. Good luck!
- Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes9y
You said you supplement your income with speaking...but hey, if they are paying you in vegetables then more power to you.
I am glad we agree on why it works, no fault to find. I got a 15 year, not 30 year mortgage because higher payments and faster loans = good.
- 9yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @David Dachtera:
Originally posted by @Roy N.:
Originally posted by @David Dachtera:
There is no known way to post spreadsheets to the forum, only the copy-and-paste of the summary information in the earlier post.
Sure there is and it's simple to use. Just upload the spreadsheets to the Bigger Pockets FilePlace and place a link to it here in the thread.
Thanx much, Roy! I wasn't aware of that. Let me explore it ...
If you go back one year in this discussion ... I posted several spreadsheets demonstrating the various scenarios put forward to the FileSpace.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
Originally posted by @Chris May:
Originally posted by @David Dachtera:
I know no one's going to listen to this, but I'll put it out there anyway...
No, there's no "magic" to a HELOC.
There ARE, however, certain advantages.
1. Deductions?
Check with your tax professional about your ability to deduct the interest on a HELOC from your taxable income.
2. Credit?
A HELOC should be reported on your credit profile as real-estate related. BMO Harris is notorious for getting this wrong and reporting it as simply "revolving" credit. Correctly reported, a HELOC does NOT count against your revolving credit utilization.
Using this strategy, you're borrowing and repaying an amount annually. This helps support a strong credit profile and a favorable credit score.
One downside is the possible impact on your debt-to-income ratio should you seek to replace an auto, major appliance, etc. requiring a new loan just after applying a "chunk" to your mortgage.
Deposit accounts, mattresses, extra monthly principal amounts, etc. each have their own unique advantages. Few of them do you much good come tax time or on your credit report, however.
Just wanted to put that out there ...
Tax treatment of using a HELOC to pay part of your mortgage and then using cash to pay the HELOC is identical to using that cash to pay the mortgage directly. No different.
... except that with the HELOC you may get an additional $616 a year in deductions - check with your tax professional.
- Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes9y
Originally posted by @David Dachtera:
Originally posted by @Chris May:
Originally posted by @David Dachtera:
I know no one's going to listen to this, but I'll put it out there anyway...
No, there's no "magic" to a HELOC.
There ARE, however, certain advantages.
1. Deductions?
Check with your tax professional about your ability to deduct the interest on a HELOC from your taxable income.
2. Credit?
A HELOC should be reported on your credit profile as real-estate related. BMO Harris is notorious for getting this wrong and reporting it as simply "revolving" credit. Correctly reported, a HELOC does NOT count against your revolving credit utilization.
Using this strategy, you're borrowing and repaying an amount annually. This helps support a strong credit profile and a favorable credit score.
One downside is the possible impact on your debt-to-income ratio should you seek to replace an auto, major appliance, etc. requiring a new loan just after applying a "chunk" to your mortgage.
Deposit accounts, mattresses, extra monthly principal amounts, etc. each have their own unique advantages. Few of them do you much good come tax time or on your credit report, however.
Just wanted to put that out there ...
Tax treatment of using a HELOC to pay part of your mortgage and then using cash to pay the HELOC is identical to using that cash to pay the mortgage directly. No different.
... except that with the HELOC you may get an additional $616 a year in deductions - check with your tax professional.
Tell me where this $616 in tax benefits comes from.
- 9yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @David Dachtera:
You - and anyone else - can find the spreadsheet files here:
Amortization of a 30-year loan, $200,000 initial balance, 5% APR.
Amortization of 30 year loan, $200,000 initial balance, 5% APR, loan accelerated to 9.17 years by making a $15,000 additional principal payment once a year ("velocity banking").
David:
We have come full circle {See my post with links to spreadsheet of payment scenarios a year ago in this thread}.
Instead of making a single 15K payment at the end of each year, you would be further ahead to make an additional payment of $1250 each month. Better yet, make your mortgage payments and additional payments either semi-monthly or, preferably, {accelerated} bi-weekly and you will come out much further ahead.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
The annual interest on the payments to replenish the HELOC.
Since accelerating the mortgage "loses" some deductible interest, the HELOC interest "recovers" some of it.
Ideally, of course, you'll be zeroing your taxable income through other strategies.
- Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes9y
Originally posted by @David Dachtera:
The annual interest on the payments to replenish the HELOC.
Since accelerating the mortgage "loses" some deductible interest, the HELOC interest "recovers" some of it.
Ideally, of course, you'll be zeroing your taxable income through other strategies.
LOL. I'm sorry. But this is one of the most boneheaded theories I've read on this thread, and that's saying a lot. Quite simply what you just said is 100% bogus.
1. Any income tax deductions you can on interest paid still means you're in the hole on the interest. It's always better to pay with cash and not have to pay interest or take a deduction in the first place.
- and, more importantly -
2. THERE IS NO DIFFERENCE BETWEEN DEDUCTING HELOC OR MORTGAGE INTEREST. i*(M + H) = i*M + i*H. i = interest, M = mortgage balance, H = HELOC balance. You're just shuffling money around in debt buckets. Moving mortgage balances to a HELOC, and paying off the HELOC at the same rate you would otherwise pay the mortgage principal off at is a zero sum game.
I, for one, don't want to "recover" any deductibility if it means I'm paying more overall. Quite possibly the worst piece of financial advice I've EVER HEARD.
- Chalmette, LA · Member since 2017 · 3 posts · 6 votes9y
I didn't read ALL 14 pages of this thread, but I read a lot -- and it seems like the point that everyone is missing is that this works IF you deposit your entire paycheck into the HELOC every pay day. Then, using the HELOC as a checking account, pay your normal monthly bills out of it, including the mortgage. This way, you're not making additional payments on a HELOC because depositing your paycheck twice or four times a month (depending on how often you get paid) is registering as the HELOC payment.
So, you took a big chunk out of your mortgage's principle, and then with the HELOC, you may be paying higher interest. But... you're making huge payment every month, then raising it some, huge payment, raising it some. So it becomes a 5 steps forward, 3 steps backwards process.
I've done the math with a very high percentage rate on the HELOC, and you can easily pay off a 30 year mortgage in 10 years, but you HAVE to treat it like a checking account. Many keep bringing up this simple interest argument -- I believe the real power is that you can bring money in and out thereby constantly lowering your monthly average.
- Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes9y
Originally posted by @Michael Schnell:
I didn't read ALL 14 pages of this thread, but I read a lot -- and it seems like the point that everyone is missing is that this works IF you deposit your entire paycheck into the HELOC every pay day. Then, using the HELOC as a checking account, pay your normal monthly bills out of it, including the mortgage. This way, you're not making additional payments on a HELOC because depositing your paycheck twice or four times a month (depending on how often you get paid) is registering as the HELOC payment.
So, you took a big chunk out of your mortgage's principle, and then with the HELOC, you may be paying higher interest. But... you're making huge payment every month, then raising it some, huge payment, raising it some. So it becomes a 5 steps forward, 3 steps backwards process.
I've done the math with a very high percentage rate on the HELOC, and you can easily pay off a 30 year mortgage in 10 years, but you HAVE to treat it like a checking account. Many keep bringing up this simple interest argument -- I believe the real power is that you can bring money in and out thereby constantly lowering your monthly average.
We did this scenario and you can save money, but not nearly as much as you describe. I think it was about $1000 over the life of the loan. The general consensus as that interest rate risk won't make this an attractive option for most people.
- Investor · Flower Mound, TX · Member since 2017 · 182 posts · 198 votes9y
As Michael notes above the theory for this idea comes from using the HELOC as a checking account. You deposit your income into it semi-monthly or whenever you get a check, etc. The problem is the only advantage you get over just adding excess income to principal of the first mortgage every month, is the savings of the daily interest on the HELOC --- from when you deposit, to when you pay your bills. This is what giant corporations do (sometimes) with their excess cash... The problem for the "average guy" is the your $10,000 a month paycheck, floating for an average of say 15 days before you have to pay your bills (and hence run back up the HELOC) only get's you a few bucks of savings. If you have 10K lying around just sitting permanently in cash, then just pay down the principal on the first and be done with it. If you think you can squeeze out much more liquidity just by paying transactional bills out of your HELOC, good luck.
- 9yJim BlackburnBusiness MemberLender · Florida Based (48 states Puerto Rico) · Member since 2017 · 321 posts · 121 votesJoe Au - what is the advantage of accelerating the payoff of your biggest tax deduction during your highest income earning and most taxed years? Have you considered taking that extra $500-$1000 per month and investing it instead? If you can earn a higher return than your actual net cost of capital (after tax deduction cost of interest), then you are coming out ahead. I can't tell you how many clients I've seen who accelerate the payoff of their residence before reaching 67 years old, and then realize that they still have a 20-30 year time horizon, with which to build a comfortable retirement nest egg through disciplined investing. They say "Jim, my home is owned free and clear, can I get a loan on that now via a variable rate HLOC or fixed rate mortgage that I can use to buy more real estate?" Ask anything.
Stairway Mortgage, a Division of NEXA Mortgage LLC597 Reviews - Rental Property Investor · Louisville, KY · Member since 2016 · 48 posts · 55 votes9y
@David Dachtera, @Chris May, @Joe Au
I can speak about the origins of this concept and why it works.
This whole theory is based on a specific type of mortgage that exists prevalently in Australia and sparingly in the UK. I know it well because I had such a mortgage in the UK.
https://en.wikipedia.org/wiki/The_One_account
In the UK they called it the One Account and basically it is a combination of mortgage, checking account and line of credit - all in one. You buy a house for $100k with 20k down. From then on you have an "available facility" of $80k - that facility will have a certain timeline (20-30 years) before it expires. You use the account as a checking account so that your income and expenses come out of it and you pay a set interest daily on whatever you owe. So, if you receive $5000 in income you are now paying interest on only $75k. A few days later you pay a bill for $1,000 and now you are paying interest on $74k. The interest is calculated daily but paid once monthly.
So yes, you can save some money either by:
1. if you take advantage of interest free offers, credit cards with 60 days to pay and just the lag between income and expenses you can save by basically "earning" the same interest rate on the mortgage on any money you can keep even for one day in the account.
2. if you need money for another purchase such as a car or whatever, you can withdraw the money up to the facility and only pay interest at the mortgage rate (typically lower than other rates)
I recently sold the apartment in the UK that was under this mortgage and all that happened was that once I transferred the sale money, the account now had a positive balance and so I no longer owe any interest.
It seems that someone has tried to reverse engineer that concept into the US reality by using separate HELOC, mortgage and checking accounts - it will work in the same way but less efficient and a lot more work to do all the transfers...
- Rental Property Investor · Louisville, KY · Member since 2016 · 48 posts · 55 votes9y
@Scott L. the issue with the idea of using the 10k to just pay down the principal is that then it's gone and you can never see it again - in a HELOC you can take it back if there is a need for it in the future.
The next step on this ideia is that you have a HELOC as your emergency stash, so that you can always access it if there is an emergency, but you don't pay any interest if you don't and you don't have money sitting around in a checking account or under your mattress.
- Aldie, VA · Member since 2017 · 2 posts · 1 vote9yit works. yes this method is counter intuitive so most think it is scam. i got a heloc earlier this yr and working to pay my mortgage off faster basically you use heloc as your daily checking and no savings account. you just need to understand 3 concepts. interest earned vs saved vs paid. listen to this it will start making sense. https://www.listenmoneymatters.com/how-to-actually-save-thousands-on-your-mortgage/
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
Sorry - it's not based on any specific type of loan. It works for home loans, auto loans, even other types of installment loans, secured and unsecured.
@Michael Schnell is quite right. Most often, when this is discussed, it is suggested that using a line of credit - HELOC or otherwise - to receive your regular payroll deposits is the favored usage. You can either write checks or make ACH transfers directly from the HELOC if your lender supports that, or transfer money to your checking account as needed to satisfy your cash draw needs.
When I had my house, the 1st and the HELOC were both with the same bank as my checking account. So, transfers between them were easy, and mortgage payments could be made thru on-line banking by transferring to it from checking.
If @Chris May has downloaded the spreadsheets and still doesn't believe, perhaps he can take that up with Microsoft and explain to them why Excel's calculations and built-in functions come to the wrong result, and also to the educators in Australia and other countries where this is taught as part of basic financial education that what they teach their people and what their people due as a matter of financial course everyday and have been doing for years doesn't work. I'm sure they'd be interested to hear what he has to say.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
Originally posted by @Roy N.:
Originally posted by @David Dachtera:
You - and anyone else - can find the spreadsheet files here:
Amortization of a 30-year loan, $200,000 initial balance, 5% APR.
Amortization of 30 year loan, $200,000 initial balance, 5% APR, loan accelerated to 9.17 years by making a $15,000 additional principal payment once a year ("velocity banking").
David:
We have come full circle {See my post with links to spreadsheet of payment scenarios a year ago in this thread}.
Instead of making a single 15K payment at the end of each year, you would be further ahead to make an additional payment of $1250 each month. Better yet, make your mortgage payments and additional payments either semi-monthly or, preferably, {accelerated} bi-weekly and you will come out much further ahead.
Actually, Roy, and I have vague memories of this from the previous pass, doing $1,250 monthly rather than $15,000 annually only trims off 3 more payments - from 110 to 107 - and reduces the payoff term from 9.17 years to 8.92. Not a big change (0.833%).
It will take me a while to figure out how to get Excel to do the bi-weekly payments, so I probably won't.
I will post the updated spreadsheet from this evening's exercise later on.
- Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes9y
Originally posted by @David Dachtera:
If @Chris May has downloaded the spreadsheets and still doesn't believe, perhaps he can take that up with Microsoft and explain to them why Excel's calculations and built-in functions come to the wrong result, and also to the educators in Australia and other countries where this is taught as part of basic financial education that what they teach their people and what their people due as a matter of financial course everyday and have been doing for years doesn't work. I'm sure they'd be interested to hear what he has to say.
I see you chose not to respond to my thorough debunking of yet another of your claims. Your statements on tax deductions were ludicrous.
It's becoming more and more clear you're a snakeoil salesman.
- 9yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @David Dachtera:
Actually, Roy, and I have vague memories of this from the previous pass, doing $1,250 monthly rather than $15,000 annually only trims off 3 more payments - from 110 to 107 - and reduces the payoff term from 9.17 years to 8.92. Not a big change (0.833%).
It will take me a while to figure out how to get Excel to do the bi-weekly payments, so I probably won't.
I will post the updated spreadsheet from this evening's exercise later on.
If you stick with monthly payments, the increased pay-down on the mortgage itself is not significant ... but there would be no HELoC interest incurred!
If you switched to {accelerated} bi-weekly, the difference is much greater ... and no need to figure out how to make your spreadsheet handle the bi-weekly payments, the ones I uploaded last year already do that ;-)
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
Originally posted by @Chris May:
Originally posted by @David Dachtera:
If @Chris May has downloaded the spreadsheets and still doesn't believe, perhaps he can take that up with Microsoft and explain to them why Excel's calculations and built-in functions come to the wrong result, and also to the educators in Australia and other countries where this is taught as part of basic financial education that what they teach their people and what their people due as a matter of financial course everyday and have been doing for years doesn't work. I'm sure they'd be interested to hear what he has to say.
I see you chose not to respond to my thorough debunking of yet another of your claims. Your statements on tax deductions were ludicrous.
It's becoming more and more clear you're a snakeoil salesman.
Once again, the evidence proves you wrong.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
Here's the new spreadsheet I started last night:
This shows which fields to enter and how to view the results. Instructions are included in a separate worksheet.
I'll be making this available to my colleagues in the Renatus community, as well.
The spreadsheet is not locked and all the formulas are visible.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
Originally posted by @Chris May:
Originally posted by @David Dachtera:
If @Chris May has downloaded the spreadsheets and still doesn't believe, perhaps he can take that up with Microsoft and explain to them why Excel's calculations and built-in functions come to the wrong result, and also to the educators in Australia and other countries where this is taught as part of basic financial education that what they teach their people and what their people due as a matter of financial course everyday and have been doing for years doesn't work. I'm sure they'd be interested to hear what he has to say.
I see you chose not to respond to my thorough debunking of yet another of your claims. Your statements on tax deductions were ludicrous.
It's becoming more and more clear you're a snakeoil salesman.
Since you don't have to buy anything from anyone to do either loan acceleration or the Debt Snowball - it's all right here on the web - I'm not sure why you would say that.
Still, to each their own ...
- Chalmette, LA · Member since 2017 · 3 posts · 6 votes9y
Originally posted by @Chris May:
Originally posted by @Michael Schnell:
I didn't read ALL 14 pages of this thread, but I read a lot -- and it seems like the point that everyone is missing is that this works IF you deposit your entire paycheck into the HELOC every pay day. Then, using the HELOC as a checking account, pay your normal monthly bills out of it, including the mortgage. This way, you're not making additional payments on a HELOC because depositing your paycheck twice or four times a month (depending on how often you get paid) is registering as the HELOC payment.
So, you took a big chunk out of your mortgage's principle, and then with the HELOC, you may be paying higher interest. But... you're making huge payment every month, then raising it some, huge payment, raising it some. So it becomes a 5 steps forward, 3 steps backwards process.
I've done the math with a very high percentage rate on the HELOC, and you can easily pay off a 30 year mortgage in 10 years, but you HAVE to treat it like a checking account. Many keep bringing up this simple interest argument -- I believe the real power is that you can bring money in and out thereby constantly lowering your monthly average.
We did this scenario and you can save money, but not nearly as much as you describe. I think it was about $1000 over the life of the loan. The general consensus as that interest rate risk won't make this an attractive option for most people.
Well, the amount of positive cash flow matters as well. I happen to have about $1500 after bills. So, I'm dumping $5000 on top of a HELOC every month, then removing $3500 around the 25th. That's huge, and if I don't go to dinner much, or to bars much, or happen to drive a little less one month, that money doesn't sit in my wallet or a normal checking account, it goes towards the balance. That's something I COULD do with a regular mortgage at the end of every month, but out of fear of not being able to get it back, I wouldn't.
So not only is the $1500 pulling down the principle of the slightly higher interest rate loan (not to mention the less interest of the 25 days with $5000 sitting on it), but also my emergency funds for vacancy, repairs, maintenance, taxes, insurance, future vacation funds, and Christmas budget would sit on the HELOC and therefore the principle comes down. These are all things that I kept in a separate checking account before. You really do have to throw everything at it for it to work. The fact that a HELOC allows multiple withdrawals removes the fear of paying down a mortgage.
One other thing @Chris May, I saw some of your arguments about interest calculations and tax benefits not being that much different. I agree 100% -- and if there's a difference, I'd say it's negligible. Like I said above, this works better than multiple principle payments on a normal loan only because of the removal of fear. I would never throw spare cash at a mortgage; I would, however, throw it at a HELOC.
- Rental Property Investor · San Francisco, CA · Member since 2017 · 206 posts · 138 votes9y
There are alot of Youtube videos on this topic and I am checking it out too. The concept may work if you could stick to the budget and the program. Let me know how it turned out.
- Investor · Nashville, TN · Member since 2015 · 429 posts · 143 votes8y
@David Dachtera @Eric Jones @Chris May
Hey guys, I've been reading this thread, very interesting to see the different opinions. I'm getting ready to refinance one of my rentals into a 1st position HELOC. Personally, I don't think it's a good idea to use debt (HELOC) to pay debt (mortgage). I saw the points everyone was making though. I think 'to each his own' definitely applies here :)
When you refi into a HELOC, the mortgage goes away and you're left with the 1st position HELOC. There isn't really a risk of the lender freezing the line because they're in 1st lien position. I think this is more of an issue if the mortgage still exists and the HELOC is in 2nd position.
Anyways, I appreciate the different insight and thought given in this post.
Cheers!
-Mark
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