Investor · Draper, UT · Member since 2016 · 120 posts · 57 votes
I want to build equity with my primary home as soon as possible. And I came across a method using HELOC to reduce the interest paid to the mortgage. Does any one have experience with it?
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
10y
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.
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
This a great discussion. The fact that some challenge this method is great. This method absolutely works. I am living proof as I stated in an earlier post.
I have learned over the years, that there will always be those that do and those that don't or won't.
I think we all know the old saying "you can lead a horse to water but you can not make him drink.". I believe this to be true in this instance. Thanks @Dave Dachtera for explaining this and providing this information for all to explore. 17 or so years ago it was a real bear to find this info.Now it is right here for all to explore.
A couple of calculators for you guys to play with. Use the difference between your net monthly income and your monthly expenses from the heloc calculator as your monthly additional payment in the amortization calculator.
This a great discussion. The fact that some challenge this method is great. This method absolutely works. I am living proof as I stated in an earlier post.
I have learned over the years, that there will always be those that do and those that don't or won't.
I think we all know the old saying "you can lead a horse to water but you can not make him drink.". I believe this to be true in this instance. Thanks @Dave Dachtera for explaining this and providing this information for all to explore. 17 or so years ago it was a real bear to find this info.Now it is right here for all to explore.
Am I to take it that now it's paid off, you'll never borrow any money against your home?
(Because, if and when you do, it shows you wasted so many opportunities, by paying it off early in the first place!) [So much income, but so few ideas as to what to do with it?]
And if your answer is: yes, you'll never borrow against it - then my answer is exactly the same: so many wasted opportunities! Nonetheless, all the best...
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
Thank for the well wishes. I increased my Heloc on my primary. This gives me the most options but I will always have enough cash to pay it off if needed. With the mortgage gone I don't need to bring in as much cash to be free. Less debt means less money I have to make. I am not trying to grow a big business. I am just going to have enough passive income to do the things I want to do without having a w2.
Thank for the well wishes. I increased my Heloc on my primary. This gives me the most options but I will always have enough cash to pay it off if needed. With the mortgage gone I don't need to bring in as much cash to be free. Less debt means less money I have to make. I am not trying to grow a big business. I am just going to have enough passive income to do the things I want to do without having a w2.
The key words seem to be "if needed". It looks like you're at least acknowledging that it's your (high) w2 income that got you there in the first place, not some pay-off-your-mortgage-quicker "product", that should not be promoted (by you or anyone) to non-high income earners!
[Because after all that - you haven't paid off your primary anyway, and won't in the near future!]
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
Your assumption would be incorrect about the high w2 income. Your assumption about promoting a product is incorrect also. Like I said in an earlier post, if you want to know more I will share the information. I am not selling anything. This is just a shift in the way we have be taught to think. It is just simple math. You may use OPM to buy houses . I used OPM to pay down my mortgage...plain and simple.
BTW that w2 income was never more than 40k, while raising two growing boys and having a stay at home wife/mom helping on that end. See, I was completely debt free until I started investing in rentals. I will be debt free again in a few years. I will do the same thing with the rentals that I did with my home. ...less debt equals less money needed to enjoy the freedom. I don't need the whole pie. I just need a slice . 😀
Your assumption would be incorrect about the high w2 income. Your assumption about promoting a product is incorrect also. Like I said in an earlier post, if you want to know more I will share the information. I am not selling anything. This is just a shift in the way we have be taught to think. It is just simple math. You may use OPM to buy houses . I used OPM to pay down my mortgage...plain and simple.
BTW that w2 income was never more than 40k, while raising two growing boys and having a stay at home wife/mom helping on that end. See, I was completely debt free until I started investing in rentals. I will be debt free again in a few years. I will do the same thing with the rentals that I did with my home. ...less debt equals less money needed to enjoy the freedom. I don't need the whole pie. I just need a slice . 😀
Thanks for correcting my exaggerated assumptions. I do have a little objection to your "I used OPM to pay down my mortgage...plain and simple" comment, inasmuch as you still owed those "other people" all the money that they fronted you, until your money paid them off, right?
ie. "A mortgage by any other name...".
But I agree, everyone should take out a HELOC on their own home, for investing! Cheers...
Investor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
8y
I guess one could look at it that way. The money I would have been saving or investing , I used to "pay " the HELOC. I just still had access to my extra money when I used the HELOC. Bottom line is I used the HELOC to attack my primary principle with large chunks. This allowed me to eliminate my mortgage much faster while still having access to my money. There is always more than one way to get to the l pot of gold. I just chose this way. It isn't right or wrong , it just is.
This a great discussion. The fact that some challenge this method is great. This method absolutely works. I am living proof as I stated in an earlier post.
I have learned over the years, that there will always be those that do and those that don't or won't.
I think we all know the old saying "you can lead a horse to water but you can not make him drink.". I believe this to be true in this instance. Thanks @Dave Dachtera for explaining this and providing this information for all to explore. 17 or so years ago it was a real bear to find this info.Now it is right here for all to explore.
A little conversation redirect here: this "method" as posed by the original poster has been thoroughly and utterly debunked.
A quick analogy:
I brush my teeth two minutes per cleaning. That's the minimum required length of time for healthy teeth. I use an electric Oral B toothbrush.
Desiring to improve my oral health, I decide to begin brushing my teeth an extra 2 minutes, for a total of 4 minutes. I heard about a great system for improving my dental health, which requires purchasing a second toothbrush, a Sonicare, for minutes 3 and 4.
I go to the dentist, and she tells me how great my teeth are doing. I say "I've been using this great system where I brush my teeth for two minutes with an Oral B and then two more minutes with a Sonicare. Amazing right?"
To which she responds, "why not just brush for 4 minutes with the Oral B?"
To which I then respond, "you don't understand. See, it's a system and it clearly works. There are YouTube videos about it! You said yourself my teeth have less plaque. Also, I can always just use the Sonicare to clean my dishes or for overnight guests"
Clearly all of this is nonsense, right? It doesn't matter what other amazing things you can do with a HELOC, using it to pay down your mortgage (THE ORIGINAL QUESTION POSED IN THIS THREAD) is just like using two toothbrushes in your oral hygiene routine. It works, but it's completely without purpose. No reason to involve a second debt vehicle. To call it a "system" is just bizarre.
Yes I suppose so just using a credit card might work
Or just prepaying your mortgage and not putting yourself at risk of incurrent greater interest charges if you happen to slide-past the forgiveness date.
Used savings and HELOC to "prepay" the mortgage when balance was at 183k. Saved a bunch in interest (roughly 85K) at the cost of HELOC interest (foretasted total of 3.5k) and forfeited interest income on the savings (minimal). Totally worth it to get out from that 5% note, without having to refinance. The key as to why this worked was the terrible interest rate on condo mortgage. Wish I could have done it earlier in the loan, but I had neither the savings nor the equity :/
The pre-payment from your savings had a big impact on the mortgage financing ... as any prepayment does.
The "transfer" of debt from your mortgage to your HELoC, shows an interest saving on your mortgage, but it's not evident from the above that you are paying off your HELoC quickly nor accounting for the interest incurred thereon.
The HELOC will be paid off in about 18 months. I am using the HELOC as my "checking" account so that timline takes into account that every month i "add" about $7500 in debt to the HELOC (house mortgage, car payment, CC bill), but I make "payments" everytime we (wife and i) get paid. So the HELOC balance is declining pretty quickly.
The total interest I'll pay on the HELOC is about $3500. The total interest I avoided by prepaying was $85,000 (of course some of this was because of savings payments while the rest was from the HELOC). The $3,500 in heloc interest is doable to save 85k. (This info is all in another tab in my excel file - I'm happy to share it).
The two reasons that this worked for me are:
1. Interest rate differential. The mortgage was at 5% and the heloc was at 3.79%. Despite anyone's position on this particular topic, I think we all can agree that a lower interest rate on debt is better. The HELOC was a very low cost alternative to refinancing.
2. Having a line of credit allowed me to start the "prepayment" process sooner. In January of 2018, i reduced my mortgage principal by about 110 or 120k. Without that line of credit, the impact of my cash prepayment would not have been as effective. As opposed to making mortgage payment where 90%-ish of the payment was going to principal i would have been making payments where 60%-ish went to principal. The cost of the HELoC interest more than made up for the savings.
Whether this process "works" or not, I don't know and I'll leave it to you all to hash out. What i do know is that 6 months ago i had a mortgage on a condo with a balance of 186k and right now that is at 4k. I will make 3 more payments until the deed is in my hand. I still have work to do to pay off the HELOC, but via this process depositing checks into one account vs another isnt really work.
In January of 2020, all debt that I associate with this place will be gone. Unless of course we get pay raises next year...if that is the case it will be sooner. So whenever that time comes, i will look back and say i paid off a house in 2 years. Someone will ask me how. I'll tell them i used a HELOC to make prepayments and save on interest. He or she will say...that doesn't work, it's been proven to be a scam. I'll say, ok (as i buy another rental using the equity in the condo)
The *only* reason this is working for you is the interest rate differential. It is a rare interest rate environment when you have a HELoC rate sufficiently lower than a fixed-rate mortgage (still likely not lower than a variable rate mortgage ... which are not available in the U.S.A. {ARMS are a different beast again}) to achieve anything beyond a token reduction in interest paid. What you have done is effectively refinance your mortgage at a lower, albeit variable, rate.
If you go back a couple of years in this thread, I posted a series of spreadsheets comparing variations one of the cases originally presented to sell this approach.
If you were to model making more frequently (i.e. accelerated bi-weekly) mortgage payments and augmenting these payments with additional principal payments (the amount you currently apply to the HELoC), my conjecture is the gap would be rather narrower.
i do not disagree with your statement and when i pay my house off next, I will use that approach and keep the HELOC as a safety net in case I need to write a big check.
What I love about getting to the airport is that there are multiple ways to get there. I prefer the train, others prefer to drive. Does driving work...yep. Does taking the train work...yep. Just because I someone chooses to drive, doesn't mean that the train is a scam. At the end of the day, you just have to get to the airport before your plane leaves.
Rental Property Investor · NJ · Member since 2018 · 152 posts · 56 votes
8y
Only read through the first 3 pages of this thread, but wow people who don't have a basic grasp of finance trying to explain hocus pocus strategies. @Eric Jones - Amazing job being patient, I'd have given up after 3 tries.
I hope that people understand that the only 2 times this strategy will work are:
Interest rates between HELOC and 1st are equal and excess cash is being put into mortgage - essentially prepayment.
HELOC has lower interest rate, just simple arbitrage.
But if people want to pay me 199.95 so I show them how excel works, I'd be happy to take their money.
Real Estate Agent · Jersey City, NJ · Member since 2014 · 41 posts · 26 votes
7y
Great thread and some really good discussion in here..
I personally love the HELOC and I believe it is a great tool to have in everyone's toolbelt. It is like a giant credit card that you could do anything you want with. If you want to pay mortgage early and be debt free, sure you can, as long as the interest rate differential is working in your favor.
One way to really make this work very well is to ensure you are using HELOC as your checking account. All bills (monthly mortgage, utlities, credit cards etc) should come out of the HELOC and all income (rental, W-2, other) should go into the HELOC. That reduces the average daily balance and as long as you make more than you spend, it will work it's "magic"...
Springville, UT · Member since 2014 · 95 posts · 16 votes
7y
@David Dachtera. This post was some time ago. What is really missing are the numbers, or spreadsheets that can illustrate the savings. Have you used the strategy? Do you have an excel spreadsheet with actual numbers and projections? I want to see if I want to use this strategy until I am ready for another rental. Thanks,