Use HELOC to paydown mortgage fast

415 Replies

Originally posted by @Chris May :
Originally posted by @David Dachtera:

@Pedro Martins ,

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 ...

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.

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.  

@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

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.

Originally posted by @Brian Cardwell :

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...

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.

Originally posted by @Brian Cardwell :

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!]

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 . 😀

Originally posted by @Brian Cardwell :

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...

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.

Originally posted by @Brian Cardwell :

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.

Originally posted by @Chad Koenig :

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.

Here is my real world example:

Condo mortgage - 252k - 5% 30yr fixed

HELOC - 70.4k line - 3.79% adjustable

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 :/

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@Andy Bosone

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)

Cheers.

@Andy Bosone

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.

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