HELOC to pay off Mortgage Faster?

29 Replies

Hey everyone!

I have read a post about HELOC's before but couldn't really find an answer to the question. I'm curious if anyone has used a HELOC (home equity line of credit) to pay off their mortgage in larger chunks, reducing the total interest you pay on the mortgage and shortening the time to pay it off. I'm very interested in this strategy and want to implement it this year.

Has anyone done this strategy? And if so, where could I find information about how to use a HELOC? I understand the concept but I've heard people have troubles getting it from a bank if they know it is being used to pay off a mortgage.

Also, how is interest applied to a HELOC? Is it simple interest or is it compounded? And what is the "normal" time frame for the compounding if it is?

Any help would be appreciated! This is a huge goal for me to accomplish in 2017 and I want to waste no time achieving that!

Wishing everyone the best of luck in 2017!

Jason Meyers

Here's my favorite sentence from that thread so far (by @Joe Splitrock, page 9): "I think part of the confusion is that the HELOC pay down mortgage plan is promoted by gurus who charge fees to help you implement". Followed by: "The way you can pay your mortgage off faster is by making additional principal payments" ("you must state on the extra payment that it is "Principal Only""). 

Another REALLY good one from Joe: "The marginal advantage you get from putting your paycheck towards debt a few days sooner, is offset by the risk of getting further in debt". Cheers...

The strategy will work if you stick with it.  The problem for most people is the discipline to stick with it.  

You're looking at paying off long term interest by paying principle now which will reduce your cashflow in the present because you're paying extra to pay the HELOC balance back down. Long Game vs. Short Game.

Ideally you're income is greater than your expenses so you can pay the HELOC balance back down. You don't need to pay a guru MEGA BUCKS if you understand the concept. @Brent Coombs is right.

Another question to ask yourself is: Why do I want to pay down the mortgage faster ?  If you're looking for a refi later on down the road it may help but you're taking cash today out of your pocket you could use to put on a down payment for another property.

@Jason Meyers The bank doesn't care what you use the money for as long as you make the payments when due. Interest probably depends on the type of product you're using. Overall, I'm pro HELOC but the discipline of having it is where a lot of people go wrong.

@Aaron Howell This information you gave me is awesome! Have you used a HELOC to help pay down a mortgage quicker? I have no doubt that me and my business partner have the discipline to stick with it and not abuse our line of credit. Our strategy is to pay off the mortgage as fast as possible for two reasons: 1. Reduce our overall interest cost by thousands of dollars (I understand this is reducing our interest write-off, but I am more concerned about making money than having tax deductible write-offs) and 2. We want our two properties (purchased in a package deal) to be "cash cows" in the short term horizon rather than in 30 years when the traditional mortgage would be paid off.

@Brent Coombs made a really good point about making sure the additional payments are "Principal Only," I would have not known to do that.

Simply to put this, I understand that there are positives and negatives to every strategy you use. Some think refinancing is the best way, but I want to try HELOC. Nevertheless, it will be a learning experience for me and potentially on my next property I will use a refinance to learn more financing skills and learn the pros and cons of that strategy.

I guess what I am looking for is a website or Excel Spreadsheet/Calculator that will show me the amount of money I will save and/or how to implement this strategy correctly. Do I need to look for specific wording or clauses in the HELOC to make sure I'm not going into a bad situation that will hurt me? That's where I am getting stuck.

I truly appreciate everyone's help on this topic!

I read the entire forum post. It is basically a way to force yourself in to using your cash flow from your normal income and put it in to your principle. You save a very small amount on interest over the entire amortization schedule due to the way that the heloc is set up but its hardly worth it. The reason that to mortgage is being paid down faster is because you are putting all of your cash towards principle every month and that is where you are saving the money on interest over the life of the loan. It isn't because of something special with a heloc. Some people in the thread thought it was some little know "cheat the system" type deal but its not. Its over rated.

What I took from the thread is that you may as well NOT take the risk with the adjustable rate of a heloc and just make extra payments to your mortgage directly. Don't use debt to pay off debt. A heloc is a great tool, just not in this particular use.

And to reply to @Brent Coombs about the link to the other HELOC post. Mainly to say it shortly, one person thinks the strategy works and the other doesn't. They go onto pages of discussion of why this will or will not work, that is why I posted this again in the forum since I wanted additional thoughts on the topics with possible links to additional information or calculators that could help "test" the HELOC strategy. I don't fully understand this strategy either, that's why I'm asking BiggerPockets Forums! I've done research and I am still not 100% convinced that it will or will not work. So simply put it, this strategy seems very complex and will ONLY work if you're having positive cash flow every month. If you do not have the discipline to pay down your HELOC every month it will obviously not work and if you're negative cash flow every month it will not either. The part people seemed to get confused on is how the interest is calculated between a mortgage and HELOC. If you just transfer money from a HELOC to your mortgage, you will owe that amount on your HELOC, but at what interest expense? I really hope I (and others too!) can figure out if this is an ideal strategy to implement.

Stay hungry my Real Estate Friends! 

@Jason Meyers , I hope you do realize that by achieving your 2 goals sooner {"1. Reduce our overall interest cost by thousands of dollars" and "2. We want our two properties (purchased in a package deal) to be "cash cows" in the short term horizon"}, you WILL come to the conclusion that the BEST use for all that early-gained equity will be to:-

(drum roll)..... BORROW against that equity - to buy MORE cash cow Real Estate!?

ie. Why wait until THEN? Get where I'm going with that thought?

ie. WHY do you think that the two investments you have now will be all you EVER want?

ie. How do you intend to "stay hungry"?...

@Tyler Turpin Thanks for your input! After reading part of that forum, I came to a similar conclusion as you did. It either seemed that the strategy would work great or it would barely save you any money whatsoever. I'm still interesting in doing future research to find out more about it though..

@Brent Coombs I completely agree with borrowing against the early-gained equity in the house. I wouldn't be waiting for anything, it just takes time to build equity in the house; that's why I was looking into a HELOC to speed up that process. These two investments are NOT the only two I ever want, it is just a strategy I wanted to implement to have two homes clear of debt as I build my portfolio.

@Jason Meyers , just to reiterate my "why wait until then?" question, my thought was heading in the direction:- a BETTER use for your HELOC would be to jump straight into real estate that will generate significantly higher returns than its interest rate cost! ie. NOW is the time - low interest!

ie. if you can't find property that generates MORE income/appreciation than you'd be otherwise saving by paying off your low interest rate quicker - then how hard are you really looking? (Yes, bargains are generally harder to find right now, until the next crash - but distressed/value-addable properties ARE out there, waiting to be snapped up by HELOC-cashed-up buyers!)

Otherwise, forget the HELOC idea, and just make any/all extra payments as principal-only.

I'm really glad to see you got THAT point! Cheers...

Hello and welcome to BP! Do not worry about your debt if the tenants are paying it for you with their rent. AHELOC is typically a last resort for borrowing. That being said, just do whatever has you reaching your goals. I agree that making extra principal payments and label them as such so the loan processes knows what you are doing if you have a positive cash flow. If you believe what Robert Kiyosaki is saying you've been brainwashed at not seeing the big picture. There is nothing bad about positive cash flow debt. If your loans make you feel weird just pay them off but not with a HELOC loan. Do not let the sales pitches fool you.

Good luck to you!

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This only has an advantage if your Heloc is a lower rate than your mortgage and won't be jacked up anytime soon (more likely will be). Otherwise, you're just paying extra interest to pay down.

If the rental is cash flowing well and you don't really have a need to pay off the mortgage, keep it. The right lender will just need the lease and the mortgage debt can be offset in qualifying for the next rental. You can also save the Heloc to get the next rental if the numbers work out right then pay it down quickly to reuse again.

@Jason Meyers . There are some opposing opinions for sure. But my initial conclusion would side with the people that say your HELOC money would be better served as a down payment on another cash flowing rental property. I'd be willing to bet that if your HELOC was used to buy a foreclosure property with a lot of value add opportunities in it, that your return would be a lot better and quicker than using it to pay down a mortgage. If you used the HELOC for a new purchase, you could just take your cash flow from the new property, pay your HELOC payment with it each month, then anything left over you could use to pay extra principal on the mortgage you wanted to cut time off of.

A friend told me they were looking into this and getting excited about it so I gave them this response. I know this thread is an older one. What did you decide to do?

HELOC are great for down payment, closing costs and rehab costs for flips with the rates right now. Use it for that and have at least 20K from your flip you did to pay down whatever after you pay off your HELOC balance you used for your down/rehab. This sounds way better than some drawn out process to get one of your properties paid off.

I've listened to a few podcasts that talk about this strategy in depth. It seems like a good strategy to follow specifically for my situation. I purchased a house a year ago using a VA loan which didn't require the typical 20% down. I think this would be a good way to build my equity up and get ahead of the interest payments faster. I don't see it mentioned above, but I think part of the reason people are using the HELOC as opposed to simply paying interest only payments is the fact that once you make a payment to your mortgage, that money is out of your control. If you load up your HELOC and life drops something unexpected, you always have the ability to use the money building in your HELOC for that unexpected expense instead of towards the next mortgage lump sum.

I hear the argument that you could be better served using that extra money to invest into new cashflowing properties.  In my situation, I feel it would be a better investment to build some equity in my primary residence first, especially if current numbers and income holds, I'm expected to cut the payoff time from 30 years, to somewhere between 8-12 years.

Some run-on sentences but this was my first BP post!  Please let me know if you have any feedback

@Randy Walters , you've got the pros and cons worked out fairly well. The main thing that YOU will likely find difficult (if I understand correctly) is: getting anyone to let you even have a HELOC, until you ALREADY have sufficient equity.

Get what I mean? As for perhaps requiring access to your paid-down amount in tough times, a compromise could be to not necessarily make all your extra payments as "principal only", but just pay extra when you can anyway. Then, once you're say a year ahead in your payments, you could just stop paying for a year if needed/desired.

There's many more ways to be smart with your money than paying a Lender EXTRA to set up a "HELOC to pay off mortgage faster" PROGRAM because of being swayed by hyped advertising. Thank you for your service. All the best...

Thanks, @Brent Coombs

I see your point about the equity requirement.

I had some time to consider things and thought up other ways to pay quicker. Obviously, if you have some expendable income, you can throw it at your mortgage early. But if you wanted to mirror this strategy without the use of a HELOC, you could simply dump those payments into a separate checking/savings account designated for "Payment towards mortgage" bucket. Boils down to paying $100/month vs. paying $600/6months or $1,200/year in larger chunks. This could give you a little safety net if something were to arise where you needed money, you could tap into those funds designated for mortgage acceleration.

Obviously, you could be more/less aggressive/conservative with the residual income you set aside based on your goals and cashflow ie $500/month or $5,000 every 10th month.

As for opportunity costs and putting that money into other cashflowing assets, it is still better to pay down debt in your main home rather than having the funds sitting in an account not working for you correct? I would rather pay down the mortgage, which in turn allows for larger HELOC use if desired, which can then be used if a screaming deal presented itself. Yes, a free and clear property still needs to be maintained, taxes, HOA etc. But having that peace of mind is powerful, and you can always leverage that money in the future if needed.

@Jason Meyers :  Like Angela above, I'd like to hear whether this is working.  I see lots of discussion around it but never a spreadsheet that shows details for comparison.  Did you ever find one?

When I put it in my own spreadsheets I didn't get much for savings, especially when comparing it to the complexity of moving everything around and the risk of going in to more debt.

Originally posted by @Eric Y. :

@Jason Meyers :  Like Angela above, I'd like to hear whether this is working.  I see lots of discussion around it but never a spreadsheet that shows details for comparison.  Did you ever find one?

When I put it in my own spreadsheets I didn't get much for savings, especially when comparing it to the complexity of moving everything around and the risk of going in to more debt.

 Go through the 11 pages of the last link mentioned above

Use HELOC to paydown mortgage fast

There are spreadsheets used by different people to support their point of view. If you've any questions, I would PM those individuals directly for help. 

Otherwise, we might have another 11 pages of "I'm right and you are wrong" comments. 

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