Has anyone used an all in one on their primary residence (or not used it and are willing to share why)? I know the interest rate is higher than a 30-year fixed but it might be advantageous to pay down interest.
Thoughts? Suggestions? I'm a newbie to real estate investing, so little words are very much appreciated :)
Big picture if it helps: I'm exploring an all in one so I can plop extra savings into it until I'm ready to purchase additional properties and then can pull the money from the all in one for a downpayment elsewhere and then will continue to throw money into the all in one from my main job as I save for additional downpayments.
If you use it as it is intended, yes it will out perform a lower fixed rate 30 year mortgage. The key to is that you must stop most or all your banking elsewhere and now start banking in the HELOC.
By banking, I mean all your deposits and banking activity needs to now be done through the HELOC. Where it really accelerates is if you typically don't spend all your monthly earnings and you have money left off after all monthly expenses and that money stays in the HELOC. You also benefit from the float, meaning that you get paid say $10,000.00 at the beginning of the month, but you don't pay all your bills right at the beginning, maybe some at the middle, others towards the end of the month. So you have that float period where more of your earnings are keeping your HELOC balance lower for a number of days during the month. This will produce a lower monthly payment due on the HELOC and lower interest, thereby paying of the HELOC faster, and opening up more available credit for you to tap for a project you have in mind?
I hope this helps?
Kevin, Thank you a million times over! We were about to close on a refi locking in a 2.5% 30 year fixed and pulled the plug at the last minute to switch to the All in One, but the lender pretty much told me why I was making a poor choice, so this is very affirming. I so appreciate it!!
@Stacy Voss @Kevin Romines Nailed it! If you qualify, and the numbers work, I don't think there's a better option out there!
My wife and I used this on our primary that we later turned into an investment property. I loved it so much that I left my job in Medical sales to join a broker that specializes in this loan. It's great for investors, as you can use idle cash to pay down principle and save interest. Then whenever a good opportunity arises, you can simply write a check out of your credit line and purchase in cash. Each additional house pays off faster than the last with the additional cash flow.
I'd say you're making a great choice!
Amazing--thanks, Justin! I had a lender basically tell me I was making a colossal mistake and haven't slept well since, so this is beyond helpful!
@Sarah West The basic concept is that you take out a 1st position HELOC instead of a standard fixed rate 1st mortgage. Once you take it out, you stop banking with your normal bank or credit union and you now redirect all your income / deposits into the HELOC. You also pay all your bills and any cash needs from the HELOC as well.
You do this so that during the month, after your deposits are made and before you start paying your bills, your HELOC Balance is temporarily at its lowest point for the month. Interest on the All in one is simple interest, so it is calculated on a daily amount then added up for the month and that is your minimum payment at the payment point in the month. Because you had all your deposits go into the HELOC and there may be a certain amount of float time, meaning the time after deposits, before you pay your bills, your HELOC has a smaller balance, so the daily interest calc. during that period is less than it will be after you have paid all your bills for the month. Therefore the payment on the HELOC will be lower, and more of your money will stay in the HELOC giving you a lower balance.
Keep doing that month over month and your balance will come down much faster than a 30 year fixed rate mortgage, therefore paying off the mortgage much faster. The best part is this is not money lost, meaning, you can always pull lout the amount of credit that you have up to the high loan limit, versus where your current balance is. You can do that to help cover down payments & closing costs for new real estate investment purchases.
Now lets look even further down the road. So you bought a new rental, now the rents coming in from the rental, also go into the HELOC. You also pay the mortgage payment and all expenses of the rental from the HELOC. Assuming you bought a cash flowing rental, then that means you are leaving more in the HELOC (incoming rents) than you are taking out for that property, thereby paying off the HELOC faster, also increasing the amount credit available for you to use to buy more houses down the road. So basically it compounds on its benefits the more you use it in that way.
You must use the HELOC in the appropriate manner to get the maximum benefits out of it, but what an awesome tool it can be when used correctly. I would also advise that you keep an emergency stash of cash in your regular bank. Only in the one off chance that we have another meltdown situation again, and they shut off the ability to draw on the HELOC's like they did in 2008. that way you are not stuck with no cash. If that were to happen again, I would then stop banking in the HELOC and just make the payments on it, and start banking in your normal bank again. Cash is King, always hoard your cash!!!
I hope that helps?
Hey @Kevin Romines , I think I tracked with all of that except for 1 thing: when I purchase (finance) an investment property, do I buy that one with its own All in One or are you saying to put the $ from that one into the primary or ?? Again, thanks a ton--so helpful!
@Kevin Romines Did a great job explaining the principles!
The only thing I'll add is that through the 2008 meltdown we didn't have any of our client's lines of credit frozen or called. I'd always recommend leaving some room on your line in case of another crash though. I do still keep my old bank accounts open for incidentals, I just don't keep much money in them, because I'd rather it be working for me on my line.
@Stacy Voss To answer your question, it really depends on the situation. It doesn't really make sense to have two of these loans open with balances, because that just dilutes your cashflow. However, if one is paid off, it might not be a bad idea to open another so you can access the equity on that property as well. Being that the rate is slightly lower on primary residences, a lot of clients look to maximize their leveraging off that line first.
@Justin Phillips @Stacy Voss @Kevin Romines Okay, so another question that popped up - I just looked into the bank that my Mortgage is through and it appears that there is a suspension on new HELOC applications. Is that normal? Does any HELOC have to come from the company / bank that the Mortgage is actually with?
This Program is with a 1st position Heloc that replaces your current mortgage. Part of what makes it so different is that it’s tied to a zero balance sweep checking account. So that checking account becomes your depository, with every deposit sweeping to your remaining balance on your loan. Since it’s a credit line, you still have full access to pay your bills etc.
It’s a very specialized product, which is why the broker I’m with focuses only on this loan.
@Sarah West No it does not. You can find a lender who specializes in All in One and finance with them. The only I am aware of is that you normally can only have 1 All-in-One. That's why a lot of people use it for their personal residence.
@Axel Meierhoefer Hey Axel, I’m with a lender that focuses solely on this one specific loan. You can actually have up to 3, one for each property type. So one Primary, one Investment and one Vacation/Second home.
We recommend starting with your primary, as it usually gives you the biggest line, and has a slightly lower rate.
@Justin Phillips Ahh, cool. I was only aware of residence and vacation. Thanks for sharing
Technically, you can do this same thing with any HELOC that you might want to open, both in the 1st and or the 2nd mortgage position. The principals are the same. However not all HELOCs calculate interest in the same way, so you would want to know the way the HELOC calcs interest is as simple interest on a daily balance.
@Kevin Romines @Stacy Voss I also found, when researching the basis for the interest calculation to differ. Some seem to use US-prime rate and others use Libor. The differences are not very big and adjustments are mild, but that is also something to be aware of as it might surprise you, depending on the lender.
If those home is paid off and the equity is only needed for a short time, taking out a more traditional HELOC might make more sense. For properties with a remaining balance or if the goal is snowballing debt, this loan style works much better. The biggest difference is that ZBA (Zero Balance Sweep Account) that's tied to the line. You'll set up your direct deposit to that checking account, so all of your deposits sweep directly to the remaining balance, saving you interest cost. So you can pay down principle with all of your income, but without any fear, because you still have full access to all of that money to pay bills.
Traditional HELOC aren't meant to be transactional, so those transfers need to be done manually which gets very laborious. Additionally, if the HELOC is being used in 2nd position, you'd don't have access to any of those extra payments without selling or refinancing the 1st position mortgage.
The only downside to this loan style is that it's tough to qualify for. For those who qualify though, it's the best loan option out there.