Paying Down Mortgage with HELOC?

12 Replies

Hello, I'm trying to understand whether paying off my mortgage balance using a HELOC would make sense. I am feeling confused about it, because the terms of each are so different. The mortgage is a long-term, fixed rate loan charging compounding interest; the HELOC is a shorter-term, variable rate line of credit charging simple interest. Can anyone offer guidance here for how to analyze?

@Ryan H. , there isn't quite enough information to give you a definitive answer to this. I would say 90% of the time, the move would be to keep the long term loan.

As long as your long term loan has a decent rate, why would you want to pay it off early early?!? You should be making money on the investment property after paying the loan. You are building equity by paying down the loan over time as well.

A HELOC is best for short term needs. For example, if you buy a distressed property, rehab it, and flip it for a nice profit. Using a HELOC makes sense because that process might only take you several months and then you can pay off the HELOC and not pay any interest until the next opportunity comes around.

@Ryan H. There are many threads here about that. A couple of quick points....

Both loans calculate/charge interest Exactly the same way....your interest charge for any given month is the Balance times the annual interest rate divided by 12. An amortized loan is Not compounding interest. 

The heloc “works” because you are Actually paying more than your scheduled monthly payment every month  

You can achieve the Same thing by simply paying extra principal toward your loan. 

If you had an amortized loan and a heloc, with the same balance and interest rate, and made the same exact payment to each loan, they would both get paid off at Exactly the same time  

The Only advantage to the heloc is that you  have access to borrow money if you need it....since you’re putting more cash into your loan every month above the scheduled payment. 

Any other “theories” or manipulation of the numbers to justify why the heloc is better are just simply BS. 

You're looking at the wrong numbers.  Look at the difference in cash flow, realizing that as you decrease your CF, you are increasing your cost.  Your tenant is already doing this paydown for you...for free.

I've come across a couple investment groups that are very gung ho about HELOCs, and while they do provide much more flexibility in payment compared to a traditional mortgage they're certainly not the silver bullet that some make them out to be. Often they're pitched as 'you can pay off your mortgage in 7 years vs 30 treating your HELOC like a checking account' when in reality you could do the same thing by just paying extra principle on your mortgage.


I think if you can get a equal or better interest rate on a HELOC vs mortgage then it's definitely worth it, even if the interest rate is higher on the HELOC then it still might be worth it if that flexibility in payment is really important to you. If you're looking to use your house as collateral I think HELOCs are definitely a better option than cash out refis as long as you aren't in desperate need of immediate cash. Biggest thing is understanding all the terms of the HELOC- when/if the interest rate is fixed or variable, what is the 'draw' period vs the period that you need to repay. Hope this helps

Originally posted by @Ryan H. :

Hello, I'm trying to understand whether paying off my mortgage balance using a HELOC would make sense. I am feeling confused about it, because the terms of each are so different. The mortgage is a long-term, fixed rate loan charging compounding interest; the HELOC is a shorter-term, variable rate line of credit charging simple interest. Can anyone offer guidance here for how to analyze?

No long term fixed rate mortgage has compounding interest. That would mean interest is charged on interest. That happens on credit cards or lines of credit, but not on most any loan that has fixed terms. Interest is calculated the same, the only difference is a mortgage uses an amortization schedule to create payments that match a specific term. You pay more interest early in a mortgage, because you own more principal. It is really that simple. The only way to pay a mortgage off early is by making extra principal payments. You can make those payments through a HELOC or directly to the loan. Sometimes a HELOC can cost you more if the interest rate is higher. There are all sorts of Youtube guru claiming false mathematical claims about what HELOC can do. All you do with a HELOC is transfer debt from one loan to another. Now you have two loan payments due and by making extra payments, you do pay off your mortgage faster. The point is you don't need the HELOC to do it.

The mortgage is a 30-year fixed @ 2.75%. The HELOC is an interest-only @ 3.99-6.65% variable.

As others said, there isn't enough information to provide a decision. Is the HELOC on the same investment property or is it on your primary residence? What are the rates on the 1st mortgage vs the HELOC?

I agree that generally HELOC is for short-term needs. But perhaps you want to pay off the first mortgage with the HELOC and just want to have flexibility to pay a variable dollar amount whenever you like and not have late fees if you don't make a minimum in any one month—you just pay interest instead. Maybe you want this because your total cash flows fluctuate a lot and don't want to have keep a lot of cash reserves.

You may hear some investors using HELOC as a strategy for purchasing NEW properties. I think that works well if you have lot of equity in your home and don't have a lot of cash. Having an HELOC in place allows to you participate as a cash investor, if the size of the HELOC is large enough, to win deals since the HELOC is easy to draw on—no waiting around a month or more for lender to approve a loan. It also avoids a few thousand dollars on closing cost for a new loan. Generally opening a new HELOC has very small closing costs (appraisal is the primary portion). I have even seen some lenders forgo all the fees/cost if borrowers draw a certain amount the first few months.

The most famous guy who pushed this whole thing was and is Clayton Morris, the guy who fled to Portugal after getting caught in a huge RE scam in Indy. I'd tread carefully with anyone pushing this method. I can see where it might be worth while when interest rates are 6-7% and the HELOC is substantially lower....but at the rates they are now I personally don't see much of a point...the benefit of the leveraged debt being so cheap now is to be able to earn more on your money elsewhere.

Originally posted by @Ryan H. :

The mortgage is a 30-year fixed @ 2.75%. The HELOC is an interest-only @ 3.99-6.65% variable.

Just to get on the same sheet of music, you want to pay of a fixed rate 2.75% loan with a variable rate,  4% interest loan, when real rates are teetering on being negative? 

HELOCs generally have higher interest rates. So it would be like paying down debt by accumulating worse debt

Originally posted by @Ryan H. :

The mortgage is a 30-year fixed @ 2.75%. The HELOC is an interest-only @ 3.99-6.65% variable.

Leveraging a Heloc to pay down a higher rate is fine.  Doing it to accelerate a 2.75% fixed rate is just dumb.

Don't you have a higher rate and higher risk loan to pay down?