HELOC as alternative to conventional fixed mtg...

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HELOC as alternative to conventional fixed mtg...

Jeff Goddard
Investor · Bakersfield, CA · Member since 2015 · 33 posts · 18 votes

This is a bit long so.... I am wondering if any of the BP members have heard anything about using a HELOC to replace a fixed or traditional mortgage??

I recently came across a u tube video of a fellow in Hawaii whose name is Santos Kidd.  He apparently has some kind of financial consulting company there.  He is also affiliated with the"Rinatus" organization....  Rinatus appears to be a  RE coaching organization...   There is another guy who is marketing what seems like a similar concept who has a nice video, I can't find his site at the moment....

The essence of the "program" as I understand it is to acquire a HELOC loan to replace an existing conventional fixed rate mortgage. The net effect of such a program is a drastic reduction in the term of the conventional loan due to many thousands of dollars otherwise paid in interest are saved as a result of the rapid pay down of principle. With several assumptions, such as, a positive personal income monthly, a property that is appreciating, and diligent adherence to the program an end result is a paid off mortgage is perhaps seven years vs. thirty years.

It seems that the primary benefit is derived by utilizing the floating or variable "average daily balance" which is used for computing minimum payments with an open ended HELOC product..... This allows one to avoid much of the front loaded interest on a conventional loan. The illustrations are very detailed, but I don't pretend to understand it fully, and the proverbial, "If it seems too good to be true it probably is." comes to mind....

Also considered are lower cost to create a HELOC, lower appraisal, escrow, origination fees, other fees, and no PMI.....

I talked with a friend who has been in the mortgage industry for twenty years and is an accountant as well....  He is highly skeptical....  

I appreciate any sage advice from my fellow BP luminaries.......  Knowledge gratefully accepted.

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Sean Cole
Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
10y

@Nick Moriwaki PLEASE, PLEASE, PLEASE check out the other thread that people referred you to.  

You seem to be talking about 2 different things here:

1) Having a HELOC as your 1st lien

2) Using a HELOC to save money by using it to pay down your fixed rate mortgage

The threads you've been referred to thoroughly address #2.  #1 is for you to decide if the flexibility is worth it and/or if a bank will lend on something like that.

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  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    10y

    A HELOC may or may not be better than a conventional mortgage. Depends on your goals. If your goal is to pay off the mortgage as quickly as you possibly can, a HELOC may well be a good option for you. It incentivizes faster paydown, and I believe that folks with HELOC's tend to have a mindset that speaks to that objective. If you want to go debt free as fast as possible, and a HELOC will help you stay in that mindset over the several years it takes to get there, more power to you.

    Personally, I'm not convinced that I will ever (or at least in the next decade) want to own real estate totally free and clear. I believe that the leverage that I get greatly enhances my return on equity, and that with careful management, I can still cash flow safely after the mortgage payments are made. Therefore, I look for the longest possible loan terms with the smallest possible payments, as well as no surprises. 

    Given my goals, A HELOC seems at first glance to be an inferior alternative, given that I believe they have variable interest rates (If there is a such thing as a fixed rate HELOC, sign me up! I'll take the option to borrow up to 85% of my property's value at 4% for the next 30+ years whenever I feel like it!). But as I understand it, HELOCs typically have variable rates, and I am looking for as few surprises that would disrupt my leveraged cash flow as possible.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    I sell divining rods that not only find water but also points out the best places to plant your money trees.  I'm running a special this month.  Contact me.

    1Reply
  • Chris Soignier
    Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    10y

    Everyone has different priorities and perspectives, but it's not a very good strategy for my situation.   Mortgage debt is so cheap, and even cheaper after considering the deductibility of mortgage interest, so why rush into paying it off?    I can re-deploy that money for much greater returns elsewhere.    

    I put way too much down on my residence, and would go w/ an 80% LTV if I had a chance for a do-over. But, I subsequently obtained a HELOC within $1000 of my original mortgage loan. Did I use the proceeds to pay off my mortgage? Heck no! I bought passive interests in a couple of apartment complexes that will yield ~20% annually over their lifetime. That's an easy arbitrage, considering my HELOC costs 3.xx% before interest deduction.

    0Reply
  • Jeff Goddard
    OP
    Investor · Bakersfield, CA · Member since 2015 · 33 posts · 18 votes
    10y

    @Scott Trench@Account Closed@Chris Soignier

    Thank you all for taking the time to respond.....

    Bob, I will be in touch!

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Jeff Goddard:

    @Scott Trench@Account Closed@Chris Soignier

    Thank you all for taking the time to respond.....

    Bob, I will be in touch!

    Don't dawdle, the popular colors are going fast.

    1Reply
  • Jeff Goddard
    OP
    Investor · Bakersfield, CA · Member since 2015 · 33 posts · 18 votes
    10y

    Aloha Bob,

    Just a thought, I know you are a sharp guy and have examined many interesting proposals, so my thought is this, since you are on the same island why don't you go talk with Santos Kidd.  He has a very engaging personality and does a good job of illustrating his claims.  Were I there I would try to have a chat with him, as I would really like to understand his claims thoroughly, then if it is so much fluff let others know.  I know you are probably really busy watching the sun set into the Pacific, so good on you.  Back in the mid sixties I lived in "the jungle" down by the zoo....  Fun place. 

    0Reply
  • Nick Moriwaki
    Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes
    10y

    As someone who employs this strategy, I will offer up a couple of insights/comments to posts above.  I believe the strategy is popular here in Hawaii for 2 reasons:

    1) Hawaii banks offer great introductory promo rates (1.75% for 2 years, 2.49% for 3 years etc...) prior to converting a variable rate.  This may be available nationwide, but the few other posts I've read about HELOCs haven't mentioned this. 

    2) The cost of living here is so high that most people who make a decent salary can only scrape if they have other bills to pay (family, school loans, etc...).  Therefore, people cannot build up the bank account to even consider an investment property. 

    The strategy is fundamentally different than paying off a traditional mortgage in that you use your HELOC as a place to store your money. All your money coming in goes towards paying down your balance and all expenses will essentially come out of the HELOC (routed through a checking account). In essence, your HELOC (assuming it is large enough) becomes your pseudo checking/savings account.


    One last note about the strategy is that, contrary to what has been said in this thread, the available balance in a HELOC can be used for a down payment. So if you can pay down the balance much faster using 100% of your income coupled with extremely low promo rates, you can do major damage to your principle owed and then turn around and immediately use that money to purchase another investment if you want.

    0Reply
  • Jerry PadillaBusiness Member
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    10y

    @Jeff Goddard

    @Scott Trench

    Couldn't have said it any better! I view a HELOC as a very short term strategy.... I don't think rates will get much lower than they are today, but they can definitely go up. It is a risky way to leverage for the long term on my opinion.

    [email protected]585-204-6923
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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Jeff Goddard:

    Aloha Bob,

    Just a thought, I know you are a sharp guy and have examined many interesting proposals, so my thought is this, since you are on the same island why don't you go talk with Santos Kidd.  He has a very engaging personality and does a good job of illustrating his claims.  Were I there I would try to have a chat with him, as I would really like to understand his claims thoroughly, then if it is so much fluff let others know.  I know you are probably really busy watching the sun set into the Pacific, so good on you.  Back in the mid sixties I lived in "the jungle" down by the zoo....  Fun place. 

    Aloha @Jeff Goddard.  It is fluff.  I've investigated this decades ago so I don't need to talk to a magician turned real estate huckster. 

    But the main reason would be that I HAVE NO INTEREST IN PREPAYING A MORTGAGE.  This scheme requires me to pay my principal over a shorter period of time.  I would have taken out a shorter mortgage if that was my desire.  I'll keep my 2016 money and gladly pay my mortgage in 2046 with 2046 money.

    Think about it Jeff, the mortgage is the ONLY fixed expense you have in REI. Why would you want to pay that early?

    I moved here in the 70's and there were still a few remnants of the jungle.  I wasn't far away in Kuhio Village when I first got here but found Pualei Circle for my first investment.

    0Reply
  • Nick Moriwaki
    Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes
    10y

    @Account Closed, just to clarify, you are not really "prepaying" the same way you would prepay a mortgage.  It is simply putting your money there to suppress the amount of interest paid monthly.  The money can easily come out just as easily as it went in, unlike prepaying a mortgage.  This, I would think, would be desirable for an investor given that you can pay down the balance a lot faster giving you access to more available funds to use in the near future and not build it up extremely slowly (if at all) when paying $2500/month for 30 years.  This is why I think it is most useful here in Hawaii.  I can see people in the mainland not buying into it when the properties are valued at $100K - $200K and you can easily build up your bank account when paying sub $1000/month.  

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    Hey, it is even worse for people in Hawaii.  They'll be sitting in a $10,000,000 paid off house that the bank won't lend them $200,000 unless they pay 5 pts and 12% interest and oops, retired.  Sorry, no loan for you.  

    Meanwhile I'll go thru the car for change to pay my 2016 mortgage payment.  

    AND it will be the flying car the bastids promised me back in 1999!  Damn you Popular Mechanics.

    http://www.popularmechanics.com/

    0Reply
  • Nick Moriwaki
    Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes
    10y

    The bank will loan up to $250K with little to no fees (not even an appraisal) if your property value is high enough.  Again, may only be a Hawaii thing.

    0Reply
  • Jeff Goddard
    OP
    Investor · Bakersfield, CA · Member since 2015 · 33 posts · 18 votes
    10y

    @Nick Moriwaki

    Thanks for the insight Nick, the low introductory rate for is very attractive. I contacted several lenders today trying to find someone offering a HELOC to replace a fixed rate front end loaded mortgage. I could not find such a first offered. Some were available as a second but only if the first was provided by the same lender..... The interest rates were higher than you indicated are available in Hawaii. I am still trying to understand how if you are paying the existing first, (via the HELOC) you can service the debt on the HELOC and pay it down as well... Thank you

     @Scott Trench 

    Regarding a fixed interest rate HELOC, I am told they exist, but don't know if that is true. As to access to the funds for thirty years, all the HELOC loans I have looked at are limited to ten years.

    @Chris Soignier

    Good points.

    0Reply
  • Bj Carvalho
    Makawao, HI · Member since 2016 · 19 posts · 5 votes
    10y
    I use the "1st lien HELOC" method on 2 of my properties in Hawaii. One has been just paid off 😁 and being rented for $2850/mo. Using all of that to pay down my current house on Maui. Using the rest of the equity to build another dwelling on my property for a rental. We're in it for the long haul. Points mentioned above using this method are spot on. Not having to pay amortized interest means having more going to principal now which also helps pay down balances quicker as well. It's not for everyone and takes more in depth money management skills not to mention discipline. I have referred MANY folks to Santos Kidd. Nothing wrong with hearing about it. BJ
    0Reply
  • Nick Moriwaki
    Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes
    10y

    @Jeff Goddard

    If you are using the HELOC to "chunk" the mortgage, you run all your finances (including the mortgage) through the HELOC. So for example, if your monthly income is $4000 and your mortgage is $1000 and average personal monthly expenses is $1500, you would be net positive about $1500 a month and a 6 month chunk should be $9000. This means after 6 months you should be close to a zero balance.

    So to start, you would make a $9000 principle only payment from your HELOC to your mortgage. After your 1st month your HELOC balance should be at about $7500 ($9000 + $4000 - $1000 - $1500). Then after the 2nd month, your balance should be around $6000. And so on and so forth until you get it down to 0 in about 6 months. Then you would do it all over again. So you are still making your monthly mortgage payment and using the excess monthly income to pay down the HELOC.

    This, of course, is a simplified calculation that ignores the monthly interest you need to pay for which I calculate to be approximately $35 to start, but that number will only go down every time you make payments to the HELOC. So essentially you would be able to reap the benefits of a $9000 chunk payment for under $200. Hopefully that clears things up for you.

    1Reply
  • Mike Landry
    Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
    10y

    Someone must be pushing some serious advertising dollars at this scheme.

    The only benefit it provides is if the interest rate is lower on the heloc.  

    3% interest costs you the same weather its a heloc, 30yr ect, 15 yr, ect. You only pay interest on the balance. So the only reason you "think" this works is because you are paying extra every month towards principal. Transferring your debt to a heloc does nothing magical to pay off the debt. Your heloc is just acruing interest the same way.

    Ill try to link to the other thread that disproves this scheme.

    That being said there are other good reasons for helocs.

    2Reply
  • Mike Landry
    Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
    10y

    https://www.biggerpockets.com/forums/49/topics/329076-use-heloc-to-paydown-mortgage-fast?page=1

    1Reply
  • Mike Landry
    Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
    10y

    Heloc to pay down mortgage, Myth

    0Reply
  • Nick Moriwaki
    Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes
    10y

    The fundamental difference is that you CAN pay extra every month towards principle. The strategy is dependent on putting ones entire income towards the balance to reduce interest paid monthly. The end result is paying less interest for the same amount of debt. If one plans not to put their entire income towards the HELOC then the strategy will not work.

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  • Mike Landry
    Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
    10y

    @Nick Moriwaki

    Assuming your heloc is at the same interest rate you are doing the exact same thing as just paying an extra $1500 each month. 

    0Reply
  • Mike Landry
    Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
    10y

    @Nick Moriwaki your not accounting for the heloc. Just because you CAN transfer money to the heloc doesnt save you anything. You are still paying the same interest on that debt at the same amount. 

    0Reply
  • Nick Moriwaki
    Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes
    10y

    @Mike Landry

    Understood on the first point of paying an extra $1500/month, but that money does not become unusable as it does for paying extra to a mortgage. I understand you can refi and get access to it again later, but essentially it disappears into paying down your mortgage balance. With a HELOC that is not the case, you can easily tap into any money put in prior.

    I, personally, do not use a HELOC to pay down a mortgage. Instead I move the entire balance over into a HELOC. To me, this is a much easier scenario to model since you cab easily calculate remaining interest to be paid (remaining payments * mortgage payment - mortgage balance) and compare it to an excel spreadsheet for your paydown of the HELOC. Because it is a revolving line, I am free to put everything I make/already have into the HELOC to reduce accruing interest and can then take it out later if I want to use it.

    An easy way to look at it would be if you have $100K in savings and a $100K mortgage. You could pay off the mortgage with the savings, but if that's all you had, you wouldn't even be able to cover your every day expenses. Now if you had a HELOC balance of $100K, you could, and should, put the $100K towards the HELOC to zero it out. This would reduce the daily interest that the account accrues while still providing the flexibility to use any portion of the $100K at any time you choose. Every day that money sits in your HELOC and not in your savings results in interest not paid to the HELOC (i.e. - money saved). And even with a zeroed savings you wouldn't be at risk because you have the HELOC to provide any funds you need for every day expenses.

    0Reply
  • Chris May
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    10y
    Originally posted by @Mike Landry:

    Someone must be pushing some serious advertising dollars at this scheme.

    The only benefit it provides is if the interest rate is lower on the heloc.  

    3% interest costs you the same weather its a heloc, 30yr ect, 15 yr, ect. You only pay interest on the balance. So the only reason you "think" this works is because you are paying extra every month towards principal. Transferring your debt to a heloc does nothing magical to pay off the debt. Your heloc is just acruing interest the same way.

    Ill try to link to the other thread that disproves this scheme.

    That being said there are other good reasons for helocs.

     LOL. Not this question again! Twice in two weeks.

    We just hashed this out on another thread... probably one of BPs longest. I still have PTSD from it :)

    There's nothing really to be gained in terms payoff period for the debt assuming the rates are the same or similar. 

    In the other thread, about 10 of us modeled the entire life cycle of the HELOC vs conventional mortgage and mortgage was better in every case. Just pay more to your mortgage if quicker payoff and less interest is the goal.

    2Reply
  • Mike Landry
    Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
    10y

    @Nick Moriwaki

    Paragraph one i completely agree with. Helocs have benefits and i do have one. Quick question, whats your return on invested cash when you pay extra to your principal? (Hint hint...what is the interest rate on the loan). Can you do better with that cash somewhere else? I sure as hell can beat 4.25% so i dont pay my mortgages off early. 

    Paragraph two. Im not sure i follow you. Why take out a loan with all the assiciated expenses if you are just going to pay it off with a heloc?  Also im not sure about your interest formula. You acrue interest the same on a heloc or amortized loan. You are free to pay extra on a fixed loan too. If you had a heloc you could access that too.  Not necessary to actual use the heloc. Unless you want to make interest only payments but that moves us away from the goal.

    Paragraph three ill agree with you...a little.  You are essentially putting your savings towards debt and using the heloc only when needed. Good luck getting financing on new properties with 0 savings. What happens when the rate adjusts and you are paying 6 to 15% to access your money in 5 years when you need to dip into your emergency fund. That fixed rate %4 loan will sure sound good.  This is the only financial benefit from this whole thing but it is minimal unless you are sitting around with 100,000 in your savings. And if you are I'm sure you could get a higher return on it than 4%. 

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  • Mike Landry
    Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
    10y
    Originally posted by @Jeff Goddard:

     The net effect of such a program is a drastic reduction in the term of the conventional loan due to many thousands of dollars otherwise paid in interest are saved as a result of the rapid pay down of principle.  

    It seems that the primary benefit is derived by utilizing the floating or variable "average daily balance" which is used for computing minimum payments with an open ended HELOC product..... This allows one to avoid much of the front loaded interest on a conventional loan. The illustrations are very detailed, but I don't pretend to understand it fully, and the proverbial, "If it seems too good to be true it probably is." comes to mind....

     You would be smart to listen to your friend. Assuming the same interest rate, helocs acrue the same amount of interest. 3% of 100,000 heloc acrues the same amount as 3% on 100,000 conventional.  Conventional loans are not frontloaded. You always pay one months interest on the balance. 150,000 will have a higher interest payment than the same loan with a 100,000 balance.  The pricipal payment becomes larger as the monthly acrued interest decreases ( through principal pay down)

    It is too good to be true. Dont pay for this scheme.

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