Heloc to pay off mortgage faster

684 Replies

Originally posted by @David Dachtera :

@Drew Cameron ,

We just had rather a protracted thread on this topic.

Trouble is that folks who have not been exposed to the topic misinterpret it as transferring the mortgage balance to a HELOC, which is, of course, incorrect.

@Robert Ebeling interpreted it correctly: "You accelerate your amortization schedule by making large payments."

Seriously? Still spouting this mathematical nonsense?

I'm convinced you're selling this scam to people and need to perpetuate the lie.

Originally posted by @Yoochul C. :
Originally posted by @Mike Landry:

Have you noticed that an amortized loan payment doesn't change whether you make extra principal payments and a HELOC monthly payment goes down as you pay off principle? Thats the difference between an amortized loan and a simple interest HELOC.

Therefore, using some portion of your HELOC to pay off the amortized loan is moving from one loan to another. The way it reduces your mortgage over time is that you use the HELOC to as a checking account. Any and all savings is used to pay off the HELOC. The theory is that if you ever do need cash for an unexpected bill, you would just use the HELOC for the additional cash. Over time, the HELOC amount will go down. The excess money you save goes to pay off the HELOC. Once the HELOC is paid off over time, you repeat the process.

It doesn't reduce a 30 year loan to 5 like some people state but it does shave a good portion of your loan. 

 Wrong! You obviously don't understand mortgages and how it works. Quick example. 3% interest on a 10,000 heloc and a 10,000 30 year fixed acrues the same amount of interest. 

As far as using your heloc as a checking acount...if you are paid 10,000 per month and are able to not touch your heloc (@5% interest) for 29 days you would save a woppping $40 in interest. Hardly with your time if you make 10,000 a month. 

You really need to do the math. Making the same payment on a amortized mortgage and the same payment on a HELOC for the life of the loan would result a lot less interest paid on a HELOC assuming at $10,000 loan at the same interest. The interest on the amortized loan is front ended whereas the HELOC is simple interest.

My recommendation is that before you challenge people to show you the math, do it yourself. Assuming the same principal, term, payment and interest rate, a conventional mortgage and HELOC will pay off in the same time period with the same interest paid. Math has been shown in other BP threads in the last 30 days. Search and find it yourself.

Amortized loans are not front loaded interest. They are evenly loaded through the life of the loan and interest is calculated as a percentage of principal. This is identical to a HELOC. Amortized loans have a fixed payment amount which is how they differ from other loans such as a HELOC.

Amortized loans do not have compounded interest. If you want the definition of simple versus compounded interest, you can Google to get the answer, I can assure you it has nothing to do with amortization and is not the difference between conventional and HELOC loans.

Conventional and HELOC accumulate interest at the same rate. Paying a lump sum from a HELOC to a conventional mortgage only transfers debt from one loan to another. It doesn't accelerate payment any faster than paying the smaller cash payments directly to the conventional mortgage.

The argument that using the HELOC as a checking account means you accelerate principal payments and keep cash fluid is valid. This will have some effect on how fast you pay off your mortgage, but it is minimal compared to just making extra cash payments directly to your mortgage. The risk is that someone may use the HELOC as a revolving credit account and will end up spending more money. For that reason, if someone is trying to payoff a mortgage sooner, the best recommendation is to just make extra cash payments every month.

HELOC can be a valuable tool for investors when used properly, but that is another discussion.

Originally posted by @Yoochul C. :
Originally posted by @Mike Landry:

Have you noticed that an amortized loan payment doesn't change whether you make extra principal payments and a HELOC monthly payment goes down as you pay off principle? Thats the difference between an amortized loan and a simple interest HELOC.

Therefore, using some portion of your HELOC to pay off the amortized loan is moving from one loan to another. The way it reduces your mortgage over time is that you use the HELOC to as a checking account. Any and all savings is used to pay off the HELOC. The theory is that if you ever do need cash for an unexpected bill, you would just use the HELOC for the additional cash. Over time, the HELOC amount will go down. The excess money you save goes to pay off the HELOC. Once the HELOC is paid off over time, you repeat the process.

It doesn't reduce a 30 year loan to 5 like some people state but it does shave a good portion of your loan. 

 Wrong! You obviously don't understand mortgages and how it works. Quick example. 3% interest on a 10,000 heloc and a 10,000 30 year fixed acrues the same amount of interest. 

As far as using your heloc as a checking acount...if you are paid 10,000 per month and are able to not touch your heloc (@5% interest) for 29 days you would save a woppping $40 in interest. Hardly with your time if you make 10,000 a month. 

You really need to do the math. Making the same payment on a amortized mortgage and the same payment on a HELOC for the life of the loan would result a lot less interest paid on a HELOC assuming at $10,000 loan at the same interest. The interest on the amortized loan is front ended whereas the HELOC is simple interest.

Yoochul, this is simply not true. Conventional mortgages do not have front end loaded interest.

Edit: oops, just noticed Joe made the same point but in better detail.

@David Dachtera

Are you implying that moving the entire mortgage balance over does not work? It should save more money from going to interest because you can pay down the balance faster than you can pay down the "chunk" of the HELOC. Also gives you much more flexibility in the long run. I would much rather have an $80K HELOC (balance of $60K) on a $100K property than a $60K mortgage balance and a $20K HELOC on that same property. In a few years when the amount owed is much closer to 0 I would have the ability to put a larger chunk of money back to work for me instead of only having access to a few thousand dollars.

@Yoochul C.

I, like you, at first thought the interest in a loan was "front loaded". I have come to see that it only seems that way because the payment plan is set through amortization. The fixed payments have a predetermined pay down amount, which then lowers the balance and the interest paid on the next payment. This is why I've been trying to stress that the HELOC strategy is not a magical interest changing formula, but rather a drastic change to the balance in which the interest is calculated. As I think you've stated before, this is made possible because of the flexibility of a HELOC to be used as a pseudo checking account.

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

@Drew Cameron ,

We just had rather a protracted thread on this topic.

Trouble is that folks who have not been exposed to the topic misinterpret it as transferring the mortgage balance to a HELOC, which is, of course, incorrect.

@Robert Ebeling interpreted it correctly: "You accelerate your amortization schedule by making large payments."

Seriously? Still spouting this mathematical nonsense?

I'm convinced you're selling this scam to people and need to perpetuate the lie.

Exactly. The false pretense of the HELOC scam is the claim that making larger payments from a HELOC is better than just making smaller cash payments directly to the mortgage. At the end of the day the HELOC is accumulating interest at the same rate as your mortgage. That is why it is mathematical nonsense.

The other part of the HELOC scam is the financial advisers who charge monthly fees to help you implement a strategy. Unfortunately most of these advisers are just sales people with no financial education or fiduciary responsibility - meaning no responsibility to act in your best interest.

I feel like this is a bad episode of Myth Busters where we keep busting it over and over again.

My local investing group is starting something new: we're actually doing a weekly class on mortgage acceleration so people can learn what it is - and what it isn't.

Every Thursday at 7pm. Western suburbs of Chicago, accessible from Interstates 88 and 355. Also accessible via public transit, though the commuter trains are about three miles south of us. I'll check the bus routes. Taxis service is available. PM me if you wish to attend so I can get you registered and send you the address - pre-registration is required, this is not open to the public and we only have so many seats.

There is no fee to attend. Coffee is provided.

@Joe Splitrock ,

... except that its not a myth and has been confirmed repeatedly.

... and no, you don't have to pay ANYone to learn how to do it. There is enough free info "out in the wild" and in the prior thread that anyone who knows how to use calculator can figure it out for themselves.

Make additional payments without another account like a HELOC - works just fine. Produces one result, but does not have an impact on your credit profile.

Use a HELOC or other revolving account to pay big chunks works well, also. Produces a similar result and bolsters your credit profile.

Your choice.

@Drew Cameron , why not explore it yourself and see if it would be helpful rather than taking the word of those who have never done it, don't understand it, and refuse to learn to understand it?

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

@Drew Cameron ,

We just had rather a protracted thread on this topic.

Trouble is that folks who have not been exposed to the topic misinterpret it as transferring the mortgage balance to a HELOC, which is, of course, incorrect.

@Robert Ebeling interpreted it correctly: "You accelerate your amortization schedule by making large payments."

Seriously? Still spouting this mathematical nonsense?

I'm convinced you're selling this scam to people and need to perpetuate the lie.

...and I'm convinced that you choose to believe in your own misconceptions as "Gospel" truth and refuse to learn the REAL truth ...

... which I've proved enough times that I refuse to do it again. Go back, check the numbers and LEARN!

Originally posted by @Nick Moriwaki :

@David Dachtera

Are you implying that moving the entire mortgage balance over does not work? It should save more money from going to interest because you can pay down the balance faster than you can pay down the "chunk" of the HELOC. Also gives you much more flexibility in the long run. I would much rather have an $80K HELOC (balance of $60K) on a $100K property than a $60K mortgage balance and a $20K HELOC on that same property. In a few years when the amount owed is much closer to 0 I would have the ability to put a larger chunk of money back to work for me instead of only having access to a few thousand dollars.

No, that's what the others are saying.

HELOCs are typically interest only - YOU decide how much to pay down the principal on each payment.

Fairly simple to calculate, really. Two pieces:

Interest: Monthly periodic rate x the current balance

Principal: A HELOC might be interest only with a 10-year balloon. So, to pay it off in 10 years, the principal portion is one 120th of the principal balance at inception.

Add those together and that's the monthly payment.

Hint: The result will be higher than even a 15-year fixed rate amortized loan, and likely out of reach for many W2 people.

The big chunk method works as does the pay added principal monthly method. Choose which ever works best for you.

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

@Drew Cameron ,

We just had rather a protracted thread on this topic.

Trouble is that folks who have not been exposed to the topic misinterpret it as transferring the mortgage balance to a HELOC, which is, of course, incorrect.

@Robert Ebeling interpreted it correctly: "You accelerate your amortization schedule by making large payments."

Seriously? Still spouting this mathematical nonsense?

I'm convinced you're selling this scam to people and need to perpetuate the lie.

...and I'm convinced that you choose to believe in your own misconceptions as "Gospel" truth and refuse to learn the REAL truth ...

... which I've proved enough times that I refuse to do it again. Go back, check the numbers and LEARN!

Here the page where I shattered your fairy tale:  https://www.biggerpockets.com/forums/49/topics/329...

Also interesting to note for anyone else reading this... I asked David a half dozen times to disprove my math but never did. 

Apologies for the less than ideal formatting in the spreadsheet linked below. Scenario 1 shows the HELOC technique, scenario 2 spread the effect of making the same monthly HELOC repayments to the mortgage instead. David won't respond to this. Using the HELOC results in more interest and longer payoff.

https://www.dropbox.com/s/gzvdujsmx9b5si9/Mortgage...

**mic drop**

Originally posted by @David Dachtera :

@Joe Splitrock,

... except that its not a myth and has been confirmed repeatedly.

... and no, you don't have to pay ANYone to learn how to do it. There is enough free info "out in the wild" and in the prior thread that anyone who knows how to use calculator can figure it out for themselves.

Make additional payments without another account like a HELOC - works just fine. Produces one result, but does not have an impact on your credit profile.

Use a HELOC or other revolving account to pay big chunks works well, also. Produces a similar result and bolsters your credit profile.

Your choice.

@Drew Cameron , why not explore it yourself and see if it would be helpful rather than taking the word of those who have never done it, don't understand it, and refuse to learn to understand it?

Hey David the problem is there are gurus out selling the HELOC pay down strategy and they are lying about why it works. They are also charging people to implement the strategy. A good example is the YouTube video link you shared in the other thread, which was filled with lies and the guy was selling services. You presented it as a good explanation. Do you see my concern? You are an experienced investor who leads an investment club and you are suggesting people watch a video by a scam artist. I am not picking on you, just pointing out if you could be fooled then there is real concern for the general public.

We agree paying extra principal towards a mortgage in small or large chunks will reduce interest payed and term over time. 

I never said that a HELOC was a scam but there is a HELOC pay down scam. Let me explain the difference.

The first point is whether you use small payments towards a mortgage or large payment from a HELOC, then small payments towards the HELOC, it will get you similar pay down results. You stated the same.

Your claim that a HELOC or other revolving account will improve your credit score MAY be true, but really depends on several factors. I would argue that improving a credit score is not the main reason people use the HELOC mortgage pay down strategy, but lets examine your claim closer.

There are several factors that affect your FICO. General guide line is 35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used. FICO is going to affect the amount owed category which represents your credit utilization. Revolving accounts such as HELOC will improve your FICO more than mortgages, car or student loans. But revolving accounts can also do damage to your credit score. Credit utilization is a ration of how much credit you have available to how much is being used. For example if your lender cut your HELOC limit from $100,000 to $75,000 it can negatively affect your credit score. The same is true for closing credit cards. This is why I say that a revolving account MAY help your credit score. Carrying a balance on credit cards may also help your credit score, but I wouldn't advise that. 

It really takes financial intelligence to use these strategies and my main point is that YouTube gurus and scam artists are preying on people who don't understand. 

My opinion is that a smart investor would use a HELOC for investment property, not mortgage pay down. But hey, this is a real estate investment forum, so there is obvious bias here.

@Chris May

Your spreadsheet only illustrates that you are missing the point of how the HELOC strategy works since you use the same number as your payment each month.

To implement the strategy the HELOC needs to become an upside down checking account (i.e. - the difference between the HELOC limit and the balance owed is your available funds). Your entire net income would go towards paying down the HELOC balance just like your entire net income goes towards raising your checking account balance. A common misinterpretation of this is that you are paying more, but in all reality all you are doing is reallocating your funds. Sure, it could go to your checking account, but by reallocating it into the HELOC you save X% on interest paid for those funds.

Another misconception is that this is the same as paying extra to your mortgage every month. However, in the "pay more to your mortgage" scenario, getting access those funds takes time, effort, and incurs additional fees. With a HELOC you can move that money over to your checking account in a matter of minutes. Additionally you won't be able to pay nearly as much to your principal as you would using the HELOC strategy since the HELOC strategy utilizes ALL of your net income. I don't know anyone who would advise doing this when paying off a mortgage.

To accurately compare the methods you would need add a net income and a checking account balance into your scenario. The monthly payment towards the HELOC would be net income - interest and run this until the balance is zeroed. Because no money goes to the checking account that value is $0 while there is still a HELOC balance and would begin to increase after the HELOC balance is paid off. The mortgage scenario would be modeled by taking net income - mortgage payment and adding it into your checking account. These scenarios will play out much differently than what you have laid out in your spreadsheet.

Originally posted by @Nick Moriwaki :

@Chris May

Your spreadsheet only illustrates that you are missing the point of how the HELOC strategy works since you use the same number as your payment each month.

To implement the strategy the HELOC needs to become an upside down checking account (i.e. - the difference between the HELOC limit and the balance owed is your available funds). Your entire net income would go towards paying down the HELOC balance just like your entire net income goes towards raising your checking account balance. A common misinterpretation of this is that you are paying more, but in all reality all you are doing is reallocating your funds. Sure, it could go to your checking account, but by reallocating it into the HELOC you save X% on interest paid for those funds.

Another misconception is that this is the same as paying extra to your mortgage every month. However, in the "pay more to your mortgage" scenario, getting access those funds takes time, effort, and incurs additional fees. With a HELOC you can move that money over to your checking account in a matter of minutes. Additionally you won't be able to pay nearly as much to your principal as you would using the HELOC strategy since the HELOC strategy utilizes ALL of your net income. I don't know anyone who would advise doing this when paying off a mortgage.

To accurately compare the methods you would need add a net income and a checking account balance into your scenario. The monthly payment towards the HELOC would be net income - interest and run this until the balance is zeroed. Because no money goes to the checking account that value is $0 while there is still a HELOC balance and would begin to increase after the HELOC balance is paid off. The mortgage scenario would be modeled by taking net income - mortgage payment and adding it into your checking account. These scenarios will play out much differently than what you have laid out in your spreadsheet.

 Nick. Quick response to your comments:

1. My example is just showing the strategy of moving mortgage debt to a HELOC and repaying your HELOC in regular amounts. David continually claims this magically pays off your mortgage faster and I created this file in a previous post to disprove it. He has yet to even respond to it.

2. Your 2nd paragraph regarding the "upside down checking account" has some validity, I think we disagree the extent to which this has an impact, but it will have an effect. In that sense I agree. Although... I also think there's some nuance here and that you're effectively prepaying in reverse. This strategy is really just forced financial discipline.

3. Your statements about using a HELOC to access "equity" in your real estate assets has merit, but isn't really what the original post was about.

In short, I don't really disagree with the mathematics of your argument. I do think it can be a risky strategy though.

You also debunked the "mortgages are front-end loaded with interest" argument. David also thinks this is true.

I think you and I are in the same page.

Originally posted by @David Dachtera :

@Chris May,

Show me where I said ANY of the things you claim I said.

Show me where ANYone said ANYthing about "moving mortgage debt to a HELOC".

You continue to look for arguments and I will waste no more time with you.

@Joe Splitrock already did that here: https://www.biggerpockets.com/forums/49/topics/329076-use-heloc-to-paydown-mortgage-fast?page=10

Originally posted by @Nick Moriwaki :

@Chris May

Your spreadsheet only illustrates that you are missing the point of how the HELOC strategy works since you use the same number as your payment each month.

To implement the strategy the HELOC needs to become an upside down checking account (i.e. - the difference between the HELOC limit and the balance owed is your available funds). Your entire net income would go towards paying down the HELOC balance just like your entire net income goes towards raising your checking account balance. A common misinterpretation of this is that you are paying more, but in all reality all you are doing is reallocating your funds. Sure, it could go to your checking account, but by reallocating it into the HELOC you save X% on interest paid for those funds.

Another misconception is that this is the same as paying extra to your mortgage every month. However, in the "pay more to your mortgage" scenario, getting access those funds takes time, effort, and incurs additional fees. With a HELOC you can move that money over to your checking account in a matter of minutes. Additionally you won't be able to pay nearly as much to your principal as you would using the HELOC strategy since the HELOC strategy utilizes ALL of your net income. I don't know anyone who would advise doing this when paying off a mortgage.

To accurately compare the methods you would need add a net income and a checking account balance into your scenario. The monthly payment towards the HELOC would be net income - interest and run this until the balance is zeroed. Because no money goes to the checking account that value is $0 while there is still a HELOC balance and would begin to increase after the HELOC balance is paid off. The mortgage scenario would be modeled by taking net income - mortgage payment and adding it into your checking account. These scenarios will play out much differently than what you have laid out in your spreadsheet.

 Thank you sir!!!  Excellent. 

If i'm at a surplus of $1000 every month from my income less all my expenses, why not use this surplus of funds to store that money in my heloc account thus driving down the principal of the heloc instead of just having the money accrue in a non interest bearing checking or a paltry interest bearing savings account.  In essence, i'm getting the portion of 4% plus interest charged by the heloc by storing my savings in the heloc account.  Am I missing something?  

Assume, I pay the $1000 to make extra payments to my mortgage.  I can't get access to that money if I need to pay for any unexpected event.  Or people say to have 6 months of living expenses.  etc..  Keep the funds in the heloc account.  

Originally posted by @Yoochul C. :

If i'm at a surplus of $1000 every month from my income less all my expenses, why not use this surplus of funds to store that money in my heloc account thus driving down the principal of the heloc instead of just having the money accrue in a non interest bearing checking or a paltry interest bearing savings account.  In essence, i'm getting the portion of 4% plus interest charged by the heloc by storing my savings in the heloc account.  Am I missing something?  

Assume, I pay the $1000 to make extra payments to my mortgage.  I can't get access to that money if I need to pay for any unexpected event.  Or people say to have 6 months of living expenses.  etc..  Keep the funds in the heloc account.  

 In a logistical and purely mathematical sense, what you're saying is correct.

I think the debate is really one of risk. Relying on a HELOC for your emergency funds seems like a bad idea, but it's a strategy one could employ.

Originally posted by @Yoochul C. :

If i'm at a surplus of $1000 every month from my income less all my expenses, why not use this surplus of funds to store that money in my heloc account thus driving down the principal of the heloc instead of just having the money accrue in a non interest bearing checking or a paltry interest bearing savings account.  In essence, i'm getting the portion of 4% plus interest charged by the heloc by storing my savings in the heloc account.  Am I missing something?  

Assume, I pay the $1000 to make extra payments to my mortgage.  I can't get access to that money if I need to pay for any unexpected event.  Or people say to have 6 months of living expenses.  etc..  Keep the funds in the heloc account.  

In this situation a HELOC could be used to manage money. The concept is that at any given time you have maximized your principal pay down. The point I disagreed on previously was your belief that a mortgage and HELOC accrue interest differently. If you are using a HELOC to have a line of credit in case of emergency, that is fine.

Just to be clear, a HELOC is not a savings account. You are not keeping funds in the HELOC account. You are paying off a loan balance in the HELOC. When people say to have 6 months living expenses, they are not referring to a loan. You should have 6 months in an FDIC insured savings account.

Originally posted by @Joe Splitrock :
Originally posted by @Yoochul C.:

If i'm at a surplus of $1000 every month from my income less all my expenses, why not use this surplus of funds to store that money in my heloc account thus driving down the principal of the heloc instead of just having the money accrue in a non interest bearing checking or a paltry interest bearing savings account.  In essence, i'm getting the portion of 4% plus interest charged by the heloc by storing my savings in the heloc account.  Am I missing something?  

Assume, I pay the $1000 to make extra payments to my mortgage.  I can't get access to that money if I need to pay for any unexpected event.  Or people say to have 6 months of living expenses.  etc..  Keep the funds in the heloc account.  

In this situation a HELOC could be used to manage money. The concept is that at any given time you have maximized your principal pay down. The point I disagreed on previously was your belief that a mortgage and HELOC accrue interest differently. If you are using a HELOC to have a line of credit in case of emergency, that is fine.

Just to be clear, a HELOC is not a savings account. You are not keeping funds in the HELOC account. You are paying off a loan balance in the HELOC. When people say to have 6 months living expenses, they are not referring to a loan. You should have 6 months in an FDIC insured savings account.

 Joe, 

Everybody knows a HELOC isn't a savings account. The point is, that it "acts" like one only assuming you pay off chunks of your mortgage. Essentially I am keeping my funds in a HELOC if i'm using it to pay off my mortgage assuming I used my 6 months of living expenses to buy down the principal. So my 6 months of living expenses is in essence "stored" in the HELOC.

This is a scam. It was widely discussed a few weeks ago. Just check the archive. Paying a loan with a loan that might even have a higher interest rate makes no financial sense, unless you are the person selling the loan.

@Nick Moriwaki and @Chris May an upside down checking account is a loan. Nobody in the financial industry would be able to legally call it anything else. I understand the term is being used here to make a point, but I am also trying to make a point. Using a HELOC to pay off a mortgage is just using one loan to pay off another. I don't think it is good advice to recommend anyone run their finances in deficit. If you don't have money to pay down your mortgage, don't do it. You should always have cash in the bank. Your HELOC line of credit can be reduced or the bank could call the loan.

This is one thing that got people in trouble during the last financial crisis. Here is how it went down. Lose your job, bank calls the loan and you have no money, bank forecloses, you become a renter. It is real and it happens to people all the time. 

For the common person, the best strategy is to set a budget. Cut up your credit cards and don't use revolving credit. Save up 6 months cash reserves in an FDIC savings account. Allocate extra monthly principal payments towards your mortgage principal. If you are operating in a budget, you will maximize use of your funds each month without needing a HELOC to do it for you. If you don't have a budget, the HELOC will get you deeper in debt.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here