Heloc to pay off mortgage faster

684 Replies

Originally posted by @Yoochul C. :
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.

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

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.  

This is an interesting topic, so I modeled this concept of using a HELOC as a checking account.

My math assumes the following: 50,000 balance on Jan 1, 5% interest rate, 5,000 monthly take home pay, and 3,000 monthly expense (and 2,000 surplus).

Scenario 1: On the 1st of every month, pay entire 5k paycheck to HELOC, spend 3k per month using HELOC spread evenly each day throughout the month.

Result: On December 31 your balance is 27,827. Interest paid is 1,827 for the year.

Scenario 2: On the 1st of every month, pay 2k to HELOC.

Result: On December 31 your balance is 27,900. Interest paid is 1,900 for the year.

Doesn't seem worth the effort to me. Others might disagree. Of course, there are also a million variables so everyone's outcome may be slightly different.

Originally posted by @Joe Splitrock :

@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.

 No disagreement here Joe! I was agreeing solely in a mathematical sense. Foregoing savings and relying solely on a line of credit for living expenses seems like financial suicide.

Originally posted by @Chris May :
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.  

This is an interesting topic, so I modeled this concept of using a HELOC as a checking account.

My math assumes the following: 50,000 balance on Jan 1, 5% interest rate, 5,000 monthly take home pay, and 3,000 monthly expense (and 2,000 surplus).

Scenario 1: On the 1st of every month, pay entire 5k paycheck to HELOC, spend 3k per month using HELOC spread evenly each day throughout the month.

Result: On December 31 your balance is 27,827. Interest paid is 1,827 for the year.

Scenario 2: On the 1st of every month, pay 2k to HELOC.

Result: On December 31 your balance is 27,900. Interest paid is 1,900 for the year.

Doesn't seem worth the effort to me. Others might disagree. Of course, there are also a million variables so everyone's outcome may be slightly different.

 Chris,

thanks for the model. Try this. Don't assume a 50k amount in the heloc. Do a $2000 (surplus) paid to the mortgage using funds from the HELOC. Do this every month for a year. Keeping the balance of the HELOC at $0 result at the end of each month. I wonder if you'll get a different result. See what this does to the mortgage over the 1 year?

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

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

 Joe,

Don't I still have access to my HELOC to pull out my savings from if I lost my job? I mean, why would I keep my savings in a savings account when I can use it to offset my HELOC?

Originally posted by @Chris May :
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.  

This is an interesting topic, so I modeled this concept of using a HELOC as a checking account.

My math assumes the following: 50,000 balance on Jan 1, 5% interest rate, 5,000 monthly take home pay, and 3,000 monthly expense (and 2,000 surplus).

Scenario 1: On the 1st of every month, pay entire 5k paycheck to HELOC, spend 3k per month using HELOC spread evenly each day throughout the month.

Result: On December 31 your balance is 27,827. Interest paid is 1,827 for the year.

Scenario 2: On the 1st of every month, pay 2k to HELOC.

Result: On December 31 your balance is 27,900. Interest paid is 1,900 for the year.

Doesn't seem worth the effort to me. Others might disagree. Of course, there are also a million variables so everyone's outcome may be slightly different.

 Also, are you factoring in the savings in interest from paying off the mortgage as well?

I asked the same question on the other thread, and once again it's a trending post in BP. This has to be the topic of the month. Anyhow, the risk of using heloc is greater than the benefit of it in this scenario. You can save a nickel and dime on interest if you deposit your income to the heloc, but using it as emergency fund just doesn't sound safe at all.

With today's low interest in mortgage, it's very easy to find other investment that will outperform the 3-5% interest range. So maybe you don't want to pay off the "easy money", instead, use the extra money to find better investment. 

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

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

 Joe,

Don't I still have access to my HELOC to pull out my savings from if I lost my job? I mean, why would I keep my savings in a savings account when I can use it to offset my HELOC?

My point is that there is no savings. Once you pay down your mortgage from your HELOC, you take on HELOC debt in exchange for mortgage equity. You keep saying that it keeps your money free, but my point is that it doesn't keep your money available. Yes, you have access to your HELOC to incur more debt. Once you lose your job, you are no longer paying down the HELOC, now you are just running your debt higher. Yes you paid down principal on your mortgage and saved money, but your mortgage monthly payment stays the same.

My point is that 6 months cash reserve is recommended to weather the storm until you can find a new job. Over those 6 months as you run your HELOC up higher, the interest payment keeps going up. You will be borrowing from your HELOC to pay your mortgage and even to pay interest on your HELOC. You see what is happening, you are borrowing from one source to pay another and even to pay the source you are borrowing from. You will spiral into financial ruin quickly.

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

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

 Joe,

Don't I still have access to my HELOC to pull out my savings from if I lost my job? I mean, why would I keep my savings in a savings account when I can use it to offset my HELOC?

My point is that there is no savings. Once you pay down your mortgage from your HELOC, you take on HELOC debt in exchange for mortgage equity. You keep saying that it keeps your money free, but my point is that it doesn't keep your money available. Yes, you have access to your HELOC to incur more debt. Once you lose your job, you are no longer paying down the HELOC, now you are just running your debt higher. Yes you paid down principal on your mortgage and saved money, but your mortgage monthly payment stays the same.

My point is that 6 months cash reserve is recommended to weather the storm until you can find a new job. Over those 6 months as you run your HELOC up higher, the interest payment keeps going up. You will be borrowing from your HELOC to pay your mortgage and even to pay interest on your HELOC. You see what is happening, you are borrowing from one source to pay another and even to pay the source you are borrowing from. You will spiral into financial ruin quickly.

Ok, this is what I do. Lets just say I have a $30k rainy day fund. I use HELOCS for down payments on rentals that I purchase. lets say I use $40k for a down payment. I wire the funds from my HELOC to title. I use the 30K to offset my $40k, leaving 10K in my HELOC. Did my rainy day fund disappear? no. It is still accessible if I lose my job. With my excess savings and cashflow, I'll pay off the HELOC, grow my savings back up to the $30k and repeat. Its just financial discipline.

Now if i were to use the 30k rainy day fund to make a one time principal payment to my mortgage, then I don't have a rainy day fund anymore.  I can't get that back from my lender.  Am I doing anything wrong?

Originally posted by @Yoochul C. :
Originally posted by @Chris May:
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.  

This is an interesting topic, so I modeled this concept of using a HELOC as a checking account.

My math assumes the following: 50,000 balance on Jan 1, 5% interest rate, 5,000 monthly take home pay, and 3,000 monthly expense (and 2,000 surplus).

Scenario 1: On the 1st of every month, pay entire 5k paycheck to HELOC, spend 3k per month using HELOC spread evenly each day throughout the month.

Result: On December 31 your balance is 27,827. Interest paid is 1,827 for the year.

Scenario 2: On the 1st of every month, pay 2k to HELOC.

Result: On December 31 your balance is 27,900. Interest paid is 1,900 for the year.

Doesn't seem worth the effort to me. Others might disagree. Of course, there are also a million variables so everyone's outcome may be slightly different.

 Chris,

thanks for the model. Try this. Don't assume a 50k amount in the heloc. Do a $2000 (surplus) paid to the mortgage using funds from the HELOC. Do this every month for a year. Keeping the balance of the HELOC at $0 result at the end of each month. I wonder if you'll get a different result. See what this does to the mortgage over the 1 year?

 There are two different strategies here that we're talking about concurrently.

The first is using a HELOC to pay a mortgage (ignoring all the other "checking account" theories). That has been thoroughly debunked. Zero savings whatsoever.

The second is a strategy for paying off the HELOC balance... What I'm calling the checking account strategy. That's what I was modeling in my recent post. The savings are negligible.

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

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

 Joe,

Don't I still have access to my HELOC to pull out my savings from if I lost my job? I mean, why would I keep my savings in a savings account when I can use it to offset my HELOC?

My point is that there is no savings. Once you pay down your mortgage from your HELOC, you take on HELOC debt in exchange for mortgage equity. You keep saying that it keeps your money free, but my point is that it doesn't keep your money available. Yes, you have access to your HELOC to incur more debt. Once you lose your job, you are no longer paying down the HELOC, now you are just running your debt higher. Yes you paid down principal on your mortgage and saved money, but your mortgage monthly payment stays the same.

My point is that 6 months cash reserve is recommended to weather the storm until you can find a new job. Over those 6 months as you run your HELOC up higher, the interest payment keeps going up. You will be borrowing from your HELOC to pay your mortgage and even to pay interest on your HELOC. You see what is happening, you are borrowing from one source to pay another and even to pay the source you are borrowing from. You will spiral into financial ruin quickly.

Ok, this is what I do. Lets just say I have a $30k rainy day fund. I use HELOCS for down payments on rentals that I purchase. lets say I use $40k for a down payment. I wire the funds from my HELOC to title. I use the 30K to offset my $40k, leaving 10K in my HELOC. Did my rainy day fund disappear? no. It is still accessible if I lose my job. With my excess savings and cashflow, I'll pay off the HELOC, grow my savings back up to the $30k and repeat. Its just financial discipline.

Now if i were to use the 30k rainy day fund to make a one time principal payment to my mortgage, then I don't have a rainy day fund anymore.  I can't get that back from my lender.  Am I doing anything wrong?

It makes a difference how you are using the HELOC, at least from a risk standpoint. In your original example, you were paying down a mortgage on a primary residence. In this example you are funding a down payment on an income producing property. That is different because assuming you have positive cash flow, now you have money coming in each month to pay the HELOC. That reduces your risk if you were to lose your job because the property is a source of income.

In the second paragraph example, you are not really getting the money back, you are just taking out a loan equivalent to what you paid down on your mortgage. Whether that loan is a HELOC or credit cards, it is still a loan. HELOC is just lower interest rate than credit cards, but as I said it is secured debt so if you are unable to make the payments they can go after your property.

A loan is not what financial experts recommend when they talk about having a 6 month cash reserve. 

I know having cash sit in low interest accounts seems like a waste, but you are trading low return for high security. This is how investing works, lower return means lower risk. Higher return is higher risk. You always want some cash reserves. I am not saying HELOC shouldn't be used and your example of buying an income producing property is a great example of a way to use a HELOC. Still you should have some cash.

This mostly comes down to risk and each person has to choose their own tolerance. What you are suggesting is more risky than what I am advocating. That doesn't mean I am right, just means I am being more conservative. 

Originally posted by @Yoochul C. :
Originally posted by @Chris May:
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.  

This is an interesting topic, so I modeled this concept of using a HELOC as a checking account.

My math assumes the following: 50,000 balance on Jan 1, 5% interest rate, 5,000 monthly take home pay, and 3,000 monthly expense (and 2,000 surplus).

Scenario 1: On the 1st of every month, pay entire 5k paycheck to HELOC, spend 3k per month using HELOC spread evenly each day throughout the month.

Result: On December 31 your balance is 27,827. Interest paid is 1,827 for the year.

Scenario 2: On the 1st of every month, pay 2k to HELOC.

Result: On December 31 your balance is 27,900. Interest paid is 1,900 for the year.

Doesn't seem worth the effort to me. Others might disagree. Of course, there are also a million variables so everyone's outcome may be slightly different.

 Also, are you factoring in the savings in interest from paying off the mortgage as well?

Look at my post earlier in this thread. I modeled the effect of using a HELOC to pay a mortgage. There's a link to an excel file.

There is no interest savings using this method. 

Using a Heloc instead of directly prepaying your mortgage can have a very small interest payment advantage if all other things are equal. Let's say you get a payment on the 5th of the month, then you can take the money to the bank and a day later you have reduced the outstanding principle of your Heloc. If you did the same straight to your mortgage, you would have to wait until the end of the month before your principle (this time on the mortgage) gets reduced. In comparison, you have a longer time to pay interest on. Obviously, those dates are arbitrary. But this is the only monetary advantage you can have using a Heloc to feed mortgage payments. The total monetary benefit over the course of a mortgage is small. The disadvantages have been discussed sufficiently. Prepayment principle of your mortgage is the only way to significantly reduce its duration. You can do this with or without Heloc, it makes only a very small difference.

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

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

Why is it only when you get in trouble with a HELOC that they can take your home?

And how is having an emergency fund in cash any different than going to the bank and drawing on the amount you've paid down on your HELOC? If you put your emergency fund towards a HELOC today, you can easily take it out the next month. Meanwhile you just saved yourself that interest for that month. It may seem like peanuts, but I don't see a risk in it when it's as liquid as money in a checking/savings account. Now compound that strategy over a few years and the savings aren't so small.

It seems to me that this strategy, and its advocates, have been confused by thinking interest on a mortgage is front loaded.

Am I right in assuming that if interest was front loaded, this strategy would actually have some merit?

@Nick Moriwaki

There is a huge difference. Money taken out of a Heloc needs to be paid back. A cash reserve does not.

Should you lose your job and you live off your cash reserve, you have no debt once the reserve is spent. The same amount drawn from your Heloc is debt with your property as collateral. Good luck paying it back should your income situation not improve in time.

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

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

Why is it only when you get in trouble with a HELOC that they can take your home?

And how is having an emergency fund in cash any different than going to the bank and drawing on the amount you've paid down on your HELOC? If you put your emergency fund towards a HELOC today, you can easily take it out the next month. Meanwhile you just saved yourself that interest for that month. It may seem like peanuts, but I don't see a risk in it when it's as liquid as money in a checking/savings account. Now compound that strategy over a few years and the savings aren't so small.

Either a mortgage or HELOC is secured against your home. Assuming you are paying your mortgage every month, you can keep your house through bankruptcy. Credit card balances are not secured and can be wiped during bankruptcy.

Look at it another way. I am buying a property and I have $30K in the bank for a down payment or I have $30K available on a HELOC. The bank will definitely view this as two different things. Cash is cash and credit is credit.

Revolving accounts such as HELOC are usually subject to term modification. That includes credit limits, interest rates and term. A fixed mortgage is not. So in a situation where you find yourself out of work and the bank decides to lower your credit limit or call your loan, the house of cards collapses. That would never happen with cash.

HELOC is fine if you have money going in as fast as it is going out, but when money is only going out, all you are doing is increasing debt.

I am not saying you cannot save a few dollars, I am just saying it comes with heavy risk and low reward. As others have pointed out if you want to take risk with HELOC there are many other better investments than a mortgage pay down. Like buying income producing rental property for example.

Originally posted by @Andreas W. :

@Nick Moriwaki

There is a huge difference. Money taken out of a Heloc needs to be paid back. A cash reserve does not.

Should you lose your job and you live off your cash reserve, you have no debt once the reserve is spent. The same amount drawn from your Heloc is debt with your property as collateral. Good luck paying it back should your income situation not improve in time.

The point is if you already have a balance on your HELOC, you would use your emergency fund to pay off that HELOC balance instead of that emergency fund sitting in an checking account.

@Yoochul C.

And if you then use the Heloc to prepay your mortgage, you have locked the money in. There is no going back, your monthly mortgage payments cannot get reduced. Your previous cash reserve is now your property equity. No problem until you actually need your reserve. Many people call it emergency fund.

First you need a 20% or greater savings in the interest rate between the HELOC and your first mortgage. If your HELOC and First Mortgage aren't at least 20% apart, don't bother. IF they are, taking out a chunk of money to pay down the first with the HELOC then attacking the HELOC balance and repeating will save you some interest. That combined with making aggressive principal payments will get your mortgage paid off very fast. My suggestion, if you can achieve the interest savings, do it and then at some point, look to refinance to a 10 or 15 year loan because the rates will be as low as the HELOCs. ONce you get there, you can forget about using the HELOC. Even if you don't employ the HELOC and you want to aggressively pay down the debt, look to get into the 10 or 15 year when the payment you will make is comfortable and approximately the amount you've been sending in month-to-month to pay down the principal.

@Joe Splitrock @Andreas W. @Yoochul C. @Chris May

HELOC Comparison

See above spreadsheet for a comparative example using some numbers provided in this thread. I used $5000/mo income, $3000/mo expenses, $150,000 mortgage/HELOC limit @3% and a starting "emergency fund" of $12,000. For the HELOC scenario, I moved the $12,000 into the HELOC immediately.

To debunk the point most people are making, at any point in time after the first month you'll be in a BETTER situation if something requires you to tap into your funds. You'll have all the equity built up already at your disposal. For example, if you look at month 24, in a traditional mortgage scenario, the bank account total is around $43,000. In the HELOC scenario the bank account is $0, but you have access to over $51,000 worth of funds. If, for some reason, after 2 years, you absolutely needed $50,000 to pay for an emergency, which situation would you rather be in?

The spreadsheet also allows you to play around with the interest rates to find a relative break even point.  

Also, from what I understand (after talking to the bank), available funds from a secured LOC can be used as a down payment while unsecured funds cannot. Therefore, the HELOC does not limit your buying potential as an investor. However, in another thread, the point was made that banks may look at your HE LOC differently. At one bank here, the bank looked only at my minimum monthly payment (interest only), while another looked at a maxed out balance. Could be a positive/negative depending on your bank.

Originally posted by @Nick Moriwaki :

@Joe Splitrock @Andreas W. @Yoochul C. @Chris May

HELOC Comparison

See above spreadsheet for a comparative example using some numbers provided in this thread. I used $5000/mo income, $3000/mo expenses, $150,000 mortgage/HELOC limit @3% and a starting "emergency fund" of $12,000. For the HELOC scenario, I moved the $12,000 into the HELOC immediately.

To debunk the point most people are making, at any point in time after the first month you'll be in a BETTER situation if something requires you to tap into your funds. You'll have all the equity built up already at your disposal. For example, if you look at month 24, in a traditional mortgage scenario, the bank account total is around $43,000. In the HELOC scenario the bank account is $0, but you have access to over $51,000 worth of funds. If, for some reason, after 2 years, you absolutely needed $50,000 to pay for an emergency, which situation would you rather be in?

The spreadsheet also allows you to play around with the interest rates to find a relative break even point.  

Also, from what I understand (after talking to the bank), available funds from a secured LOC can be used as a down payment while unsecured funds cannot. Therefore, the HELOC does not limit your buying potential as an investor. However, in another thread, the point was made that banks may look at your HE LOC differently. At one bank here, the bank looked only at my minimum monthly payment (interest only), while another looked at a maxed out balance. Could be a positive/negative depending on your bank.

Correct me if I'm wrong, but all that shows me (despite massive obfuscation), is that paying more towards your debt pays it off faster.

Could you make a third section where it's traditional mortgage plus 100% of all excess cash, instead of just an additional $300? Start with the exact same numbers too. Both of them at $150,000 rather than the non-HELOC keeping money in savings.

Compare apples to apples.

It would be the same, but in what scenario would you ever pay your entire net income to a mortgage and leave yourself with no reserves? You can't access it (quickly) once you've put it in. That is the point of the strategy. You are reallocating your money into the HELOC at no risk.

Create Lasting Wealth Through Real Estate

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

Start here