Hi all. Apologies if this topic is addressed in another part of the forum; I've checked through and couldn't find anything which specifically addressed my question.
I am a young investor with no experience when it comes to the real estate market. I have begun doing a lot of research and really enjoy and value the resources BiggerPockets is putting out. In doing my due diligence and trying to learn as much as possible, I have come across a company called "Replace Your Mortgage". I am curious if anyone else has found this site and could provide their experience or thoughts in general about the company's HELOC strategy.
When it seems to good to be true it usually is, but this strategy does make a lot of sense at least on paper. Yes, when following this strategy the individual must be very diligent in keeping up with the cash flow required, but if they do, I do see how it makes sense even with the variable interest rate associated with the HELOC.
The strategy will work if you're disciplined. I don't think you need to buy a program though. The principle is what you need to take away ( Use HELOC money to pay your bills, deposit your income back to HELOC balance, Occasionally use HELOC money to pay extra principle on a loan, and repeat).
You are gonna have the extra bill of the HELOC payment but Long Term you will have a lot a interest that you're defeating by paying principle off early. Long Term interest vs. Short Term Heloc Payment
@Joshua Metayer search " Truth in Equity" on BP, I think they are similar to what the company you mentioned is doing.
I heard about this on one of @Joe Fairless podcasts.
Danger, proceed with great caution, shysters ahead!
Read the terms of any HELOC, pay close attention to the terms and conditions and events that gives the lender the right to limit or terminate credit advances as well as to terminate the loan and call amounts due!
A line of credit may be secured by real estate, it is not have the color of a mortgage.
Reasons to terminate a HELOC could be a change in your job, income, taxes, your credit score, assessment of your ability to pay at any time. They may also call them due without a reason, their loan concentration or servicing requirements can change, dozens of reasons can be pulled out of a hat.
Payoff your mortgage quicker? Make additional payments to principal you can figure that to any date you want it paid off! :)
Rates are going up and everyone now thinks HELOCs (which are almost all ARMs) are a good idea?!
One of the misconceptions about HELOCs is that they are only 2nd lien loans. That is not true. In fact, almost every bank will allow the HELOC to be in first lien position which reduces your risk of having it frozen immensely. No different than the risks of mortgages. In fact, there are now dozens of Hedge Funds lined up to buy HELOC paper from banks because they have noticed over the last 5 years to be 115 times less default than a mortgage. Especially those in first lien position.
Also, the concern about the lender terminating your credit is no different than the "Acceleration Clause" everyone signs when they get a mortgage. It's the same verbiage, but you greatly reduce your risk of this if you allow the bank to take first lien as opposed to 2nd lien. Basically, just a normal refinance.
Paying extra on your mortgage is definitely one way to get out of debt faster. However, the HELOC is an open-end line of credit that allows money to move in and out 24/7. A Mortgage is closed-end. This means you can put all your income into the simple interest HELOC and when bills are due, you can use the HELOC to pay your bills. Essentially no different than your checking account. This allows all of your money to reduce the "Average Daily Principal Balance" as opposed to just paying a little more each month.
We have to remember that a mortgage was never designed to be consumer friendly. It's a debt tool used by banks to segregate income. Ever wondered why car loans, student loans, mortgages, and personal loans are all structured as installment loans? It's because they are closed-end. Money can only go in and not out. This forces the consumer to only put some of their money towards the debt, instead of all of it thus staying in debt longer and paying more interest. But the #1 goal for banks is to get your deposits for Fractional Reserve Lending purposes! So, since they are segregating your income where are you leaving the portion you don't put towards your mortgage? IN THE BANK where they want it!
So, I don't think the HELOC strategy is for everyone but I don't know too many smart wealthy individuals that finance real estate with a mortgage. For the same purposes businesses don't usually get loans...they get lines!
I am currently working with Replace Your Mortgage and have found the education offered there to be really valuable. They helped me determine if a heloc in first lien position was right for me, provided a list of banks and credit unions that offer helocs with the right attributes, and offer helpful bonus content like interviews with successful real estate investors.
I am at the final stages of closing on my heloc, and am really excited to gain some ground on paying off my house. We'll be putting all our money into the heloc and paying bills out of it, effectively driving down the principle (and thus the interest payment) and our leftover money will go to the principle. I really to keep my money liquid, and using a heloc like this will allow me to pay down the house while maintaining access to the equity. This strategy definitely requires self control though.
I had discovery calls with both replace your mortgage and truth in equity, and for me the choice was an easy one. Discovery calls are free for both, I recommend reaching out and talking to them directly.
Based on my experience so far, I can recommend Replace Your Mortgage as a worthwhile investment.
I am with @Chris Mason here. In the last few weeks on this site I have seen more people saying they are shifting gears and going with HELOCs on everything. Regardless of 1st or 2nd lien position, rates on a HELOC are for the most part uncapped, capped at very high rates or have very short fixed periods. What is going on right now? What about the near future of interest rates make anyone think this is a great strategy except for people who REALLY know what they are doing. Like someone only drawing an amount that they will pay off in a very short period of time.
I don't have experience with this company in particular, but I have done a lot of research into the heloc strategy and to me it doesn't seem to be worth it. Personal finance has a lot to do with the mental side of things. Since the heloc strategy is so "messy" or complicated compared to just paying extra on your principal I think it's better to just save money and put a little extra on your principal payment each month. Plus you aren't taking on the same risk as you would be with opening a heloc. The strategy makes sense numbers wise but sometimes that isn't the best way to go. Just like when paying off debt, with a few exceptions you should pay off your smallest debts first rather than tackling the debt with the highest interest rate. It helps you stay motivated and not get bogged down in the math. In the end it's up to you what to do. But this was my reasoning. Hope this helps!
hi guys I am just learning about using a heloc as a "mortgage" but forgive me for sounding naive but....isnt a heloc an "equity" line - meaning you must have "equity" first? Equity by definition is the value of the house over/above the balance of the mortgage - this value is almost always alot smaller than the actual balance!
EX: I buy house with mortgage for $200k. The house is worth $220k. This means the equity is $20k. So how do I use $20k to pay the mortgage??
@Everett Mccurdy , I believe they are talking about replacing your 200K mortgage with a 200K HELOC but to do this you need a certain amount of equity in your home.
I'm curious what are the risks with replacing your mortgage with a Heloc?
I too was intrigued by this when I saw the video by Michael Lush so I started looking into it. Live in one unit of a 4 plex and found a Credit Union here in Seattle that agreed to take the first position of my Home, and because of appreciation and my initial 20% down payment, I was able to get the full 500k. Since my loan was 430 I had 70k open to me. Then I sold another property and instead of sitting on the cash I put it in my HELOC, that way instead of getting .05% in the bank, I was getting about 2k on it because I no longer had much of a payment (about 80k). It also has an intro rate of 1.9 percent which means in the first year alone I'll have paid the debt down to such a large extent interest rate won't make a big difference. It's capped at 7%. But I'd rather pay 7% on 100k then 4% on 350k. Simple math.
Then, all of my incoming rents and my paycheck paid it down each month. I suddenly owed about 60k in 2.5 months. Then I found a deal that I couldn't pass up so I got a massive discount on it since I was paying cash from the HELOC (really hard to do in Seattle). The money was working for me when I had access to it, and ready to go when I found an opportunity worth investing in. I've been singing the praises of this ever since I got mine done back in November, and it truly is the best of both worlds. Access to the cash when you need it, but keeping your interest payment low when you're not using it. I didn't use replace your mortgage at the time because I found the bank myself. I moved all my banking to the institution that issued the heloc. There are many advantages that I didn't realize then, that I realize now, aside from the obvious which I just mentioned.
1. I feel less exposed to the markets now because my principle is getting paid down so aggressively, a 10% swing is easy to stomach since I'm easily getting more than 10% of equity in less than 6 months (depending on the size of my paychecks which fluctuates).
2. I'm no longer compartmentalizing my debts from my earning. Psychologically, I now associate it all as one thing. Every time I write a check off my heloc account I see my debt rise. And every time I deposit rents or paychecks, I see my debts go down, my interest payment go down, and wealth go up.
3. I get a small rush each month when I see how much debt I've eliminated. I have several other rental properties and I'm going to try and get a heloc in first position on each of them as well. That way I can get access to the capital as well as pay them down faster. If I don't see any good deals then I just pay debts down more quickly while waiting for the next recession or whatever.
4. I realize that the obsession with interest rates is exactly what banks want you to obsess about. They profit from people focusing on interest rate and monthly payment totals. This is how they make money, and why banks always own the most valuable real estate in every major city. Think about it.
I wondered if it was too good to be true when I first started and I can say that it isn't. It's the perfect product, and the 30 and 15 yr fixed loans seem like such a ripoff in comparison. But it depends on if you have some equity in your home and you're cash positive at the end of every month. Most banks won't do it if you have less than 20% equity.
there's very little benefit of a fixed loan over a heloc in first position as long as you're not treating the heloc as spending money. The only small advantage is interest rate can't go up. But this is basically a non issue since when you pay your mortgage this way interest rate has a much smaller affect on the total amount of interest you pay. Banks and lenders have been very successful at getting everyone to focus on interest rate, and have profited immensely because of it.
I have yet to see any reasonable argument against doing a heloc as first position. Only people worried about interest rate and now people claiming that it's fraudulent posters. If you try to rationalize the facts of it a fixed loan has little to no rationale.
By the way, I noticed that most naysayers in here happen to be lenders...who are the people with the most to lose (lenders profit very little on this prosuct).
@Seattle Eltons thanks for confirming my thoughts.
Appreciate all of the replies since the original posting.
One of my chief concerns when contemplating this investment was the rising interest market that we are entering. The strategy may have performed very well in the 2009-2016 markets, while it may not be as advantageous with higher interest rates. I've heard the HELOC follow the prime rate -- does anyone have insight as to how that rate performed over the last 20 years? As I said, the last 10 probably won't give enough history due to the finanical state our markets were in. Must say, I'm pretty unfamiliar with how the structuring of the HELOC's interest rate works.
Overall, it seems fairly split on whether investors think this strategy could be beneficial or not. While I agree with @Account Closed points out, I think the true advantage of the HELOC is the open nature of the structure, where you could openly withdraw and deposit funds as you saw fit. You'd have to have diligence in managing this, but in all honesty, how hard is that really?
Does anyone have any negative experiences once they opened a HELOC in a first lien? I hear a lot of speculation about why it won't work or wouldn't be as beneficial, but does anyone in the community have personal experience with a HELOC deal which didn't pan out?
Thanks again everyone, appreciate the input.
And thank you @Naveed Q. , that was a great link you shared
On the down side, read the small print, terms can be changed, they can pull the credit line, they can call it due upon open ended events from yoour financial position, etc.
Yes, this stuff happens, a landlord investor had got cut off and the would not advance funds because they thought he had become over extended, that did over extend him and he hurried to sell off his houses, it was a bankruptcy in the end.
Use HELOCs very carefully! :)
I am an advocate of HELOCs for the sheer flexibility of them. I don't understand why someone would pay down their home loan faster (some of the cheapest money you can borrow) just to have all of your equity locked up in the property. This is not an issue with a HELOC. Raising rates should be a fairly obvious concern, but I will reiterate something @Bill Gulley pointed out that had not occurred to me before, although it definitely should have. HELOCs are a different breed of loan with different guidelines and restrictions. I have had four different HELOCs from three different institutions suspended at the whim of the lender. In one case I had just paid it off and was counting on access to that money. It put us in a hurt locker with no recourse, but it was relatively minor compared to if it had been the entire mortgage amount. Certainly something to consider with these strategies.
Something else to understand about HELOCs that may or may not have already been mentioned. HELOCS recast daily based that day's principal balance which reduces the interest you pay as principal decreases. Mortgages rarely recast and in fact, lenders try to keep consumers from doing so because they ultimately lose the interest profits.
A simple formula to test if a HELOC will work as a mortgage is Balance divided by Surplus divided by 12 equals Pay off in years. A $200,000.00 debt balance divided by a diference in income and expense [$8,0000.00 - $6,000.00 = $2,000.00] divided by 12 months in a year is a pay off of 8.33 years. $200,000.00 divided by $2,000.00 equals 100 months divided by 12 months in a year equals 8.33 years. This formula is accurate in almost every case. You can find calculators for this using YOUR income / expenses by searching "Equity Optimization" or "Equity Advantage" input YOUR numbers and get a result. You do not need to Replace Your Mortgage either. A 2nd Lien HELOC and even a PLOC could work. Its all in the math. Im an expert at this strategy. I can't self promote my website or company as my previous posts giving inarguable content has been removed. Its important that you do your research, test the math and see for yourself. There of course is risk to Replacing Your Mortgage with a first lien HELOC. As the primary impetus to US Bank shutting their first lien heloc product down I know all the caveats to this approach. A Professional Blend approach mitigates the risk and provides the exact if not better results. A mix of fixed and heloc blend is a safer and more advantageous approach.
I did research on heloc too. I see advantages of using heloc. But if they close the heloc line or call it due for any reason and you can not pay the heloc , can they forclouse on your house ?