Burlington, VT · Member since 2016 · 5 posts · 7 votes
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.
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.
I am using a first position HELOC instead of hard money to fund my acquisition and rehab right now.
My heloc does not require any principal payments. I can keep a balance paying interest only, up to 10 years according to the guy who closed the loan for me. However after reading the mortgage that was recorded at the ROD, I do not see any mention of this. Would that fact be on the promissory note?
I am concerned about the bank calling this balance due. Has this happened to anyone?
Additionally, it sounds like banks open larger lines of credit to businesses. Does anyone know how to build large credit lines with banks? Ideally I would like to have a large credit line open that functions similar to a HELOC. The low interest only payments really save you money on holding costs.
Where I am in the business of commissions, passive rental income, and capital gains. What will banks want to see from my business to underwrite a large line of credit? Would a rental account be considered an accounts receivable and thus something to secure the credit line?
Thank you
HI Rich,
I have a commercial 5 year term line of credit at fixed 4.99% with a local credit union that I utilize as well.
They lend up to 80% LTV and 1.25x debt coverage ratio (DCR) based on your personal financial statement (PFS), asset statements, tax returns, W2's, and paystubs to document your PFS.
Its similar to these variable HELOC products on primary and secondary residences except its fixed and has a clause in the note that allows for renewal. Now obviously the "renewal," is not guaranteed but this product has functioned beautifully like some others have mentioned on this thread. I did ask about this renewal feature to see what could increase or decrease its chances, but short to say as long as you're paying on time he felt they'd be able to renew. I think it also depends if the particular bank has enough room in their lending bucket left (bank appetite) for commercial real estate and real estate backed assets (notes). What I do is I keep 3-4 commercial banking outfits on back up in case I need to take out this line of credit and jump ship.
I basically dump in all excess income flows into that bucket to greatly knock principal down.
Since interest is accrued daily after 12:00 AM each day it allows interest to constantly be calculated off a lower principal since there are constant flows going into the account through out the month.
In the long term, wouldn't it pencil out better to get your maximum mortgage amount, invest the desired amount into another property/venture, and leave your excess slush fund in a stock market index?
Also, interest is only tax deductible on HELOC amounts up to $100k unless the HELOC is used for buying or improving your home.
... interest is only tax deductible on HELOC amounts up to $100k unless the HELOC is used for buying or improving your home.
If that's true, I'm surprised I've never seen anyone else mention that. Are you sure that rule doesn't mean: "unless the HELOC is used for buying or improving your home OR taxable income producing investments"? Because as far as I know, if the funds for those other investments are borrowed (but not against your own home), the interest payments ARE deductible (ie. not limited to $100k borrowed). I just don't see the difference from an IRS perspective. Who's right?...
@Thomas Mattausch, and are you also suggesting that all your HELOC's interest payments for the first $100k borrowed are deductible, REGARDLESS of what you spend the money on?
(Otherwise, why even have the "unless" clause?) [Your vote above suggests I'm on the right track].
But I'm thinking you may have just meant: interest is deductible up to $100k borrowed for MAINTAINING value, but interest on amounts above $100k need to show IMPROVING value?...
@Rich Hupper@Albert Bui To Rich's point/question: Could you could create a corporation which had a line of credit that encompassed multiple properties which were held in the corporations name? Similar to an LLC, but the advantages would be a lower tax-rate than a pass through entity, plus the combined assets which could be held as collateral for the bank to extend an even larger line of credit. Perhaps this would be a business line of credit vs. HELOC? Anyone have insight as to that?
But to @Seattle Eltons earlier point (PG 1), the combined LOC (business or HELOC) can be used to purchase deals right on the spot without having to seek out other investors or private capital. I feel like in the long run, you could string a few quad-plexes together with this strategy, use excess income and cash flow the cash flow to pay off debt portion quickly and go out and have access to a potentially very large source of cash which could be used to gobble up the best deals? The more I think about it, the more sense it makes.
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.
@Brian Simmons - I live in Utah. I'd like to talk to you about your experience. Send me a quick email kevin.nelson1020@gmail
This is my first post. I've enjoyed reading comments from others, so today I signed up.
I, too, am thinking of a HELOC in a first lien position, but I'm having trouble convincing my financial advisor.
Wondering also about if they can foreclose or call it due. That's a good question, and we need the answer.
Sorry, I don't know the answer.
Is there a calculator that I could enter in my info to PROVE the balance would pay down faster? I've watched videos about it and read a lot of articles and know someone who has done it, but I'm getting sideways looks from my banker, etc.
Great thread - thanks to all contributors for your insights! I spoke with a broker at replaceyourmortgage.com. Their first lien HELOC strategy is to move *all* your cash flow through the HELOC account: your rental income and expenses + personal income and expenses + your other businesses' income and expenses.
My accountant may have a heart attack at the prospect :)
Has anyone run into problems with the IRS or their CPA due to moving blended cash flow through one HELOC?
@Brian Simmons and @Kevin Nelson care to post an update on your experience with this HELOC strategy? I too have been thinking about it and would love to know your experiences. Thanks!
We have used the 1st position HELOCs on both homes we currently own (just sold one). We rented one home and used the rent as payment to the HELOC (they only usually require interest payments), as well as directed our incomes to it as well. The second home HELOC was receiving interest only payments at that time.
this enabled us to pay off the first home...which was a buy/hold home that appreciated quickly in the Hawaii market. We just sold that home, but missed the capital gains time line by 1 month (another story), but will still able to take that money/profit and pay off my current home..bought/built in 2012 :-).
we were lucky with market timing, but this HELOC method did give us flexibility and "increased our equity" since we paid down principal quickly while the market rose quickly.
MANY folks get into trouble with this method if not disciplined though.
@Brian Simmons and @Kevin Nelson care to post an update on your experience with this HELOC strategy? I too have been thinking about it and would love to know your experiences. Thanks!
Hey everyone. Multiple people have reached out to me directly to get my take on this strategy. I didn't use the "replaceyourmortgage" guys and I never met with them. I just did my own thing. I guess I am happy I did it but it is too early to tell because I pulled money out to invest it. My investments are doing well. However, because my payment is amortized over 15 years my debt ratios are too high to qualify for a loan to buy a rental property (monthly payment is P&I) and so I can't use the money in my HELOC to buy rental properties for real estate...so that was a downer. This was one of the main reason I did the HELOC strategy...to buy rental properties and pay less interest on my mortgage. Had I known that I wouldn't have been able to qualify to buy a rental property I probably would've just taken out a HELOC in the 2nd lien position but in the end it has worked out because I am happy I am not investing in real estate right now cause the cryptocurrency market is booming and that is where my money is.
Does the strategy work...I don't know cause I am not living it to the T. Yes, all my income goes to my HELOC every month but my mortgage balance is higher now than when I took out the HELOC because of my investments.
I have learned to diversify...paying down your mortgage faster is one way to save money but if you use your equity to make more money than you would've saved paying down your mortgage than the later option is better. You just don't know if your investments will pay off and that is the gamble. In reality, if you borrow money and are paying 4.24% on it than you need to make an 8.5% ROI to have it be a better option than just paying down your mortgage faster. Again, having known what I know now I would've probably just got a HELOC as a 2nd mortgage because I wanted to invest in rental properties but I didn't realize this until after I had the HELOC. Plus my rate has gone up to 4.25% and it started at 3.99% which they predicted would happen so this wasn't a surprise.
Having a HELOC as a 1st mortgage is nice cause of the flexibility but it really is all about being disciplined on the strategy and I haven't really done that. My hope is that even though I have pulled money out that in the end I'll be paying less interest because I am making 2 payments a month and taking advantage of monthly accruing interest but I am not sure I can prove its success at this time.
Signing on for the first time in about a year and glad to see people are coming around to the idea of using HELOCs in lieu of the conventional mortgage. I was a part of a few spirited debates regarding this topic over a year ago with many of the major details being covered here.
I've created a spreadsheet that I've been tweaking over the past couple of years that I occasionally show people to demonstrate the difference between a conventional mortgage, a conventional mortgage while paying an extra $X, and a 1st position HELOC (replacing the mortgage). You can tweak the numbers to your specific scenario and find a break even point with the variable HELOC interest. The savings are generally drastic.
The one thing I always get questioned about is the "bank account" column which I use to show the major difference between a HELOC and a mortgage and the ability to use your liquid assets to reduce your HELOC balance and therefore further reduce the amount of interest you pay.
I'm in Utah and been hunting for some reasonable terms on the 1ST OP HELOC. Found one that we ended up going with, but after reading this thread it confirmed there are better terms out there. @ Seattle Eltons what institution were you able to find a 7% cap with? Can you relay info?
So, I think I get the idea that you take out a heloc to pay down your mortgage and keep a lot of your monthly cash flow money in the heloc so you pay less interest on that money for many days of the month. Would this strategy work with say a $20,000 heloc, where you write a $15,000 check to your mortgage and then work to pay off the heloc and repeat?
So, I think I get the idea that you take out a heloc to pay down your mortgage and keep a lot of your monthly cash flow money in the heloc so you pay less interest on that money for many days of the month. Would this strategy work with say a $20,000 heloc, where you write a $15,000 check to your mortgage and then work to pay off the heloc and repeat?
Why take out a (higher interest rate) HELOC to help pay off a low interest rate mortgage?
[I've read all the arguments - there's plenty of threads besides this one on the topic].
If you're that desperate to pay off a mortgage (that's likely costing less than your homes' appreciation), then why not just "work to pay off the mortgage and repeat"?
ie. Put your excess income into extra "principal-only" payments! Welcome to BP...
Coming back to the original question I believe the following:
The math used for HELOC calculations is sound and the main benefit lies in daily interest calculations on the remaining balance combined with the fact that any unused monthly income lowers the balance of the loan amount
To make the strategy work one needs to be disciplined. If that is the case amazing flexibility is available, especially for real estate investment opportunities
Many posters caution about the ability of the bank to call on the loan. The same posters advocate for a regular mortgage with possibly extra principle payments. That means the assumption is that a person would qualify in the first place. Should a HELOC really be called, that same person would instantly qualify for a regular mortgage, everything else remaining equal - so this is a very theoretical risk (besides the fact that banks don't normally call lines of credit that are being served regularly. If you are getting flagged and considered to have your line called, you have probably given the bank a reason. Otherwise you are not important enough to them to even be considered. We love to believe that the banks see as as a customer in human form but that is not true. we are numbers in spreadsheets that have to perform against expectations. If you do, you don't get flagged.
I believe research is valuable and should be rewarded but the main value in Michael Lusts program is the bank list. The price is pretty steep for that. One can find lenders and apply criteria freely available to negotiate a good deal.
As I am getting deeper and deeper into the topic of real estate investing, I appreciate people whoa re willing to find creative ways to achieve goals. Bankers and media have conditioned us to look at mortgage first even though the math clearly indicates that other tools have faster, better priced outcomes
@Axel Meierhoefer Great post, thank you. To summarize your post, the math for a first lien HELOC makes sense as long as you're disciplined and committed to the strategy. One needs to be conscious of the bank's ability to call back the HELOC, but, while important, the holder of the HELOC would (typically) still be able to get a traditional mortgage in this worst case scenario.
I would appreciate your elaboration on bullet point #4 -- what would you recommend as the best way to generate your own "bank list" if someone is interested in pursuing this strategy independently? What are some of the key points of consideration one should observe before taking out a first-lien HELOC?
I agree with your summary. What I am finding as I am pursuing this strategy myself is that it all starts with the banks you know and the people you know in those banks. Though that sounds good in theory, because I have been dealing with the largest banks in the past, I have found that they are the least flexible. So if banks, then small and local and flexible ones.
One trend , to use David Greene's quote, I am detecting, is the question of you doing work versus others doing work for you. There are mortgage brokers out there who love to find a deal for you and they get money on commission. I use a number of them to search their connections in the lender community and present offers to me. Yes, they might be a little more expensive on first glance, but when you actually get to negotiating, you will deal with the lender and can see how much commission you find the broker deserves, and how much you can/want to afford.
I have not done it yet, but for my upcoming deals out of state, I am planning to use the BP community to help me find brokers and banks in the markets I am interested in and begin working with them.
I always emphasize building relationships first and then be fair and dependable and trustworthy in those relationships. That has always served me well.
So when I suggest to create a path outside of the typical convention, I encourage you to keep learning all the time. Just here on BP I have learned and keep learning a ton about things I never considered. I listen to podcasts of other organizations as well. What attracts me are titles of blog posts, podcasts, books, etc., that describe an unconventional approach. In my experience I could sum it up like that:
"Most people are like lemmings. They follow what they are being told and blindly walk with the crowd - off the cliff - into their demise. Don't be a lemming - be an innovator and leader."
If you apply this approach you would not have had a problem with the real estate bubble, or the financial bubble, or any of the recent crisis. Actually those who are innovators and leaders benefited from all the other people's misery and misfortune, and multiplied their portfolios for pennies on the Dollar.
Putting it another way: You can eat at McDonald's everyday and receive a very predictable but also unhealthy and lame meal. Or you can seek out the innovative chefs who cook the cool meals that make your mouth water for more. You might say finding these chefs is more work but if you ever tasted the rewards of that work, you will never go back to McDonald's - except maybe to punish yourself :).
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.
HI Elton,
I've had similar experience to you Elton integrating differing flows into a line of credit to greatly amortize the balance and reduce the volume of interest due/paid. Rate, to a certain extent is inconsequential when the balance is being paid/amortized down this fast.
What seattle bank does an intro of 1.9% and cap at 7% ?
The best cap I've seen so far is the around 10.85% with starting around 4.30% or so at CMG mortgage - "All in One" which packages the checking/swap account + ARM loan feature + line of credit.
Most HELOC's I've seen were 18% cap with monthly adjustable. Some credit unions offer lock in periods but you have to manually trigger or request that to lock in 5-7 year periods.
Albert, I think I'm remembering that cap wrong and got it confused with a 7/1 arm that I had that had a reset cap of 7% after 11 years or something like that. Sorry for misleading. I think the product that I have caps at 12 or something.
I'm currently paying about 5.5%, up from 4.5% early last year. Not a huge deal, since I now owe 300k compared to the 400k I owed as recently as August. Low rates are a nice bonus, but not high on the priority list for me. Again though, if you're barely squeaking by on the monthly payments and other expenses, think very hard before getting involved in this strategy. It won't help nearly as much.
So, I think I get the idea that you take out a heloc to pay down your mortgage and keep a lot of your monthly cash flow money in the heloc so you pay less interest on that money for many days of the month. Would this strategy work with say a $20,000 heloc, where you write a $15,000 check to your mortgage and then work to pay off the heloc and repeat?
Why take out a (higher interest rate) HELOC to help pay off a low interest rate mortgage?
[I've read all the arguments - there's plenty of threads besides this one on the topic].
If you're that desperate to pay off a mortgage (that's likely costing less than your homes' appreciation), then why not just "work to pay off the mortgage and repeat"?
ie. Put your excess income into extra "principal-only" payments! Welcome to BP...
A couple of reasons. You can't realistically apply, as aggressively, extra payments to a fixed loan like a heloc due to the open nature of the heloc. I literally plough all my money into my debt every month without concern of lost investment opportunity or concern that something is going to come up that I have to pay for. With a fixed, it's simply not possible to replicate. So you could pay down a scheduled mortgage down each month. It's effectively burying money that could be used elsewhere, and you can't do it as aggressively since no one is going to be able to foresee how much money they can possibly pay extra each month. Before doing the HELOC thing I was paying an extra 350 per month. Eventually I was thinking about increasing that, but ultimately realized that my money was better off somewhere else. I look at my heloc as a holding area. While it's not being put to productive use, it's reducing interest paid. It's literally having your cake and eating it too, except for the interest rate being a bit higher and fluctuating (mine is at 5.5% and could go higher).
@Seattle Eltons, you "ultimately realized that my money was better off somewhere else"?
Really? Where?
ie. Using your argument, the only way your $350/m play money is better off elsewhere is if you're actually putting a lot more than that back into your mortgage/HELOC each month, in which case, why couldn't you have been doing that in the first place?
ie. If any month goes by that you redraw/re-invest more than you would have normally paid off your mortgage, then you've taken steps backwards!
["But there was this unrepeatable opportunity that my HELOC was useful for"!] Yeah yeah...
@Seattle Eltons, I just realized that my post above makes it look as if I'm not in favor of your HELOC method, which is untrue. Your "money was better off somewhere else" clause makes perfect sense, providing that you (and everyone reading) acknowledge/realize that this means that you likely will not pay your home off any quicker than if you'd just paid out your original mortgage over 30 years!
It's just the the "Replace your mortgage" rhetoric is always promoted as a way to pay off your home sooner - when the promoters/lenders know that in reality, most participants cannot/won't maintain the discipline required to do so.
Whereas, for wise investors (no doubt including yourself), paying off your home sooner will never need to be your reason for replacing your mortgage with a HELOC! Cheers...
@Brent Coombs I used the nice HELOC calculator that one of the previous posts mentioned before and ran a bunch of scenarios varying the interest rate on the HELOC and increasing it year over year to kind of stress test the model. What I found was that I could almost TRIPLE my current fixed interest rate on my mortgage, and increase that interest rate at 0.5% more each year, every year and I would still pay the same amount of interest over the life of the loan as my 30-year fixed at 3.75%. and even in that scenario, I am still paying my mortgage off in 126 months as opposed to 360.
The key to this strategy is recognizing that your personal cash-flow is a tool that can be utilized to aggressively decrease your principle balance on a daily basis and avoiding that interest. Yes your interest rate will be higher, but your balance is also a factor in the payment equation. 350K at 3.75% vs 100K at 14% is roughly the same interest payment.
It took me some time to put it all together before I had that Ah Ha moment, but the math works. and yes, there is a requirement for the owner to be disciplined with their finances. But I imagine anyone that is focused on paying their mortgage down faster is already on the right track as far as personal finance.
Your point of the marketing towards individuals that want to pay off their mortgage, but then incur more debt for investment properties is understandable. But I can see how that is a natural transition. If you are executing on this strategy and can see first hand how CASH FLOW is a very powerful tool with debt, then it makes sense that people would start to look at rental properties in the same way, because they are all about CASH FLOW.
I will definitely be pursuing this HELOC strategy for my rentals and primary residence.