Replace your mortgage with a HELOC

27 Replies

Hey Folks,

I've been looking into the concept of replacing our home mortgage with a fixed rate HELOC as described on sites like Replaceyourmortgage.com. They want about $2000-2500 for their coaching and information. It seems like a good idea in a lot of ways but curious if anyone out there has done this and how it went. Thanks for any advice. This is clearly a big decision because if you replace your mortgage you can't get the same one back!

Thanks,

Josh

@Josh Saul are you saying they want you to pay $2000-2500 fees for them to tell you the tricks?

Dont pay it! There has been some speculations online "how to pay down your mortgage quickly with HELOC". Look up online.

I was considering that until I put everything on spreadsheet, then play around with all kinds of scenarios.

In conclusion, it's very tricky and not worth the hassle/risk. It's always easier to just put extra money in your monthly mortgage.

Fyi, HELOC typically are variable rates. If they offer you a guaranteed fixed rate which is LOWER than your current mortgage rate, may be worth a try. Otherwise, walk off.

Originally posted by @Josh Saul :

Hey Folks,

I've been looking into the concept of replacing our home mortgage with a fixed rate HELOC as described on sites like Replaceyourmortgage.com. They want about $2000-2500 for their coaching and information. It seems like a good idea in a lot of ways but curious if anyone out there has done this and how it went. Thanks for any advice. This is clearly a big decision because if you replace your mortgage you can't get the same one back!

Thanks,

Josh

 This was debated extensively here... https://www.biggerpockets.com/forums/61/topics/269...

At some point my eyes started glazing over lol. I was researching the same topic last night and found that thread. Seems a handful of people were pro and a multitude of people against it. I still have not found anyone who actually did it and was successful. 

Big nothing info. At the end of it is some "guru" wanting a few grand to impart some knowlege. Then they direct you to a loan company where you rack up one debt to pay another. 

Just send in additional principal each month. There, i just saved you 2500 bucks. 

@Josh Saul , if you're already disciplined enough to spend less than you earn, then as Peter suggested, put every extra dollar that you haven't spent each month into a "Principal-only" payment, and make sure your Lender knows that's written on their records. Also, make sure you keep your own records/receipts of those specially allocated payments.

Sure, you'd never have access to those funds again as you might with a HELOC, but, you need to decide: are you really doing this because you want to be out of debt asap? [If not, then why are you even thinking about this?]

Afaik, there's no way a HELOC Interest Rate will be at as low an Interest Rate as your typical mortgage.

HELOCs should be for when you don't want/need to be out of debt in a hurry! And they know that!

Ergo: Their $2000-2500 "coaching and information" fee runs perilously close to being an outright scam! My 2c...

I think the model of the current conventional mortgage is outrageous. Why is it even legal to be forced to pay interest on a 20-30 years loan UPFRONT when you may not even have the loan that long?! You should pay interest for the ACTUAL amount of time you are borrowing the money. There are no justifications that excuse this financial piracy. So I like the CONCEPT of the HELOC but want to talk to people who have actually done it from start to finish. Sometimes we need to think outside the box even if the HELOC thing sounds nuts. There are definitely some products out now where banks/lenders are offering fixed rate HELOCS, 20-30 year draws and a built in banking account with debit card/checks. People are clearly interested. I just want to hear from someone with experience.

Originally posted by @Josh Saul :

I think the model of the current conventional mortgage is outrageous. Why is it even legal to be forced to pay interest on a 20-30 years loan UPFRONT when you may not even have the loan that long?! You should pay interest for the ACTUAL amount of time you are borrowing the money. There are no justifications that excuse this financial piracy. So I like the CONCEPT of the HELOC but want to talk to people who have actually done it from start to finish. Sometimes we need to think outside the box even if the HELOC thing sounds nuts. There are definitely some products out now where banks/lenders are offering fixed rate HELOCS, 20-30 year draws and a built in banking account with debit card/checks. People are clearly interested. I just want to hear from someone with experience.

"Outrageous"? I just looked at the amortized payments of an $80,000 mortgage over 30 years at 5% interest (if I put $20k deposit on a $100k purchase). What would I expect to pay in interest per year on that? Year 1 = $4,000 interest, if it was an interest-only loan. What did I see in the amortized repayment schedule? Even in the first year, I was never required to pay the full $4,000 interest, for the simple reason that some principal was being removed, every payment. And depending on how long I asked the loan to be for, of course the proportion of the total amount each month allocated to principal must be much smaller at the beginning, than towards the end.

ie. Not outrageous at all! Cheers...

[Remember, with a conventional Loan, your Lender has given you the full loan - "UPFRONT"!]

@Brent Coombs   So if we use your example and say that you are essentially getting $80K loan at 4% and it was not amortized over 30 years then paying the interest for the year would be $3200 or about $267/mo and $222/mo (for 30 years).  The amount in interest would decrease every payment because you would be paying down the principal.  You're telling me that it is more fair to the homebuyer to pay substantially more interest for the first half of the loan and less principal just to have an even payment amount over the course of the loan?.  Most lenders know that the average home buyer is in that home 10 years or less. They front load the loan so they get their interest money back first and keep the homebuyer slaving away to make payments without realizing equity in the principal until the very end of the 20-30 year term.  Then we're told that investing in your home is best thing you can do - for the banks.  You should pay interest on the amount of time you owe the money.  Lets see the amount we pay towards principal stay the same and interest decrease over time.  Or how about at least having the OPTION to pay it off this way if its possible you may not live in the same place 30 years?
 

Originally posted by @Josh Saul :

@Brent Coombs  So if we use your example and say that you are essentially getting $80K loan at 4% and it was not amortized over 30 years then paying the interest for the year would be $3200 or about $267/mo and $222/mo (for 30 years).  The amount in interest would decrease every payment because you would be paying down the principal.  You're telling me that it is more fair to the homebuyer to pay substantially more interest for the first half of the loan and less principal just to have an even payment amount over the course of the loan?.  Most lenders know that the average home buyer is in that home 10 years or less. They front load the loan so they get their interest money back first and keep the homebuyer slaving away to make payments without realizing equity in the principal until the very end of the 20-30 year term.  Then we're told that investing in your home is best thing you can do - for the banks.  You should pay interest on the amount of time you owe the money.  Lets see the amount we pay towards principal stay the same and interest decrease over time.  Or how about at least having the OPTION to pay it off this way if its possible you may not live in the same place 30 years?
 

You asked: "You're telling me that it is more fair to the homebuyer to pay substantially more interest for the first half of the loan and less principal just to have an even payment amount over the course of the loan?" My answer: YES! 

You don't get to say: I don't want to pay interest until I've decided when I'm ready to pay it off!*

* [ie. While I do say: "You should be charged interest on the set time you've agreed to owe the money", that does not translate to: You should get a lot of that interest back if you pay it off quicker"!]

Know this: same-amount payments for the duration, is a (great) feature of conventional loans.

But, no-one is preventing you from making extra "principal-only" payments, to shorten the loan!

That's the way to save on interest!

@Josh Saul , you really should try to get a basic understanding of the principals of compound interest and time value of money.  in an amortized loan you pay interest on the amount owing at the time of each payment.  since more principal is owed at the beginning of a fully amortized mortgage you pay more interest at the beginning.  since less principal is owed at the end you pay less interest.  This means as time goes on more of the payment goes to principal, which is the feature that allows the entire loan to be paid off in a given amount of time with equal monthly payments.

Before fully amortized mortgages became available, the home buyer had two options.  one was to get a 5 year interest only loan, with the result that the entire loan was due in a lump sum in 5 years and no principal had been paid down.  The other option was to get a ten year loan where each payment paid a fixed amount of principal plus interest.  This resulted in much higher payment amounts early in the mortgage, with payments unaffordable to most people.

The advent of the 30 year fixed rate mortgage in the United States has made home ownership possible for a percentage of the population unheard off in any other country.  it has also led to the establishment of a liquid market for homes, allowing people to move up or down the size ladder and change locations as needed.  in countries without an established mortgage access people tend to either rent all their live or stay in a family home forever whether they'd like to move or not.

To those of us who remember 13 and 14 percent mortgages, your complaints sound like not only from someone who does not understand interest, but also someone who has no understanding of how economy really works and thinks he is 'owed' his 'rights'.  Its probably not your fault, you grew up in an era of participation trophies and taught by socialist academics who believe government regulation is the answer to every problem.  in any case no one will ever force you to get 'ripped off' by the evil financial manipulator, you still have many choices.  You can pay cash for a house; see if one of your left wing professors will lend you the money under terms more beneficial to yourself, of you can move to one of the few remaining countries more closely aligned with your economic philosophy, Cuba or North Korea.

@Brent Coombs  

If someone borrows money and then pays back the money they should only be responsible for the amount of interest owed over that period of time.  End of story.  The banks and mortgage brokers make money originating the loan regardless of whether or not the money comes back to the lender the next day.  Borrowers are also required to pay mortgage insurance to get the loans further protecting the lenders.  They are protected all the way around - not to mention providing loans to unqualified borrowers that led to our last financial crises. (Yes I know all those people should not have taken out loans they couldn't pay - borrowers fault, don't blame the banks)  Lenders get paid upfront then again over the 1st half of the loan and the buyer only really starts to acquire equity on the back half?  Hold on to that all you want.  I posted in Innovative Strategies hoping there were some but it seems the only brilliant ideas you have to offer are to make extra payments towards principal.

@Don Konipol

I'm glad you think amortized mortgages are the answer to creating wealth equality through home ownership.  Although I get the feeling you don't believe in the concept of wealth equality and are more a feudal tenure type of guy. That's ok.  Things change.  There will always be "the way it was before" and a need to create something new that works better.  BiggerPockets exists because people are tired of following conventional paradigms.  This may not be the best place for you.  

And I get that you want to bash an entire of generation for trying to shield their kids from the challenges of growing up.  Maybe they should see the big bad world for what it is.  I'm guessing you made your kids suffer the same way you did.  It builds character right?  In any case, just remember that those bleeding heart liberals with participation trophies are going to be pushing your wheelchair in the not too distant future.  

Josh, mortgages charge you interest based on the outstanding balance owed each year. Because you owe most the day you take out a loan that’s when you pay the most interest. Here’s a simplified example:

Loan taken out for $100,000 at 10% interest:
Annual payment made of $25,000

Year 1 interest = 10% * 100,000 = $10,000
Principle paid = $25,000 - $10,000 = $15,000
Principle due at end of year 1 = $100,000-$15,000 = $85,000

Year 2 interest = 10% * $85,000 = $8,500
Principle paid = $25,000 - $8,500 = $16,500
Principle due at end of year 2 = $85,000 - $16,500 = $68,500

Year 3 interest = 10% * $68,500 = $6,850
Principle paid = $25,000 - $6,850 = $18,150
Principle due at end of year 3 = $68,500 - $18,150 = $50,350

Year 4 interest = 10% * 50,350 = $5,035

As you can see, as the loan progresses through time you owe less principle and so you are charged less interest. By year 4 interest is half of year 1 because you owe half of what you owed in year 1. Banks are charging you the same rate (10%) but you have the advantage of having paid off a good chunk.

As far as fees charged up front for inspections etc, everyone needs to make a salary for work provided.

As far as your HELOC vs mortgage question, I use a hybrid approach. My house is half on a standard fixed rate mortgage and half available on HELOC. This let’s me cheaply and quickly access additional funds which can be paid off quickly without penalties.

Originally posted by @Josh Saul :

@Brent Coombs 

If someone borrows money and then pays back the money they should only be responsible for the amount of interest owed over that period of time.  End of story.  The banks and mortgage brokers make money originating the loan regardless of whether or not the money comes back to the lender the next day.  Borrowers are also required to pay mortgage insurance to get the loans further protecting the lenders.  They are protected all the way around - not to mention providing loans to unqualified borrowers that led to our last financial crises. (Yes I know all those people should not have taken out loans they couldn't pay - borrowers fault, don't blame the banks)  Lenders get paid upfront then again over the 1st half of the loan and the buyer only really starts to acquire equity on the back half?  Hold on to that all you want.  I posted in Innovative Strategies hoping there were some but it seems the only brilliant ideas you have to offer are to make extra payments towards principal.

My main point has been: "Replacing your mortgage with a HELOC" works on much the same principle anyway, and you would be wasting your $2,500 "coaching" fee, just to find that out!

You did say one wise thing: "if you replace your mortgage you can't get the same one back!" Amen...

Updated 8 months ago

ie. Think VERY carefully before jumping out of the frying pan!

Different strokes for different folks!

I actually talked to the guys @ replacemymortgage. They wanted me to waive the only factor that kept their skin in the game, I told them; no thanks. But I did get enough information from them to start digging. That led me to doing the rest of the leg work. It took a lot of calling around to different banks and actually going to visit banks and credit unions. I felt like a fool at time but nonetheless I got the info I needed.

The biggest thing the strategy is preaching is discipline. People are going to tell you do this, people are going to tell you to do that. What works for one, blah blah blah…

I've did the research and I’ve ran the numbers. And the way my life is set up, I have a checking and a saving and I have to transfer money... (Kevin Hart Joke)

But seriously; I've put in an extensive amount of research on this. I run the number every day and became obsessed with finding out more. I have built my own tool directly based on the information I received from a financial institutions; so… I’m good.

All this has led to the conclusion that I’m going to execute the strategy myself.

I PERSONALLY see the benefit in it.

I PERSONALLY think it makes sense.

I PERSONALLY know how to make it work for me.

And I can stand on my own and explain why it makes sense.

If anyone wants to know more hit me in the DM and I’ll try my best to explain why I think it will work.

@Charles Craig , good for you. However, I can almost guarantee that as you go along, well before your mortgage/HELOC is paid out, you will find an excuse to borrow against it again.

Therefore, it will not have worked!

(But my point would be: why should it work anyway? There'll always be opportunities to make more profit than your HELOCs Interest would cost you, so why wouldn't you take 'em?)

Think of how much investing you won't be allowing yourself, because of your (theoretical) "discipline" of always paying every excess dollar back into your HELOC! [Time for a re-think?]...

I haven't done it, but researched enough to, I think, understand the concept.

 The way I'm going to possibly use it is:

(1) always plan to have a HELOC balance for investing - every time I pay it down $20k, take $20k and put down on an investment.

(2) utilize the "float" between receiving income and when bills are due to artificially lower the average daily balance.  This isn't a huge deal in your personal finance calculations, but with $10k or $20k in rents coming in at the first of the month vs when bills and mortgage payments are taken out, adds up.

@Josh Saul then go commercial, they don’t front load like they do with 30y as it’s normally a 20y with 5y arm. Catch is you will need to have more downpayment money, and likely pay a little more interest vs being subsidized by the bank to get you financed. 30y mortgages all come down to Government wanting more home ownership.. when politics put their hand in the pot, you know things get upside down...

I think @Don Konipol summed it up nicely.  Truth is, a lot of people could benefit from some basic (or maybe more advanced) lessons in finance and accounting.  A lot of these "coaching" programs manipulate numbers and present them in inaccurate ways to force an emotional response.  Using terms like "front loading interest" is completely inaccurate.  If that was true, your entire early payments would be interest-only.  If you look at an amortization schedule for any loan, and analyze any payment, you will see the interest paid on that payment is only the interest due on the balance of the loan at that moment.  I.E., take a $200,000 loan, at 5%, on a 30 year schedule.  Your monthly payment is $1073.64.  Your very first payment has the principal paid-down at 240.31, and the interest of $833.33.  

The monthly interest on a $200,000 loan at 5% is $833.33:

$200,000 * (.05/12 months) = $833.33. 

Clearly, no manipulation of "Front loading interest"

As far as the "innovative Strategy", this topic has been commented on extensively.  Check this thread:

https://www.biggerpockets.com/forums/49/topics/329...

The only proponents are ones that "feel" or "think" this should work.  And the opponents clearly showed math that showed that it doesn't or the effects are marginal (and not really the result of the strategy, but of other factors).  Bottom line, you are shifting debt from  one loan that is fixed and low interest, to another that is variable and higher interest.  Bad debt management if you ask me.

Originally posted by @Levi T. :

@Josh Saul then go commercial, they don’t front load like they do with 30y as it’s normally a 20y with 5y arm. Catch is you will need to have more downpayment money, and likely pay a little more interest vs being subsidized by the bank to get you financed. 30y mortgages all come down to Government wanting more home ownership.. when politics put their hand in the pot, you know things get upside down...

Levi, I can tell you're being sarcastic at Josh's expense (lol), but what if he doesn't get it?...

Absolutely.... I’ll find a reason. That’s the whole point. I intended to turn myself into the bank. So that’s how it’s going to work. It’s really simple if you change your approach to thinking about mortgages and financing. 
I love how you just attacked my way of thinking with nothing  but your own perception and how you handle things. 



Originally posted by @Brent Coombs :

@Charles Craig, good for you. However, I can almost guarantee that as you go along, well before your mortgage/HELOC is paid out, you will find an excuse to borrow against it again.

Therefore, it will not have worked!

(But my point would be: why should it work anyway? There'll always be opportunities to make more profit than your HELOCs Interest would cost you, so why wouldn't you take 'em?)

Think of how much investing you won't be allowing yourself, because of your (theoretical) "discipline" of always paying every excess dollar back into your HELOC! [Time for a re-think?]...

Originally posted by @Charles Craig :
Absolutely.... I’ll find a reason. That’s the whole point. I intended to turn myself into the bank. So that’s how it’s going to work. It’s really simple if you change your approach to thinking about mortgages and financing. 
I love how you just attacked my way of thinking with nothing  but your own perception and how you handle things. 



Originally posted by @Brent Coombs:

@Charles Craig, good for you. However, I can almost guarantee that as you go along, well before your mortgage/HELOC is paid out, you will find an excuse to borrow against it again.

Therefore, it will not have worked!

(But my point would be: why should it work anyway? There'll always be opportunities to make more profit than your HELOCs Interest would cost you, so why wouldn't you take 'em?)

Think of how much investing you won't be allowing yourself, because of your (theoretical) "discipline" of always paying every excess dollar back into your HELOC! [Time for a re-think?]...

Charles, it's ok. I'm happy for you to be making exactly the same point as I was. But given the OP's reference to the replaceyourmorgage website: (eg."pay off the principle (sic) of your home much quicker...on average, in 5-7 years. It's what the wealthy have been using for years"), I had been wondering if you were falling into the same misleading mixed metaphors, per their ad. 

Notice it doesn't say "It's what the wealthy have been DOING for years" (ie. that's a provable lie).

ie. Those same "wealthy" would not be using HELOCS to pay off their home quicker (but, would always have that option - whether they used HELOCs or mortgages, because they're already wealthy. They never become wealthy through spending every excess dollar paying off low-interest Loans!) So, I'm very pleased you didn't get sucked in by their hyperbole! Cheers...

Radio ad here was “Own your home, lease your car!” Saying that houses appreciated and cars depreciated. True. Absolutely true. So who owns the car you lease? The guys paying for the commercial.
Run your own numbers...and beware any ad professing to tell you a “secret,” especially if they say it is a secret only millionaires know.

@Josh Saul late to the post, but I am in the application process of doing this with my primary residence so I can access funds to buy more properties, and not have equity just sitting there.

I have talked to the replaceyourmortgage.com people. Good people, and I like the concept, but I don't need to spend $2k on their course to figure it out. I did find my own lender who will do the HELOC with no closing costs and a great initial rate. Biggest risk with this is the variable interest rate, but the HELOC I found has a fixed rate option. Thanks!

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