HELOC payoff strategy

189 Replies

Twice recently people have told me of this new strategy to use a HELOC to pay off your mortgage faster. You essentially take out a HELOC to pay off your first lien, and then use that account to direct deposit your paycheck and make it your primary banking account.

From what they are telling me, it seems you can accomplish the same thing by making extra payments on your loan.  

The difference is your mortgage is fixed for 30 years and the HELOC is variable with an annual fee

This sounds stupid.  What am I missing? 

I suppose if you had a high-rate mortgage, that could work, or it could be that you wanted flexibility in your payment amount since HELOC can be interest-only. I don't get any way that it pays off the note any faster; the interest charged on the HELOC is going to be based on the outstanding balance. If you were in the beginning of your mortgage, it might be that because your payments are amortized, to have the same payment amount each month, the fixed mortgage would be charging you a higher amount of interest than what you'd be paying on the HELOC.

Those would be my guesses. 

@JD Martin - Two people recently have told me it is the greatest thing since sliced bread. But it sounds more like a sales pitch for the HELOC broker who gets an annual fee and adjustable rate. I just want to make sure I am not missing something.

This method is pushed heavily by Clayton Morris. He even wrote a book about it. 

The advantages are that HELOCs often have an introductory rate that will likely be lower than your mortgage rate and also you likely will put more into paying off your loan since every expense is now following through the HELOC.

He makes a big deal out of the difference between amortized debt and simple interest but I don't see the difference. Extra payments to your mortgage are all going to principle either way. 

It seems like a complicated way of putting extra money towards your principle, but even knowing all that I'm still somewhat tempted to try it to see if I actually do end up putting more towards my debt.

Take a mortgage and line of credit calculator and you can simulate how you can pay down your mortgage with the line of credit and then paying back your line of credit. You can rinse and repeat until your mortgage is paid off to see how quickly you can pay off your mortgage. Me and my wife will be doing this ourselves because personally I don’t think I need to pay someone else to tell me to pay a chunk on my mortgage and then pay back the line of credit so and then I can do it again.

I thought it was crazy too when I first heard about it. Especially when pitched as a secret formula. I had to set aside the idea that it was pitched by a company requiring a fee to tell me the secret. Did the calculation on my own and saw the effect with my income and cashflow against it. That’s when I realized that every dollar I put toward principal caused interest to lower and therefore allowed every dollar freed up to go toward the next principal payment. I know the way it’s pitched is pay off your mortgage down to zero, but I zeroed onto the idea of using it to save up for the next down payment and reserves. My wife has been on the mortgage side since we met. Her thoughts were, yes it works, but unless you truly understand it and can keep from being irresponsible with the added easy access to your money, a person could end up over extended. We’ve been using this method since last summer and wish we would have long ago. BTW, didn’t pay for the secret. Just compiled all the info I found online, formed an action plan and executed.

You're not missing anything...it's called a mortgage acceleration scam.  There are multiple versions of them sold by companies for upfront and ongoing monthly fees.  These things pop up on the forums every once and a while and they are the worst posts on the site.

this is not a new strategy. this is not a scam. this is something I did years back. if you do a search for velocity banking, you will see a FREE how to fully explained. You will find that those who don't understand it will bash it. Bottom line it works given that you make more than you spin and you move the money properly.
that should say ...you bring in or than you spend. sorry I didn't proof read.

I have a secret strategy to pay your mortgage off faster. You make bigger payments and/or more frequent payments than the amortization schedule requires. Now the bad news...I have a business method patent on this so you owe me a royalty every time you do it. If you don’t pay, I sue.

Pretty much a nonsense plan. Sold by gurus and HELOC lenders.

Taking out a loan to pay off another loan is not a payoff plan.

Like I said people bash what they don't understand. It makes sense once you understand how to use the tool. I am not selling anything. I just know that works and how empowering it can be to have ones mortgage paid off.

I heard of the same strategy once long ago, then again in 2017. I spent some time looking into it last Fall and yes, it works. The math works. But it requires tons of discipline and very actively managing your money flows going into and out of your various accounts, and the timing of those flows. I haven't set my household up to do this yet, and I'm not sure if we will try it or not. We just have other things we're trying to pursue and maybe after we get those things done, we'll look into whether we could realistically "stick to the plan" and get this done, and if so, how quickly. It can shave years off a mortgage, though. It seems like alchemy or something when you hear about it, but model it out and it works.

(Not to hijack the thread, but there is also the not-quite-related idea of simply paying half of your monthly mortgage payment, but doing that twice per month. It essentially results in making basically extra payments in a year and that goes towards principle.)

Ok let’s do this again. Mathematically there are two ways to pay off an amortized loan faster (than paying the agreed amounts per the schedule). Pay more principal sooner than required by the amortization schedule, or make more frequent payments. Oh yeah, that’s ONE way. Pay more principal sooner. Presto you pay the loan off sooner, which of course begs the question of where the extra principal cash comes from. Short answer...spend less of your income on other stuff. Now if you pay me $5000 I will dazzle you with the Black-Scholes foreign currency option pricing program that I wrote in business school to approximate option pricing from statistics available in the Wall Street Journal. Then I’ll tell you to pay more principal sooner. I’ll use your 5k to pay MY mortgages off faster so I can retire now some 23 years after I “discovered” this trick.

Or you can call Dave Ramsey and he’ll tell you how to do it by eating beans and rice and getting a job delivering pizza after you get home from your 12 hour day job and using envelopes stuffed with cash.

I recall a thread about this or something similar back in August where @Chris May completely destroyed these claims based on the math, and the proponents still stood behind their claims. 

Found it: https://www.biggerpockets.com/forums/61/topics/269698-heloc-to-pay-off-mortgage-faster?page=1

Interesting because I remember the math showed that it did work when applied correctly.  Either way it worked for me and I may not be able to articulate exactly how it worked but my mortgage was gone in less than seven years. The math works !! Again people always seem to bash what they don't understand.

Here is a basic break down of how this works. The interest rate is pretty much irrelevant. Basic facts : Primary mortgage. Equals 200k Salary equals 5k. Total monthly expenses equals 3k HELOC equals 20k in second position So lets start this off. First let's pull 10k out of the HELOC and put it on the principle of the 1st mortgage. First mortgage = 190k Heloc= 10k balance Month 1 Then let's put your entire paycheck in the HELOC acct. This accomplishes paying the minimum payment on the HELOC. HELOC= 5k balance Now let's pay your expenses from your HELOC. HELOC = 8k balance 5k(balance)+3k(expenses) Month 1 balance Primary mortgage 190k owed HELOC 8k owed Total debt 198k owed Month 2 Put the entire paycheck in the HELOC HELOC balance 3k owed (8k-5k) Pay expenses of 3k Mortgage Balance 190k HELOC balance of 6k owed (3k+3k) Total debt is 196k Month 3 Pay expenses 3k HELOC =9k Put entire check in the HELOC HELOC = 4k Mortgage Balance owed 190k HELOC = 4k Total owed 194k Rinse and repeat...... In month 5 your heloc balance owed will be 0. Month 6 So in month 6 you put 10k from your heloc on the principle of your primary mortgage. Primary mortgage Balance 180k. HELOC balance is 10k Total owed is 190k Put your entire paycheck in the HELOC HELOC balance. 5k pay your expenses 3k HELOC balance is 8k Primary mortgage Balance is 180k Total debt 188k Month 7 Put entire paycheck in the HELOC 5k HELOC = 3k Pay your expenses 3k HELOC balance is 6k Mortgage Balance is 180 Total debt is 186k At the end of one year your principle balance will be 180k . Not bad for living the same lifestyle and still have access to some cash. Rinse and repeat until your debt is gone It really is that simple. The extra open credit (10k) on the HELOC above the 10k in this case is used as an emergency fund.

But at the end of the day you are making extra payments on the HELOC - which you can do with a regular loan. Except that your HELOC rate can increase and your regular loan does not.

I just saw this:

Reduce your debt, make home improvements or set aside an emergency fund, with a Home Equity Line of Credit at a low 2.99% APR for the first 6 months and 5.50% APR after.

Why would I do that rate? I just did an OO refi at 3.875% fixed for 30 years.

Originally posted by @Brian Cardwell :
Here is a basic break down of how this works. The interest rate is pretty much irrelevant.

Basic facts :

Primary mortgage. Equals 200k

Salary equals 5k.

Total monthly expenses equals 3k

HELOC equals 20k in second position

So lets start this off.

First let's pull 10k out of the HELOC and put it on the principle of the 1st mortgage.

First mortgage = 190k

Heloc= 10k balance

Month 1

Then let's put your entire paycheck in the HELOC acct. This accomplishes paying the minimum payment on the HELOC.

HELOC= 5k balance

Now let's pay your expenses from your HELOC.

HELOC = 8k balance 5k(balance)+3k(expenses)

Month 1 balance

Primary mortgage 190k owed

HELOC 8k owed

Total debt 198k owed

Month 2

Put the entire paycheck in the HELOC

HELOC balance 3k owed (8k-5k)

Pay expenses of 3k

Mortgage Balance 190k

HELOC balance of 6k owed (3k+3k)

Total debt is 196k

Month 3

Pay expenses 3k

HELOC =9k

Put entire check in the HELOC

HELOC = 4k

Mortgage Balance owed 190k

HELOC = 4k

Total owed 194k

Rinse and repeat......

In month 5 your heloc balance owed will be 0.

Month 6

So in month 6 you put 10k from your heloc on the principle of your primary mortgage.

Primary mortgage Balance 180k.

HELOC balance is 10k

Total owed is 190k

Put your entire paycheck in the HELOC

HELOC balance. 5k

pay your expenses 3k

HELOC balance is 8k

Primary mortgage Balance is 180k

Total debt 188k

Month 7

Put entire paycheck in the HELOC 5k

HELOC = 3k

Pay your expenses 3k

HELOC balance is 6k

Mortgage Balance is 180

Total debt is 186k

At the end of one year your principle balance will be 180k . Not bad for living the same lifestyle and still have access to some cash.

Rinse and repeat until your debt is gone

It really is that simple.

The extra open credit (10k) on the HELOC above the 10k in this case is used as an emergency fund.

Or, take the $2k savings each month and just pay down the first mortgage...no HELOC needed...same result.

I'm not an experienced investor especially with this HELOC payoff strategy so take what I say as me just speaking complete nonsense but from the little bit of research I've done, it only works well if you're very disciplined and have extra income. Although yes, you can make extra payments on the regular loan with a fixed amount.. will making the monthly extra payment make a significant difference opposed to a large lump sum at once? Even if rates on your HELOC go up, is the interest accruing on a $200,000 mortgage the same as a $10,000 HELOC?

I get your point where in an environment where interest rates are currently rising (especially if they continue to shoot up like how they have been) does it ACTUALLY make complete sense?  Do you actually save money?  Maybe, but then again maybe not.  

Additionally you have to ask yourself, if your paying off your mortgage faster than expected are you really leveraging yourself to your utmost advantage?  A lot of investors on BP love to leverage their investments so therefore this strategy doesn't fit their investing criteria.

Originally posted by @Mike Dymski :
Originally posted by @Brian Cardwell:
Here is a basic break down of how this works. The interest rate is pretty much irrelevant.

Basic facts :

Primary mortgage. Equals 200k

Salary equals 5k.

Total monthly expenses equals 3k

HELOC equals 20k in second position

So lets start this off.

First let's pull 10k out of the HELOC and put it on the principle of the 1st mortgage.

First mortgage = 190k

Heloc= 10k balance

Month 1

Then let's put your entire paycheck in the HELOC acct. This accomplishes paying the minimum payment on the HELOC.

HELOC= 5k balance

Now let's pay your expenses from your HELOC.

HELOC = 8k balance 5k(balance)+3k(expenses)

Month 1 balance

Primary mortgage 190k owed

HELOC 8k owed

Total debt 198k owed

Month 2

Put the entire paycheck in the HELOC

HELOC balance 3k owed (8k-5k)

Pay expenses of 3k

Mortgage Balance 190k

HELOC balance of 6k owed (3k+3k)

Total debt is 196k

Month 3

Pay expenses 3k

HELOC =9k

Put entire check in the HELOC

HELOC = 4k

Mortgage Balance owed 190k

HELOC = 4k

Total owed 194k

Rinse and repeat......

In month 5 your heloc balance owed will be 0.

Month 6

So in month 6 you put 10k from your heloc on the principle of your primary mortgage.

Primary mortgage Balance 180k.

HELOC balance is 10k

Total owed is 190k

Put your entire paycheck in the HELOC

HELOC balance. 5k

pay your expenses 3k

HELOC balance is 8k

Primary mortgage Balance is 180k

Total debt 188k

Month 7

Put entire paycheck in the HELOC 5k

HELOC = 3k

Pay your expenses 3k

HELOC balance is 6k

Mortgage Balance is 180

Total debt is 186k

At the end of one year your principle balance will be 180k . Not bad for living the same lifestyle and still have access to some cash.

Rinse and repeat until your debt is gone

It really is that simple.

The extra open credit (10k) on the HELOC above the 10k in this case is used as an emergency fund.

Or, take the $2k savings each month and just pay down the first mortgage...no HELOC needed...same result.

 Exactly. All the person is doing is taking the spare $2k, in this example, and putting it towards debt. After month 1 he owes 198k, which is the same thing he would owe if he did nothing - $5k in salary, minus $3k in expenses, = $2k extra towards primary mortgage = $198k owed. Why would anyone want to do something so complicated? 

This is not a debt reduction plan. It is a debt transfer plan. When you use borrowed money (HELOC) to pay off other borrowed money (mortgage), you are simply transferring debt. That's why when you borrow money from your Mastercard to pay off your Home Depot card, it is called a balance transfer. It's not called a "Velocity Banking Home Depot Elimination."

And taking your entire paycheck and paying down the HELOC, only to use the HELOC to pay food, utilities, gas, groceries is not debt reduction, its debt transfer. And if you send your $1,500 paycheck to your HELOC and then subsequently spend $1,600 from your HELOC that month, you've actually gone further into debt.

What it really comes down to is that if you owe a 200k mortgage, you need to pay 200k to pay it off. Whether that is 190k to the mortgage and 10k to a HELOC. Or, 150k to the mortgage and 50k to your Uncle Joe, its the same 200k.

There are three types of replies to the mortgage acceleration posts on BP from...

  1. People who get scammed and pay fees to companies to administer the program.
  2. People who copy the scam and DIY it for "free".  
  3. People who understand simple interest, savings, and the impact of extra principal reduction on a mortgage.

For #1 and #2, they do not separate (A) the need for the HELOC from (B) the impact of extra principal pay down...it's inseparable to them. They do not understand that the HELOC is not necessary to create savings for extra principal reduction. Their mortgage is accelerated, the program works for them, and they defend it vehemently. They think others do not understand it.

Some kind members have created spreadsheets and spent hours of their time trying to help other members understand the fallacy in these programs, without success.

There is one certainty...these scams work and their victims actually promote them.

Simple interest is not a matter of opinion.

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