HELOC payoff strategy
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
Second City Real Estate4.821 Reviews
HELOC payoff strategy
Most Popular Reply
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.
329 Replies
Originally posted by @Brian Cardwell:
What is the question? There is no verdict until a question is defined.
Weren't you getting everyone excited just a little while ago that this strategy works better than simply saving money from a paycheck?
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Victor S.:
Originally posted by @Brian Cardwell:
What is the question? There is no verdict until a question is defined.
Weren't you getting everyone excited just a little while ago that this strategy works better than simply saving money from a paycheck?
Yes and I still believe it is better. How could I now that I have been shown that simply saving money from my paycheck?
The answer is simple. With closed end mortgages, once you pay your Savings to it, you no longer have access to the to the money.
When you use the HELOC method, the HELOC becomes your bank account. I would rather pay a little more to have that be the case. I will still have access to my Savings.
BTW there was no excitement. I was just supporting the process I used to pay off my mortgage. I would suggest that most who are arguing against the method I used still have a mortgage. The only way to payoff the mortgage early is to pay more money on the principle. There should be no debate about that. The debate would be the method used to do it. The method I used works in practice and in theory.
- Rental Property Investor · Bellevue, NE · Member since 2014 · 79 posts · 38 votes7y
Originally posted by @Brian Cardwell:
Originally posted by @Victor S.:
Originally posted by @Brian Cardwell:
What is the question? There is no verdict until a question is defined.
Weren't you getting everyone excited just a little while ago that this strategy works better than simply saving money from a paycheck?
Yes and I still believe it is better. How could I now that I have been shown that simply saving money from my paycheck?
The answer is simple. With closed end mortgages, once you pay your Savings to it, you no longer have access to the to the money.
When you use the HELOC method, the HELOC becomes your bank account. I would rather pay a little more to have that be the case. I will still have access to my Savings.
BTW there was no excitement. I was just supporting the process I used to pay off my mortgage. I would suggest that most who are arguing against the method I used still have a mortgage. The only way to payoff the mortgage early is to pay more money on the principle. There should be no debate about that. The debate would be the method used to do it. The method I used works in practice and in theory.
I think the biggest reason you find that so many here on bigger pockets still have their mortgage is because the low, fixed-rate mortgage is by far the cheapest debt available to anyone, especially when considering the time value of money. This allows us to maximize leverage and increase profits. Paying off your mortgage is the safest option, but it does delay investing for years in most cases, which then reduces one's overall investment returns.
I'm all for using a HELOC to acquire properties, but I would then suggest refinancing that new property with a mortgage to pay off the HELOC.
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
I understand where you are coming from. I think one needs to define what their end game is. My end game is to have little to no debt so that the amount of money I need to reach financial/ mental freedom is less. For me, less debt equals less stress. Therefore the HELOC method allows me to use my savings most effectively while still allowing me to still take advantage of any opportunities that may come along. If all my savings is tied up in a closed end loan then I can't take advantage of those opportunities.
So I think it is an individual decision. There is no cookie cutter solution.
1million in cash = millionaire
2 million in cash +1 million in debt = millionaire with stress.😁
- Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes7y
Exactly. There is an opportunity cost associated with paying additional to a mortgage.
It’s funny because people will counter the strategy by saying just pay extra to the mortgage and then later say that there are better investments out there. Both are true, but they can’t really be applied together.
Originally posted by @Nick Moriwaki:
Exactly. There is an opportunity cost associated with paying additional to a mortgage.
Don't you still have a 0 balance heloc available to you? lol
- Investor · Honolulu, HI · Member since 2015 · 106 posts · 50 votes7y
Originally posted by @Victor S.:
Originally posted by @Nick Moriwaki:
Exactly. There is an opportunity cost associated with paying additional to a mortgage.
Don't you still have a 0 balance heloc available to you? lol
I'm assuming you're saying if you pay extra to the mortgage and have a side HELOC. Yes, IF you took out a LOC you could replicate it but most people who are countering the strategy don't do this. So there's some reason that's keeping those out there who are saying "yes it works but it's exactly the same as having a 0 balance HELOC" from actually doing it.
As a side note, the way I do it is to swap the mortgage for HELOC entirely. So in that case there definitely is an opportunity cost even if you have a 0 balance HELOC because ultimately I'll be able to create more available balance in mine than someone who kept the mortgage and got a 2nd position HELOC.
- Rental Property Investor · Bellevue, NE · Member since 2014 · 79 posts · 38 votes7y
Originally posted by @Nick Moriwaki:
Originally posted by @Victor S.:
Originally posted by @Nick Moriwaki:
Exactly. There is an opportunity cost associated with paying additional to a mortgage.
Don't you still have a 0 balance heloc available to you? lol
I'm assuming you're saying if you pay extra to the mortgage and have a side HELOC. Yes, IF you took out a LOC you could replicate it but most people who are countering the strategy don't do this. So there's some reason that's keeping those out there who are saying "yes it works but it's exactly the same as having a 0 balance HELOC" from actually doing it.
As a side note, the way I do it is to swap the mortgage for HELOC entirely. So in that case there definitely is an opportunity cost even if you have a 0 balance HELOC because ultimately I'll be able to create more available balance in mine than someone who kept the mortgage and got a 2nd position HELOC.
The reason that most people aren't doing either of those methods has been given numerous times in this thread, even by me. We don't want to pay off our mortgage.
The reason that the heloc transfer method is so popular is because it's associated with MLM schemes and used with misinformation like "amortized interest" to sell bad financial advice to people that don't understand how interest works.
Nobody says it doesn't work. Most of us are just advising against it as the risk is high for little gain since the strategy promotes putting all of your savings into the mortgage, leaving no emergency fund other than a HELOC which is tied to the equity in the house.
If things go south with one's job, the economy, etc., then it leaves that person with both a mortgage and a heloc pay on. Banks have been known to freeze lines of credit in those instances. Without an actual emergency fund, one could end up losing more than they bargained for.
At least that's one of my reasons for not doing this. I mean, other than I don't want to get rid of my 3.25% interest rate mortgage.
- Real Estate Agent · watertown, NY · Member since 2016 · 29 posts · 16 votes7y
@Daniel Weed I used your spreadsheet and modified it to reflect daily amortization along with daily usage of the account as you would normally use it (Tab HELOC). @Brian Cardwell I used your example $5K income and $3K expense for this calculation. The calculation is based on you using your credit card to pay most of your expenses and paying the credit card at the end of the month before it is due. Amounts you can't pay with the credit card you would use the HELOC. Using this calculation you are keeping your daily balance at its minimal. https://bit.ly/2DlaSDy
Originally posted by @Enrique Reyes:
@Daniel Weed I used your spreadsheet and modified it to reflect daily amortization along with daily usage of the account as you would normally use it (Tab HELOC). @Brian Cardwell I used your example $5K income and $3K expense for this calculation. The calculation is based on you using your credit card to pay most of your expenses and paying the credit card at the end of the month before it is due. Amounts you can't pay with the credit card you would use the HELOC. Using this calculation you are keeping your daily balance at its minimal. https://bit.ly/2DlaSDy
Enrique, who is going to be paying your remaining heloc balance off? It looks like you're dropping $10k from heloc every couple of months with only having a little over $1k play money a month.
- Real Estate Agent · watertown, NY · Member since 2016 · 29 posts · 16 votes7y
Originally posted by @Victor S.:
Originally posted by @Enrique Reyes:
@Daniel Weed I used your spreadsheet and modified it to reflect daily amortization along with daily usage of the account as you would normally use it (Tab HELOC). @Brian Cardwell I used your example $5K income and $3K expense for this calculation. The calculation is based on you using your credit card to pay most of your expenses and paying the credit card at the end of the month before it is due. Amounts you can't pay with the credit card you would use the HELOC. Using this calculation you are keeping your daily balance at its minimal. https://bit.ly/2DlaSDy
Enrique, who is going to be paying your remaining heloc balance off? It looks like you're dropping $10k from heloc every couple of months with only having a little over $1k play money a month.
Using the information in the calculation the income is $5K a month, monthly expenses of $3K, monthly mortgage payment of $983.88 and monthly HELOC interest payment of $64.54 to $80 per month depending on your monthly average balance. Assuming that you are using rent money to make mortgage payment ($983.88) instead of your own cashflow. Imagine your HELOC approved amount is $25K and you are only using $10K every couple of month. You would use the $1,935.50 to pay down the principal on the HELOC. As you can see in the spreadsheet the max you use from the HELOC is $13,732.72 while still having the capability of making additional withdrawal if needed.
$5,000 - $3,000 = $2,000 Cash remaining
$2,000 - 64.50 = $1,935.50 Cash Flow
983.88 - 983.88 = 0
25,000 - 13,732.72 = 11,267.28 HELOC Balance
However, remember that on the 15th and the 30th of the month your paycheck is parked in the HELOC. You are only paying about $500 per month using the HELOC for balance you can't pay with a credit card. So even though you are using $10K every couple of month your average balance is rarely above $10K since you have your monthly paycheck keeping the balance at its minimal. Since a HELOC is based on the monthly average balance your principal payments are small. The short answer is that you are paying off the HELOC balance with your remaining cash flow. You would only have $1K play money if your expenses were $4K instead of $3K.
Enrique, your math doesn't work. You have 5k income with 3k expenses, 1k mortgage, and 1k play money. there is no way in hell you don't have a heloc balance (or a huge credit card bill) at the end of each year, if you're drawing $10k every 4 months.
- Real Estate Agent · watertown, NY · Member since 2016 · 29 posts · 16 votes7y
Originally posted by @Victor S.:
Enrique, your math doesn't work. You have 5k income with 3k expenses, 1k mortgage, and 1k play money. there is no way in hell you don't have a heloc balance (or a huge credit card bill) at the end of each year, if you're drawing $10k every 4 months.
Victor, The difference between what you are saying and what I am showing in the spreadsheet is that you are not including mortgage payment in your expense column. For you, mortgage payment is an additional expense. When I speak of expense I'm including total mortgage expense under the expense column so that your total expense is $3K. However, total expense does not include HELOC expense.
You can play around with the excel sheet to reflect your scenario and since the play money is smaller your chunk time period will increase to a number greater than 4 month per draw. At the end of the day the numbers don't lie. A HELOC is way more effective than making extra payment monthly or paying a mortgage down the traditional way if your goal is to payoff the mortgage the fastest way possible.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes7y
@Enrique Reyes, when a person has a 30yr, 3.75% fixed interest mortgage that they want to pay down quickly, doing so by HELOC is not "way more effective" than just placing every unspent dollar at the end of each pay period to make extra principal-only payments.
I agree than when calculated correctly, the "numbers don't lie".
So please: do the numbers correctly! Thank you...
[Note: This debate is only about the numbers. Please do not bring "psychology" or "flexibility" into it].
- Member since 2019 · 4 posts · 3 votes7y
@Mike Dymski Any kind of "holding container" for the cash would make it work. I agree the HELOC is not necessary.
- Real Estate Agent · watertown, NY · Member since 2016 · 29 posts · 16 votes7y
Originally posted by @Brent Coombs:
@Enrique Reyes, when a person has a 30yr, 3.75% fixed interest mortgage that they want to pay down quickly, doing so by HELOC is not "way more effective" than just placing every unspent dollar at the end of each pay period to make extra principal-only payments.
I agree than when calculated correctly, the "numbers don't lie".
So please: do the numbers correctly! Thank you...
[Note: This debate is only about the numbers. Please do not bring "psychology" or "flexibility" into it].
If by being more effective you mean paying the mortgage sooner then that is correct but if you mean you pay less in interest then it depends on the HELOC interest rate. Short answer it is much faster to pay off a mortgage making the remainder of $2,000 after making mortgage payment than it is using a HELOC. You can pay off a mortgage making extra payment in 9 years 11 month. All the methods I show below the shortest time is 10 years 2 months when chunking a HELOC with a mortgage.
Chunking $10K @ 3.75% interest rate it would take 10 yrs 2 months to pay off a loan of $200K @ 3.75%. The mortgage would be paid off in 9 years 5 months and the HELOC 8 months later. You would end up paying $36,773 in interest payment. In an apple to apple comparison with a traditional mortgage making extra $2,000 payment a HELOC will beat it every time as long as they have the same interest rate. Also, you would pay less in interest.
Chunking $10K @ 6.475% interest rate it would take 10 years 6 months pay off a loan of $200K @3.75%. The mortgage would take 9 years 6 months and the HELOC 11 months. You would end up paying $39,278 in interest. At 2.725 (6.475%-3.75%) interest rate higher a HELOC would pay $2 more in interest than a traditional mortgage making extra payment. It would take longer to pay off the HELOC and mortgage together compared to making additional $2,000 extra payment each month.
Chunking $10K @ 9.2% interest rate it would take 10 yrs and 5 month to pay off a loan of $200K @ 3.75%. The mortgage would be paid off in 9 years 7 month and the HELOC will take 10 months. You would end up paying $41,705 in interest. At a much higher interest mortgage and HELOC would end up paying $2,433 more in interest payment and it will take longer to pay off.
When comparing apple to apple a HELOC combined with a mortgage does well against a traditional mortgage making extra monthly payment. Based on other factor the HELOC is better because of the easy access to equity even at higher interest rate. I would be willing to pay an extra $2,433 for this easy access to my equity. Psychologically it does make most people make extra monthly payment since they know this is money they can take back if they need it. In some of the comments some people said that they have their money sitting in their savings doing nothing vs. putting it to use against debt or to work hard for them. At the end of the day the question people should really be asking is are they willing to pay extra for easy access to their equity or not? If they are then a HELOC is the way to go. Otherwise, just make extra payment and put some of your money in saving. It will protect you in an emergency and at the same time pay your mortgage soonest. It is the safest thing to do.
I bet those who pay their mortgage early by making extra payment and those using a HELOC to achieve the same goal are a very small group.
The following link has a more user friendly spreadsheet where you can verify my calculations and play around with the numbers.
https://bit.ly/2DlaSDy
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes7y
@Enrique Reyes, thank you for confirming my thesis, when you admitted: "Short answer it is much faster to pay off a mortgage making the remainder of $2,000 after making mortgage payment than it is using a HELOC".
Because as I reminded you, the debate on this thread is only about the numbers!
[As you can also see, I did guess that you couldn't resist bring "psychology" and "flexibility" into it - which is a separate debate altogether! The thread title only links "HELOC" with "payoff strategy". Get it?]...
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Brent Coombs:
@Enrique Reyes, thank you for confirming my thesis, when you admitted: "Short answer it is much faster to pay off a mortgage making the remainder of $2,000 after making mortgage payment than it is using a HELOC".
Because as I reminded you, the debate on this thread is only about the numbers!
[As you can also see, I did guess that you couldn't resist bring "psychology" and "flexibility" into it - which is a separate debate altogether! The thread title only links "HELOC" with "payoff strategy". Get it?]...
Seems to me the question on this thread was "what am I missing?"
It seems to me also that the psychology and the flexibility are an important part of "what am I missing?" and also an important part of the discussion in whole.
It is like asking, is it better to drive from NYC to DC or take the train? Well driving is faster but taking the train you can arrive rested and less stressed, both have some value. The same holds true for "flexibility and psychology". So to have the discussion with it is a waste of time.
Remember the original question was "what am I missing ?"
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes7y
Originally posted by @Brian Cardwell:
Originally posted by @Brent Coombs:
@Enrique Reyes, thank you for confirming my thesis, when you admitted: "Short answer it is much faster to pay off a mortgage making the remainder of $2,000 after making mortgage payment than it is using a HELOC".
Because as I reminded you, the debate on this thread is only about the numbers!
[As you can also see, I did guess that you couldn't resist bring "psychology" and "flexibility" into it - which is a separate debate altogether! The thread title only links "HELOC" with "payoff strategy". Get it?]...
Seems to me the question on this thread was "what am I missing?"
It seems to me also that the psychology and the flexibility are an important part of "what am I missing?" and also an important part of the discussion in whole.
It is like asking, is it better to drive from NYC to DC or take the train? Well driving is faster but taking the train you can arrive rested and less stressed, both have some value. The same holds true for "flexibility and psychology". So to have the discussion with it is a waste of time.
Remember the original question was "what am I missing ?"
Fact is, Brie wasn't missing anything! Doubting that HELOCs would be a better "early payoff" strategy, vs just depositing every excess dollar into extra principal-only payments, was well thought out!
Fact is, providers of HELOCs know that the accompanying "psychology" and "flexibility" will hinder/prevent early payoff, (in favor of re-using them, time and time again, for other purposes)!
Ergo: HELOCs are (mostly) not an early payoff strategy! Back to the numbers, please...
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Brent Coombs:
Originally posted by @Brian Cardwell:
Originally posted by @Brent Coombs:
@Enrique Reyes, thank you for confirming my thesis, when you admitted: "Short answer it is much faster to pay off a mortgage making the remainder of $2,000 after making mortgage payment than it is using a HELOC".
Because as I reminded you, the debate on this thread is only about the numbers!
[As you can also see, I did guess that you couldn't resist bring "psychology" and "flexibility" into it - which is a separate debate altogether! The thread title only links "HELOC" with "payoff strategy". Get it?]...
Seems to me the question on this thread was "what am I missing?"
It seems to me also that the psychology and the flexibility are an important part of "what am I missing?" and also an important part of the discussion in whole.
It is like asking, is it better to drive from NYC to DC or take the train? Well driving is faster but taking the train you can arrive rested and less stressed, both have some value. The same holds true for "flexibility and psychology". So to have the discussion with it is a waste of time.
Remember the original question was "what am I missing ?"
Fact is, Brie wasn't missing anything! Doubting that HELOCs would be a better "early payoff" strategy, vs just depositing every excess dollar into extra principal-only payments, was well thought out!
Fact is, providers of HELOCs know that the accompanying "psychology" and "flexibility" will hinder/prevent early payoff, (in favor of re-using them, time and time again, for other purposes)!
Ergo: HELOCs are (mostly) not an early payoff strategy! Back to the numbers, please...
Ok you win!!
I have no mortgage. I lose.
Originally posted by @Brian Cardwell:
Originally posted by @Brent Coombs:
Originally posted by @Brian Cardwell:
Originally posted by @Brent Coombs:
@Enrique Reyes, thank you for confirming my thesis, when you admitted: "Short answer it is much faster to pay off a mortgage making the remainder of $2,000 after making mortgage payment than it is using a HELOC".
Because as I reminded you, the debate on this thread is only about the numbers!
[As you can also see, I did guess that you couldn't resist bring "psychology" and "flexibility" into it - which is a separate debate altogether! The thread title only links "HELOC" with "payoff strategy". Get it?]...
Seems to me the question on this thread was "what am I missing?"
It seems to me also that the psychology and the flexibility are an important part of "what am I missing?" and also an important part of the discussion in whole.
It is like asking, is it better to drive from NYC to DC or take the train? Well driving is faster but taking the train you can arrive rested and less stressed, both have some value. The same holds true for "flexibility and psychology". So to have the discussion with it is a waste of time.
Remember the original question was "what am I missing ?"
Fact is, Brie wasn't missing anything! Doubting that HELOCs would be a better "early payoff" strategy, vs just depositing every excess dollar into extra principal-only payments, was well thought out!
Fact is, providers of HELOCs know that the accompanying "psychology" and "flexibility" will hinder/prevent early payoff, (in favor of re-using them, time and time again, for other purposes)!
Ergo: HELOCs are (mostly) not an early payoff strategy! Back to the numbers, please...
Ok you win!!
I have no mortgage. I lose.
wow, this will never end... you are going to pay it off faster, but then you will have a heloc balance to pay off, which is akin to still having a mortgage... are you gonna open up another heloc on the house to pay the first heloc off?
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes7y
@Brian Cardwell, yep, I do win. If you have a HELOC balance owing, your home is not paid off!
(But if you have no balance owing on the HELOC, how many opportunities are you wasting?)
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Victor S.:
Originally posted by @Brian Cardwell:
Originally posted by @Brent Coombs:
Originally posted by @Brian Cardwell:
Originally posted by @Brent Coombs:
@Enrique Reyes, thank you for confirming my thesis, when you admitted: "Short answer it is much faster to pay off a mortgage making the remainder of $2,000 after making mortgage payment than it is using a HELOC".
Because as I reminded you, the debate on this thread is only about the numbers!
[As you can also see, I did guess that you couldn't resist bring "psychology" and "flexibility" into it - which is a separate debate altogether! The thread title only links "HELOC" with "payoff strategy". Get it?]...
Seems to me the question on this thread was "what am I missing?"
It seems to me also that the psychology and the flexibility are an important part of "what am I missing?" and also an important part of the discussion in whole.
It is like asking, is it better to drive from NYC to DC or take the train? Well driving is faster but taking the train you can arrive rested and less stressed, both have some value. The same holds true for "flexibility and psychology". So to have the discussion with it is a waste of time.
Remember the original question was "what am I missing ?"
Fact is, Brie wasn't missing anything! Doubting that HELOCs would be a better "early payoff" strategy, vs just depositing every excess dollar into extra principal-only payments, was well thought out!
Fact is, providers of HELOCs know that the accompanying "psychology" and "flexibility" will hinder/prevent early payoff, (in favor of re-using them, time and time again, for other purposes)!
Ergo: HELOCs are (mostly) not an early payoff strategy! Back to the numbers, please...
Ok you win!!
I have no mortgage. I lose.
wow, this will never end... you are goi itng to pay it off faster, but then you will have a heloc balance to pay off, which is akin to still having a mortgage... are you gonna open up another heloc on the house to pay the first heloc off?
Really Victor.😕 Do you realize that the HELOC is a small chunk and gets paid down as you go?
When you don't understand something don't bash it.
So you just demonstrated that this isn't for everyone. It's ok. Those that choose to use this tool should have success. They will have a paid off mortgage and save thousands of dollars vs. a 30 year paid out mortgage.
KNOWLEDGE IS POWER!
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Brent Coombs:
@Brian Cardwell, yep, I do win. If you have a HELOC balance owing, your home is not paid off!
(But if you have no balance owing on the HELOC, how many opportunities are you wasting?
No balance on the HELOC = house being paid off.
I miss no opportunities because I have the money to take advantage them. Why? Because I don't have a mortgage payment. .... Funny how that works.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.