HELOC payoff strategy
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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HELOC payoff strategy
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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
- Rental Property Investor · Saint Cloud, WI · Member since 2016 · 186 posts · 63 votes8yI do feel the heloc way can create substantial savings. But I agree with those who say one has to be disciplined. If one uses the heloc method and parks their regular cash inside the heloc instead of the bank, your interest accrued becomes substantially less. For example, why keep $30,000 parked in a bank account earning .0001 pct interest when it can be put onto the heloc to bring down the amount owed? If you need the cash, it’s a heloc! Use what you need. I believe the point is to use the heloc as well for idle cash. If you do that with a mortgage, your money is tied up. With a heloc, your free cash is not. Can anyone back this up?
Originally posted by @Scott Perry:
@Brian Shurtleff nice professional start to your BP posts.. "then the smart people come in" (rolling my eyes). Again, if you use your HELOC exactly the same as your mortgage you lose! I agree with this. You MUST use the "all in one" strategy. This means, just as @Kyle N. mentioned, ALL of your income and savings goes into the HELOC. For example, I have 10K cash sitting in my savings account for an emergency fund.... well now that is sitting in the HELOC to reduce principal by 10K until I have an emergency. And yes the loan can be called in and bla bla bla... but so can your 30 year fixed rate (actually just happened last year to my best friends dad on his 30 year fixed). So this is just a simple question of how much risk are you willing to take. Should every investor use this technique? Probably not. It's like the hammer example.... the tool only works if you use it for what it is best for... could you churn butter with a hammer? Maybe.. but it's probably not the best way to do it. To use a HELOC to make a difference you have to....
1. HELOC in first position (meaning you bought the home with a HELOC, oh and no closing costs, 3% savings on this part that no one has mentioned yet)
2. ALL income and reserves MUST be put into the HELOC (again, how much risk are you willing to take)
3. Use your HELOC as a checking account and pay ALL bills out of it. (You could even do the credit card thing and use a CC for purchases and then use the HELOC to pay the balance each month)
The jury is still out for me on this whole "chunking" technique. Haven't thought about it. I am promoting the "All in one" strategy with using the HELOC only to purchase the home.
More red herrings. No, a conforming 30 year mortgage cannot be called, short of a default. HELOCs can and have (recently) been frozen. It's a mathematical fact that the only way to pay off a loan faster is by adding more money to principal. A HELOC is substituting one loan type for another. If the interest rate is the same, it will take you exactly the same amount of time to pay off as a 30 year conforming mortgage UNLESS YOU PAY ADDITIONAL PRINCIPAL. Arguing for a HELOC, you need to say how it helps you pay more principal than you could have anyway.
There are some psychological and cash management advantages to a HELOC, but they come with some risk. If you decide the risk is outweighed by the benefits, then get one and use it. First lien, second lien, interest only, etc., it doesn't matter. Mathematically you pay off a loan by paying off the principal, all of it, from your sources of income. If you have a big chunk of money lying around making 0.04%, and you want to pay your mortgage off faster, then make a principal payment. If you now have no cash cushion and are not comfortable, then get a HELOC and keep a 0 balance. The HELOC does not magically create money that you don't already have. Usually, it costs you more in interest because it's variable and rises with the Prime. People have used the "Velocity Banking" process to pay off their mortgages faster. Great, other people have done it cheaper without the shell game and the HELOC. If the process involving the HELOC helps you focus and pay more principal sooner, then its great for you. However, if you want the mathematically cheapest way to do it, simply make additional principal payments to your regular mortgage. If you want to tout the benefits of the strategy, the wrong way is to imply that there is some inherent mathematical advantage to using the HELOC strategy. "I paid my mortgage off in 7 years vs. 30 using "Velocity Banking". OK I paid my $200,000 VA mortgage off in two years (1998-2000). How? My wife and I made a boatload of money from our "day" jobs and paid it toward the mortgage rather than spending it. We didn't have to change our lifestyle a bit.....because we made more money from 1998-2000 than we did before. No HELOC, just jobs and a checkbook.
- Wholesaler · Noblesville, IN · Member since 2016 · 27 posts · 15 votes8y
@Scott L. If your 30 year fixed rate has acceleration clause it can be... copied from Google...
An acceleration clause is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment and the repayment required.
Acceleration Clause - Investopedia
https://www.investopedia.com/terms/a/acceleration-...
Originally posted by @Scott Perry:
@Scott L. If your 30 year fixed rate has acceleration clause it can be... copied from Google...
An acceleration clause is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment and the repayment required.
Acceleration Clause - Investopedia
https://www.investopedia.com/terms/a/acceleration-...So show me the "acceleration clause" in your FNMA/FreddieMac conforming mortgage (95% of outstanding 30 year mortgages) that lets the bank accelerate ABSENT A DEFAULT. Sure if you put in an LLC, do a contract for deed, fail to carry insurance...
But we're talking about using Velocity Banking for paying off your personal residence. Variable rate, and balloon payment, interest only mortgages make up <5%, so it's another red herring. And if you have one of these kind of mortgages and can qualify for a HELOC, you can very likely qualify for a refinance which would be the first step toward sanity, rather than Velocity Banking.
Man, we are going down rabbit holes now. The dreaded "Due on Sale" clause in most modern mortgages is an acceleration clause. In other words, you have to violate the terms of your contract in order for the lender to accelerate your loan. If you make your payments and do not transfer the beneficial interest in the property, they cannot accelerate the loan unless you have some crazy non standard type of mortgage. 1st Mortgages are heavily regulated and do not include language that would allow them to be accelerated arbitrarily.
I have heard, HEARD mind you, that the rules for calling a HELOC due are much more arbitrary but have not found any proof of that, nor have I poured through my paperwork to verify or deny it. I can tell you from personal experience, though, on more than one occasion that they can most certainly freeze a HELOC on a whim. And they do.
- Investor · Cannon Falls, MN · Member since 2016 · 150 posts · 55 votes8y
I think this is great discussion.Most investors have never had a loan called due but if you have you will do your best to find out why and in my case it was the bank was in trouble, I had better credit than the bank.We all need credit lines there are lines that never can be called and can be as big as you decide you need.Most investors care more about the deal and do not look through there docs or understand what they are signing.
If you have a thirty year mortgage the answer is not to pay it off but have enough cash reserves to decide what you are going to do with it to make the best return.Investing is all about banking and very few understand it or they would be investing in Debt.
Be your own Banker!!
- Bartlett, TN · Member since 2018 · 6 posts · 1 vote8y
Do you really have savings if you owe $150,000 on a 30 yr mortage. If one has $70,000 in a savings account but you owe $150,000 then isi't it the same as a line of credit. You still owe someone $80,000 no matter how you slice it. its borrowed money. If the HELOC allows you to pay your mortgage off quicker with less total intrest paid, even if the rate is higer, that is money in your pocket. Im not sure which is better but I do have an open mind.
- Bartlett, TN · Member since 2018 · 6 posts · 1 vote8y
I think everyone is in agreement, you pay the same amount of principal no matter which loan process is used. The difference is the total amount of interest. I don't think there would be any advantage to a HELOC if your principal or years remaining on the loan were under ten years. I think the real benefit is in the interest saved if you can't afford to make double payments and need longer than ten years to pay for your mortgage. While not paying any extra, just depositing your entire paycheck into the HELOC, living the same, your cash that was once sitting in a low interest savings account has become a power house driving down your principal and thus lowering the amount of interest owed on a daily basis. The total interest paid over the life of the loan would be less even though the rate is a little higher. I think its the same principal as how to get out of debt, pay down the credit card with the least debt, no matter the interest rate, then apply that amount to the next lowest debt. The argument will be, "why not just apply your savings to the fixed rate loan", if you do that your cash is gone until you sell. A HELOC allows access to your equity for the next deal when it comes.
Not sure this is right, just thinking outloaud after reading all the posts.
@Robert W Audsley, if that $150k loan is secured by an asset worth as much or more than the loan then yes, you have $70k in savings. Net worth equals total assets minus total liabilities. A savings account is just carrying more in your assets column and more in your liabilities column, but paying down the debt does not change your net worth. It just reduces your options and flexibility.
There are lot's of ways to save money. I choose to save in income producing assets, but that is not without risk. Others choose to save in money like assets (CDs, savings accounts, etc.), also not without risk but a different kind of risk. And many people, for whatever reason, probably a strong sense of risk aversion, prefer to save their money as equity in their home. All of us could have the exact same net worth, we just save our money in different forms.
- Bartlett, TN · Member since 2018 · 6 posts · 1 vote8y
@Edward B., I like your response. I too would like to put my money into income producing assets. Looking to make the leap from 401K to Assets.
@Robert W Audsley, you can invest in assets with your 401k. And defer/negate the taxes on the returns for your whole life and your children's life as well if done correctly. That is brutally hard to beat.
The value in this system for me is the ability to put all my spare money towards paying down my mortgage while still having access to the money available in the heloc. I dont even need to have a balance owed on the heloc. Just knowing that I have access to that amount if needed allows me to put all my extra income towards the mortgage. Its the security blanket that lets me pay down the mortgage without sweating. Then when life happens I still have access to heloc funds to deal with it. Without the heloc I would have to hold back funds in some form of savings account for that life event. That money in savings is better used paying down principle on the mortgage. Using a credit card with a high interest rate could accomplish the same thing, but the high interest rate is a deterent. Also, if a good investment opportunity presents itself, I can have money readily accessible, giving me time after the purchase to then find another, better way to finance the investment and zeroing the heloc balance again. I believe the value is there in the heloc if it is used properly. Just my 2 cents worth.
- Member since 2018 · 1 post · 0 votes8y
The HELOC approach indeed works. Paid off $300k < 6 years. Could probably shave off another year if I didn't spend on "wants". The pro that folks tend to overlook is that you can throw every pennies into a HELOC but still maintain the cash flow you need. Conversely, If you make an extra payment to a traditional mortgage, you can't take it out for emergencies.
I for one love to read posts of future bankrupt REI investors taking out loans with higher interest to pay lower interest loans. Having bought every property from busted REI investors this is music to my ears. This whole deal is going to be even more fun in a few years when we are looking at way higher rates. Oh the 15-20% hard money loans here we come again. I can see I better scrape up some free cash again. Its clear real estate is rolling over and so many are gonna cough up their equity, what little they have at some fire sale prices once again.
- 8yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Yet another bash from one who either disagrees or doesn't understand the process.
- Member since 2018 · 1 post · 0 votes8y
New to the forum and like the open discourse. I am in the process of getting a Heloc in 2nd position to chunk my mortgage. I am a skeptic but not a cynic, hence I need to see the proof. My issue is that when we use calculators and math, the heloc compared to making extra principle payments does not end up any better. Think about this one thing I noticed from all the Heloc proponent guru websites ....they have a calculator which is never explained but used exclusively to sell you on the idea. Granted the heloc method works better than paying a 30 year mortgage in typical fashion but if your getting a Heloc go in with your eyes wide open. Also I do understand the value of direct depositing your income into the heloc every 2 weeks and it's affect on daily average balance. Problem is can we or do we have a calculator that shows the true benefits of the affects of the heloc with income deposits and chunking and does it match up with what some of these websites show. Interest earned is the same as interest saved.
Originally posted by @Brie Schmidt:
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.
Sorry if this has already been answered, but I haven't read the whole thread. Hopefully I can clarify some part of it for you. First of all, some people advocate getting a HELOC and using it to pay off your whole mortgage, but this exposes your entire mortgage to a variable rate and that's generally a bad idea. The other recommendation (the one I have done) is to get a smaller HELOC and use it to pay large chunks on the mortgage, which exposes only a portion of your loan to a variable rate. Basically, the idea is that instead of using a traditional checking account where your money sits around waiting for bills, you pay say $10,000 toward your mortgage and then you use the HELOC like your checking account - income goes in, bills come out. As long as you are making more than you are spending and have money left over each month, that money automatically / organically lowers the HELOC balance over time (hopefully a year or so). Then you reload and do it again.
Some other people I've talked to about it say that it would be better just to take all your extra income and put it toward your mortgage each month and use a HELOC as a backup in case you have an unexpected bill. This way you're not paying interest on the HELOC but still paying down your mortgage early and saving interest. I think that's fine, but when I put a chunk of $10,000 on my mortgage and see that I've saved $20,000 in interest I don't mind paying around $100/month interest to the HELOC to sort of make it an easy / seamless process. It's like a financial discipline tool in a sense. Some people use an investment advisor at $X/month to supposedly get them greater returns and keep their money safe - I regard the HELOC interest as a fee to easily keep my money working for me instead of sitting in a checking account gathering dust. People think of the HELOC as another bill, but when used in this way you're not "paying it" every month like a bill out of a checking account, your left over income is automatically paying it down for you. I think of it like that service Acorns that rounds all your purchases up to the nearest dollar and drops the pennies in an investment account.
Most people struggle with paying down their mortgage especially early on because their balance is so high that they are paying a ton of interest and can't make any real gains on equity. The point of doing this is to keep your mortgage balance down throughout the month so you aren't paying as much to interest. You sort of "install" the HELOC on the mortgage and then use your income to keep the HELOC balance as low as you can all month. Since you are charged interest on your average daily balance, keeping the balance down as your income and bills come and go lessens your interest charges. Detractors say that you're not really saving on interest mathematically, which may be true, but I can see on my mortgage website that I've painlessly saved about $50,000 in interest and shortened my payoff time by about 4 years so far, so what do I care if the math says technically I don't have all my savings until 30 years from now or whatever. Paying your mortgage early (regardless of how you do it) gives you a guaranteed return of at least the rate you borrowed at and gets you out of debt, so finding some easy way to do it makes sense for me. Other people will tell you to take your extra income and put it in the stock market because you can greater (variable) returns there while you stay in debt longer. I prefer my approach. Hopefully this helps.
Originally posted by @Ben Zimmerman:
Originally posted by @Scott Perry:
@JD Martin I will say that EVERY not some but EVERY investor I have spoken with that uses this "All in one" strategy has found huge success.
Success is a relative term, you can be successful even by choosing a sub optimal plan of attack. However all of these individuals that you speak of would have been more successful, had they done something slightly different.
We just showed that the heloc method is actually much worse financially speaking, paying off the loan in 9.17 years, as opposed to 8.6 years if you had just applied the same amount of money as an additional payment instead of using this heloc method. There is absolutely nothing that this method can accomplish, that making additional payments can't already do. This method is worse in literally every way as opposed to making overpayments, and keeping an empty heloc if you are so worried about needing that equity in an emergency. Because in your method, immediately after you chunked, you are forced to make additional payments until your heloc is payed off. So what happens the next month if you get laid off of work? You are now making a full mortgage payment, a full heloc payment, and your heloc is already tapped out so you can't withdraw more. What do you do then? In my method if you lose your job, you only have your mortgage payment to worry about, and if you are unable to make even that payment, then you have a completely empty heloc to withdraw from to tide you over.
There is no secret sauce, there is no magic formula, there is just math. Trading one loan for another loan at a higher interest rate WILL cause you to pay more money over the course of the loan. Advocating that this method will somehow save people money is blatantly false, because as demonstrated over and over again, you will pay more. We already have way too much fake news in this world, we don't need more of it.
I don't think that's correct, try this for me. Go to the calculator below and put in an additional monthly payment of $833.33 ($10,000/12) and check the savings and the payoff date on the amo table. Then zero it out and put in a yearly prepayment of $10,000 a la the HELOC method. The savings are higher by a few thousand and you pay it off a little sooner in the HELOC method, correct? Maybe that's ultimately offset by the slightly higher interest you are paying on the HELOC, but the "chunks" seem to have a slight advantage over additional monthly payments.
But overall I just think you're looking at it in the wrong way. Most people don't have the extra money to pay that much more principal each month, nor the discipline to do it even if they have the funds. By putting a chunk of your mortgage on your HELOC and then managing it like a checking account (bills out, income in) you are paying it down organically as long as you make more than you spend. It's just paid naturally over time and you don't really miss the money. Call it a psychological advantage similar to the way your money goes straight on your 401K every month. If most people got that money each month and tried to force themselves to invest it, they'd probably fail and take a vacation or buy a new car. The fact that it's behind the scenes helps keep it safe from human nature and you can't really mismanage it. This is the same thing. You put a chunk of your mortgage on your HELOC and then you whittle away at it through your normal course of life and then do it again. It may not be a magical formula to save you millions and all that, but I'll bet you have money sitting in your checking account right now doing nothing and all of my money is holding down my mortgage balance and saving me interest at all times. There are differences in the HELOC strategy, you just don't seem to be looking for them.
Originally posted by @Brie Schmidt:
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?
Noooooo. BP needs to do something to reign this in.
There are two other threads on this topic with 20+ pages of comments each debunking every version of this strategy.
Even in a best case scenario, where the rate on the HELOC is the same as the mortgage, you save something like $70 over the course of a 200k loan.
The people who promote this "strategy" fall into one of two categories: 1) they're selling something... either loans or financial advice, or 2) have a tenuous grasp of financial math.
Originally posted by @Account Closed:
New to the forum and like the open discourse. I am in the process of getting a Heloc in 2nd position to chunk my mortgage. I am a skeptic but not a cynic, hence I need to see the proof. My issue is that when we use calculators and math, the heloc compared to making extra principle payments does not end up any better. Think about this one thing I noticed from all the Heloc proponent guru websites ....they have a calculator which is never explained but used exclusively to sell you on the idea. Granted the heloc method works better than paying a 30 year mortgage in typical fashion but if your getting a Heloc go in with your eyes wide open. Also I do understand the value of direct depositing your income into the heloc every 2 weeks and it's affect on daily average balance. Problem is can we or do we have a calculator that shows the true benefits of the affects of the heloc with income deposits and chunking and does it match up with what some of these websites show. Interest earned is the same as interest saved.
You're asking the right questions. We've modeled out exactly what you're asking dozens of times on this thread: https://www.biggerpockets.com/forums/61/topics/269...
Any savings due to the difference in calculation methodology between a HELOC and a mortgage, are at best a few hundred dollars over the life of the loan. If your HELOC has any fees or has a higher interest rate, any savings quickly become a loss.
After debunking every version of the strategy, some folks have resorted to just calling the HELOC a financial discipline tool that helps them pay their mortgage. I don't quite understand it, but I guess to each their own. It certainly doesn't save you any money though.
Originally posted by @Chris May:
Originally posted by @Brie Schmidt:
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?
Noooooo. BP needs to do something to reign this in.
There are two other threads on this topic with 20+ pages of comments each debunking every version of this strategy.
Even in a best case scenario, where the rate on the HELOC is the same as the mortgage, you save something like $70 over the course of a 200k loan.
The people who promote this "strategy" fall into one of two categories: 1) they're selling something... either loans or financial advice, or 2) have a tenuous grasp of financial math.
Nooooo, you're missing the third category, brother! People who can see the endless cycle of homeowners wasting away under their debt because they don't understand how much they are paying to mortgage interest and promote the idea as an easy way to keep their extra income going toward getting them out of debt / saving money. Yeah, you can just put all of your income toward your mortgage, but you admitted last time that you have money sitting around in your checking account while you pay maximum mortgage interest, so let's compare doing nothing and staying in debt as long as possible to my flawed solution. I win.
My daughter is having a food drive at school and we were planning on taking canned goods, but maybe we shouldn't since that's not a perfect solution for getting every last homeless person off the streets. Thanks, is there a special bible for cynics or were you just raised that if you can't work it out using math it doesn't exist? :)
PS - Chris, I moved off of the other thread because I realized that there's nothing else we can "learn" about each other's viewpoints and your negativity is tiresome, but you followed me. So if you want to keep fighting long term, that's fine, but don't forget I at least tried to lay off because I know we're sick of hearing from each other.
Originally posted by @Victor S.:
I figured I'd run several scenarios on my own home. In one I'll do 10k 0% apr credit card transfers with one-time 3% fee yearly (first month), and another an extra principal paydown of $833.33 (10k annually) monthly.
Beginning balance -$80325, with $401.1 pi and 4.375% interest rate.
It's going to take the CC method 6 years (73 mos), with cumulative int paid of $10.14k and $1.8k in fees for a total of $11.94k in interest.
Extra payments will take 75 months for a cumulative $11.5k in interest paid. Looks like this is our winner: less interest and no need to ding the credit if you can save this much monthly. Sure, you can probably get the balance transfer at 1.5% or even 0% in some cases, but I just ran with the most common % fee.
I'm not even going to entertain the HELOC idea :)
I'll just quote this again.
Why not use a 0% credit card instead of a variable heloc payment if you're so hell-bent on being creative?
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes7y
Oy vey...I can't believe these threads are still here & still going.
I don't have anything against anyone using a HELOC the way they suggest - hey, more power to everyone! - but it needs to be shown for exactly what it is - a psychological tool at best, if you are the type of person doesn't have the discipline to just make the extra payment to the mortgage. Interest rates being the same, there's no difference in the total amount of money you pay or save (maybe a couple of dollars one way or the other related to fees and timing).
I'd love to know how many people running this racket instead slip up and DON'T pay the HELOC, and instead go to Cabo or buy a Jet ski and then have to deal with double interest. This game presupposes you'll always have enough income coming in to make that super-big mortgage payment, then you pay back the HELOC by direct deposit into the account. But what happens the time the car breaks down or you need extra money for something else? What happens if you lose your job before you re-accumulate enough money to pay off the HELOC?
My point: if you're disciplined enough to have an emergency fund, and pay a substantial extra towards your mortgage every month, why would you need this psychological tool to get you to do it?
Skyline Properties - 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
@JD Martin
This "RACKET" is not for the financially irresponsible. How would you handle your car breaking down now? What would you do if you lost your job now? Those are irrelevant questions. Nothing is different in your daily life except how you move your money. It is more than psychological benefit. This method is far from a "racket".
With all due respect, Mr. Martin I wouldn't expect a moderator here to sling mud at a technique he doesn't agree with.
@Victor S.
With a credit card, there is inherently more risk. The money used to pay the mortgage would be a cash advance which likely wouldn't fall in to the zero percent rate. The banks are more likely to freeze the balance or even change the terms mid cycle. I am sure there maybe other reasons but this is what I can think of at the moment.
So before you say the banks can do that with a heloc, I will address that to. The bank is less likely to do any of the above because the HELOC is secured by the home. Your terms will not change in the middle of the contract with a heloc.
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