Truth in Equity - HELOCs

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Does anyone have experience using a HELOC to pay off a mortgage early? I just bought my first property and had never heard of such a concept until I was recently listening to the Real Estate Guys Podcast. I've been listening to them for years and have a decent amount of trust/respect for them. This company and the concept seems legit. Any thoughts?

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BE AFRAID!!! BE VERY AFRAID!! I was wondering about it to and after I investigate it I came to the conclusion that it is very dangrous. The interest rate is variable and in case of extensive inflation, you won't be able to keep up with the payments.

yeah that is a concern of mine too. at the same time, the interest rate is based on the loan balance which is being depleted very quickly. i'm really exploring my options and trying my best to think differently during these turbulent times.

just pay extra on your mortgage by yourself. it's free and safe!

Josh is right. If you, for instance have a $100,000 30 years mortgage fixed rate at 6%, aditional $200 a month toward the principal, would pay off that loan in 16.5 years. and you'll save $58,117 in interest. The only draw back is that it requires discipline.

I've been doing it for a while on one of my rentals, putting all my positive cashflow (Which was about $150 a month) against the principal. I have a 30 years loan but I plan to retire in 15 so it should have worked perfectly, however, recent property tax increase, put me in the red, so that cash flow is gone... for a while.

Originally posted by Josh Green:
just pay extra on your mortgage by yourself. it's free and safe!

I think that's really all this deal amounts to. Its done as a HELOC so you can take the money whenever you want. You dump your entire paycheck into the HELOC, the pay all your bills using the HELOC.

As far as I can tell, the real trick is simply that you pay more than the scheduled payment. If your budget is cash flow positive by $200 each month, that $200 would normally set in your checking account. After a year, you'd end up with $2400 more in your checking account when you started. By using a HELOC as your checking account, that $2400 ends up as extra payments on the HELOC rather than in your checking account. If you take that $2400 and spend it, though, you're at the exact same point you'd be if you were just paying the scheduled payment.

There's a claim that by having your money in the HELOC for all your bills until the last minute, you'll pay less interest. If you're talking 15 days interest not paid on $2000 of bills vs. the interest on the $200,000 balance, this doesn't amount to very much savings.

Another flaw is every HELOC I've every seen has only a limited time "draw" period. Five years seems typical. After than your balance is locked down and you can't take anything out. So, the whole process breaks down at that point. If you dump your entire paycheck in you've just made a nice big payment. But you can't pay the rest of your bills. So, then what? I guess the plan is to refinance into a new HELOC.

Jon Holdman, Flying Phoenix LLC

Thanks everyone for the feedback and related articles. Jon, thanks for the info on the draw period. I wasn't quite sure how that worked as the company selling the idea of the HELOC didn't get into too much detail. Seems like the 3K they want to get everything started might not be worth it.

This is slightly off topic, but aside from throwing extra cash at the mortgage, does anyone have any opinions on life insurance? Similar to a HELOC the extra cash would be liquid. Not to mention tax free and would earn more than cash in a traditional savings account.

Hi HELOCs, very unstable and full of pitfalls.Life insurance? Like a single pay policy, modified life, etc...that's nut's, IMO. Ther is the cost of the insurance, every dime you put in is not a saving account, it pays for coverage as well. Life insurance is a very poor performing savings/investment, but not according to those who sell it! Use insurance for the purpose it was originally intended for, to fund losses arising from the unexpected death of an insured! That's all, a mutual fund of government securities won't earn much, but it's better than the wildest universal policy after costs. Life insurance is only a good investment when you know when you're going to drop dead....and you don't get any of it!!
There are creative uses for financial products, but using them to kite checks, living expenses or other investments is not a creative use, more like mismanagement. If you have a specific idea or use, run it by....not saying there is not a ligit use for some product, but if it has been presented as a new "system" beware, nothing is new! It's always based off of tried and true money management techniques. Bill

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

If you took out a brand new $200K loan at 6% for 30 years, then paid $3000 on it right away, you'd knock a whole year off the loan. And save $13K in payments.

As Bill says, life insurance is to provide for those you depend on you. Its to replace the loss of your income. Since the usually retirement guideline is that you should take 4% of your next egg out each year if you want it to last forever, you need 25 times your annual salary in cash to replace your paycheck.

OTOH, life insurance death benefits aren't taxable, unlike your paycheck. If you're paying 28% federal, 4% state, and 7.5% FICA & SSI, you're only taking home 60% of your gross pay. So, if you had 60% of 25X, or 15X your annual salary, you could still take the 4% and have the equivalent of your after tax pay. Now, the earnings on the nest egg would be taxable. So, perhaps somewhere in between those two figures.

That assumes two things:
1) There is someone who's totally reliant on your paycheck, and
2) They're going to spend the rest of their life living off the insurance.

If you're young and single, the first doesn't apply. Nobody's dependent on your paycheck, so nobody but you gets hurt if you step in front of a bus. If you retired and living off your nest egg, even if you do have dependents, there's no paycheck to replace. So, in those two cases, you don't really need life insurance, either.

When it matters is if you have a young family, your spouse is staying at home while you work, and you want to provide for them if you bite the big one. Even then, do you want to provide for him or her to live off the live insurance for the rest of your live? If so, then 15X, 20X or even 25X is not the right number. If you're 25 years old now, you would have some expectation of an increasing paycheck for many years to come. The 4% guideline really says take 4% of the nest egg the first year, and then increase the draw by inflation each year. That's not bad, but may not put your spouse where they hoped to be.

More realistically, IMHO, you want to provide your spouse the ability to adapt to the situation. That might mean paying off all your debt, buying a house free and clear, and providing baby setting money while your spouse gets a degree or skill.

Now, the other half of this story is proper savings and spending. If you're not saving at least 10% of your pay, you're slacking off. If you're spending more than you make (i.e., running up credit card bills), you're REALLY slacking off. I don't care if you make $10 an hour or $100 or even more, if you let them, your expenses will ALWAYS be 110% of what you make. If you're like most people, including me, you have to fight that every moment of every day.

So, buy cheap term life insurance, when you need it. If you're staring a family, buy more. Another member made an argument the other day to buy insurance when you're young and healthy to avoid exorbitant rates when you're older or especially if you end up with some nasty disease. I don't entirely buy the idea of buying a product you don't need on the chance that you will need it later and have to pay more, but there's something to consider. If you have a family history of cancer, diabetes, heart disease or the like, maybe buying sooner rather than later is a good idea. But being diligent about controlling the spending and saving is even more important. If you're 50, smoke and have had a heart attack you're going to pay through the nose for life insurance. If you have a $1 million nest egg (a reasonable goal), then that life insurance isn't so essential.

Jon Holdman, Flying Phoenix LLC

Is it your primary residence? Is your credit good? If so, why not refinance now to a 15 year mortgage at 4.25%. If you are flush and want to accelerate, do it when you have the extra $$. You could pay it off in less than 10 years without inflationary risk.

[email protected] | 214‑929‑6545 | Podcast Guest on Show #46

Disclosure: authorized associate for truthinequity

To understand the advantages of a line of the truthinequity business model you must first understand the differences between a line of credit, a checking account and a loan. 

 Three major differences between line and loan

  • Liquidity
  • How interest is charged
  • Payment Obligation vs. balance

How Interest Is Charged Liquidity Adjusting Payment Obligation vs. Balance
Loan Algorithm, Front end loaded compounding interest charges, Time Value of Money no no
Line daily average balance , simple interest yes yes

Therefore debts should be consolidated into a line because it has more advantageous features for the payee vs. the features of a loan.

Average household income and expenses

  • Income $4000 per month
  • Expenses $2500 per month

Average household Surplus

  • Before consolidation $500
  • After consolidation Additional $1000

The line of credit should then be used as a checking and savings because of the more advantages features. Therefore, surplus can be used to avoid interest charges.

The following video presents an example of conventional banking methods vs. The TruthinEquity banking methods

I used the HELOC method for a bit and it worked fantastic! Using $10,000 increments of a 60k line and repeating every time my HELOC was at 0. I'll tell you spend less knowing that the money is coming directly out of your house. It makes perfect sense and is the best way to pay down your loan the fastest possible. You should be able to refi no problem with the amount of equity you should have into another HELOC if you haven't paid it off by the ten year draw period and enter the 15 year principal and interest payments. Because of compounding interest savings usually out ways the Variable rate adjustments by buying down the interest so fast I was on pace to pay a 30 year note in 9 years changing nothing in life style just how my money was held. However! I reached a point were I relised paying off my home was a bad Idea! 1.I would loose my tax write off 2. I would have no savings as all my money would be buying down interest and tied up in equity in my home. 3. I could buy more rental homes instead using my HELOC idea and once HELOC at zero from placing all rental income in account and faster buying it down I could repeat. I switched ideas and ways of thinking that buying down my primary loan is a bad idea rather buy more rentals with 25% down create cash flow to buy down HELOC faster. 6 months on program 2 duplexes later. It's working for me so far best of luck. Mine is through the credit union at 3.25 prime +0 variable interest only open draw for 10 years and 15 year payback. Zero fees. Zero setup fees. Zero required balance. I can direct deposit write checks and draw money at the ATM. Great loan I believe everyone should have one in primary even if not used

Hi Ben , How are you? Thank you for your post. May I ask where you learned to use the line of credit like a checking and savings account. This is not a practice that is usually taught by our current financial industry.

not sure if the question was for me or Ben. But I was self taught by doing research on the Internet. There is a book out there too "how to own your home years sooner without making any extra payments. " I used that technique but made my own personal adjustments to fit my needs. 

@Brent Boltz love the whole concept question how do you find out how much your house is worth and where do you go to apply for a HELOC. I know credit unions are usually the best choice but is there a process that needs to be done to qualify or requirements.

You have to have equity. Some banks/CU's will lend up to 90% so you have to check with them to see how much you can qualify for.

For those saying it's the same as paying your net cash flow to your mortgage lender every month as an extra principal payment, it isn't.  You are missing the time variable and how your mortgage is amortized. 

Making one $2400 additional principal payment today is better than 12 monthly $200 payments. The more equity you have, the bigger the additional lump sum payment can be from a HELOC thus reducing amortized interest in exchange for simple interest. Then your pay gets deposited into the HELOC, lowering the interest calculated. As you pay your bills, your net cash flow pays down the HELOC until you reach a zero balance and then repeat the process.

732‑328‑7003 | NJ Agent # 1752120

This sounds very interesting strategy, but, I think, HELOC interest rate is a variable rate and I'm just wondering that it may offset the benefit of simple interest. How to manage this?

We recently heard of Truth in Equity via another real estate podcast and were intrigued enough to do some research about them. Turns out you don't need to pay them the 3000 dollars to do this strategy. You need three things to make the strategy work: a line of credit, a decent credit score, and a decent amount of cash flow left over after your bills are paid. The more money you have left over after paying your bills, the faster you can pay down the HELOC balance after using it. Of course, this requires you to use the LOC as a checking account from which all bills are paid.

We are in the process of doing this. Our plan is tweaked as follows: obtain HELOC; pay down principal on our primary home with a lump sum payment from HELOC, dump all paychecks into HELOC account, use another credit card to pay all monthly expenses, then use HELOC to pay off credit card bill. In a few months, the HELOC balance is back to zero and the process is repeated.

There is a lot of information out there about this. I think it can be done, though, independent of the mortgage accelerator company if you can find a good HELOC product and you're diligent in managing your finances.

Hi Stacey,

What you said is exactly correct!! My husband and I have been pretty much conducting our finances for the past 5 years according to what you stated, possibly with a few changes. Instead of a HELOC which would put our home in jeopardy if we could not pay, we instead went with an unsecured line of credit equal to one months' salary. The interest rate was slightly higher, but it didn't make that much difference because time in the contract is more important than the interest rate sometimes!

We also utilized a debt snowball computer program to help keep us on track with where we were in paying down our debts. So, all of our income went into the unsecured Line of Credit (LOC), we paid all of our bills out of there and because we actually spend LESS than we make, that surplus each month goes to pay down debt in large chunks, and eventually the mortgage this way. We have done this for over 5 years now. We actually pay very little interest on the LOC because it is calculated on the Average Daily Balance, which we keep high by putting income in immediately and paying bills right before they are due.

It works if you are disciplined in your spending habits and have a consistent income. 

@Lisa Taylor , YOU are the rare type of person who would have paid your debt down even quicker - with a (lower interest rate) HELOC on your own home, instead of that LOC.

(Or even quicker, by just putting every spare dollar into extra Principal-only mortgage payments).

Welcome to BP. You've got a lot of reading to catch up with if you're starting with 7yo threads!...

Thanks for the welcome! If we had qualified for the HELOC, we probably would have gone with it. However, things turned out just fine for us the way we did it.

And now...we are looking at utilizing an even more efficient financial tool than either the HELOC or the LOC. It's our own whole life, dividend-paying life insurance policy. Our money that we used to sock away in unproductive accounts is now earning interest + dividends tax-free AND we have full access to the money, no applications or penalties if we can't make a payment that month. So we shall see how this goes!

@Lisa Taylor depending on the company you have the life insurance with (maybe Northwestern? I see you're in WI) you may be better off to collateralize the cash value and open a secured credit line at a bank. Interest rates will be sub 4% and the interest is deductible. Interest you accrue on life insurance is not deductible and you have to think about the opportunity cost:

Option 1:
5% dividend on cash value
- Borrow from it at 8% (average for life insurance)
- True cost of borrowing is a 3% loss on that money, in simple terms.

Option 2:
Keep the cash in the policy earning 5%, go get a 3% credit line and you're +2% even before utilizing the money for an investment property or whatever. That's a 5 point spread.

I think that using a HELOC to pay down a mortgage quickly is a fantastic strategy. The few naysayers on this thread obviously haven't actually plugged the numbers into a spreadsheet. It works. Build a model and plug in different rates.

The more important question though, is why would you want to pay off your mortgage? Every dollar you put into the equity in your home will earn as much as a dollar you stuff under the mattress - zero. And you won't be able to get that dollar back until you sell the house or do a cash-out refi.

And of all the costs of home ownership, its the only one that is static. Your taxes, insurance, and HOA? will all be increasing with the value of the home. When a 30-year mortgage is coming to its end, the mortgage payment will likely be dwarfed by the insurance and taxes. Are you really financially free?

https://www.biggerpockets.com/blogs/7595/53796-does-paying-off-a-mortgage-early-buy-security

Don't pay off mortgages early. When you have a choice of paying the bank back now or later, take later. Put the money to work. I'd take a 30-year interest-only mortgage if such a product exists. And I'd refi that as often as possible.

Medium logo jpegThomas Rutkowski MBA, Innovative Retirement Strategies, Inc. | [email protected] | 561‑676‑8982

@Thomas Rutkowski

He is correct. The only reason to pay off a mortgage early would be to take advantage of the savings through a HELOC. If your intent is to simply lower your monthly payouts you would be farther ahead to sell the house and rent.

Letting money die a slow death in a property is a painful thought when you understand the true opportunity value of cash.

It is equilivant to harnessing a thoroughbred race horse to a plow.