All Forum Posts by: Alex Corral

@Alex Corral as some have pointed out, there are still tax advantages to a HELOC, you just need to document things more clearly so that the trail of money is more obvious. The key to this strategy is to find a competitive HELOC. My current HELOC is for over $1M on a 10 year draw at prime MINUS 1%.  I pay down my loan at an accelerated pace by calculating what my monthly nut would be if I had a higher fixed rate mortgage and paying that amount vs what is actually due. The delta is applied to principle.  If I need money in a pinch I can access it easily with the HELOC.  With a traditional loan I would be behind the eight ball and potentially need to do a "cash out refi".  

But rates are creeping up very quickly, so I am currently refinancing my HELOC into a 5 year fixed rate HELOC at 3.5%. Using the HELOC strategy makes you look so much stronger in a tough market. Once the property was seasoned, I pulled a stand alone commercial loan and recharged the HELOC. Once my refi is in place I will be ready to go shopping again.

The HELOC strategy is really like a "self funded" short term bridge loan, that allows you to get into the property.

I don't think there is a problem with your spreadsheet. I just went to a fixed rate mortgage calculator and punched in $200,000 at 5.5% and term of 63 months. The payment would be $3662.18 for 63 months and total repaid is $230,717.50. If you change the rate to 4.5%, it saves around $5000 worth of interest. 

Obviously there is no option for 63 month fixed rate mortgage, but even if you take out a 30 year mortgage, then pay $3662.18 per month, the loan will be paid off in 63 months with $230,717 paid back. On a 30 year fixed, the payment would be $1135.58, so you would be required to pay that minimum, which is well under your $2000 rent. When you pay the extra principal, you just accelerate the 30 year and turn it into a 63 month loan.

I hear what you are saying on closing costs, but I still think there is higher risk of rate fluctuation. Each percentage point of interest is going to cost you roughly $5000, so you have to decide what the risk is. 

As far as your last comment about being broke paying down the mortgages with money stuck as equity, that is not really the case. Since you still have the HELOC, you have access to even more money. You could even float the payment each month from your HELOC, so if your spending is higher one month, you just have a little balance on the HELOC until the next month.

@Alex Corral there is lots of mis-informaiton about HELOC interest in the forums. I have participated in discussions around this and the split is between people who understand how interest works and people who don't.

Interest accrued on a HELOC and fixed rate mortgage is calculated the same and is based on the outstanding balance and interest rate. In other words, if I took out a HELOC for $100,000 at 4% and paid monthly even payments over 30 years, it would be the same as a 30 year fixed rate mortgage at 4%.

The only way to pay off the loan faster is by paying more principal. If you applied the same principal payments to a 30 year fixed rate mortgage as you did your HELOC, it would pay off just as fast. In the comparisons I have done, usually the HELOC takes longer and you pay more interest, because of the higher interest rate on the HELOC.

The advantage of the HELOC as a "savings account" is that all your capital goes immediately towards principal pay down. People find it easier than making extra principal payments on a mortgage. The other consideration is that once you make a principal payment to a mortgage, the cash is gone towards equity. With a HELOC you can just take the money back out if you need it.

I like your strategy of using the HELOC to make cash offers. In today's competitive environment, that gives you and advantage. I would refinance the properties into 30 year fixed rate mortgages to lock in low interest rates. Your HELOC is variable and the way the FED is raising rates, you will be stuck paying 1-2% more interest in a year or two. You are better off locking in the low fixed mortgage rates and making extra principal payments.

The typical draw period for a HELOC is going to be half of the term. So a 15 year will generally have a 7-8 year draw period. If you can get a 20 year a 10 year period may be attainable. Haven't heard of them in my area but I don't call 15 banks looking for a single loan :)

Source - I have a 15 year HELOC, draw period is over, balance $80k, 3.25% interest, monthly payment $1140! Yes, going to refi soon.