All Forum Posts by: Nick Moriwaki

The concept of replacing your mortgage with a HELOC is not about control. It's about simply reallocating your funds to pay less interest over the course of paying off a debt. People think you need to restructure your way of life when you use the strategy, but it's just not true.

Additionally the cost to obtain a HELOC can be very minimal (DISCLAIMER: THIS MAY JUST BE FOR HAWAII PEOPLE). I know a handful of people who have paid nothing to swap a mortgage for a first position HELOC.

As Steve said, it's your money and you should use it however you want.  The dollar amount and what you use it for is not so relevant in this discussion, but your question does highlight the options a lot of people face when looking at using the equity they have in their home, thus the amount of people who are drawn to this thread.

One way I've described the first lien HELOC strategy is "instant refinancing" based on how quickly you can access your equity once you obtain the HELOC. The benefit of this relative to a normal refinance is that the traditional route of refinancing prevents you from choosing when you start accruing interest. Imagine you refinance your home to get the funds and then you don't get around to finishing the project until a year later. You just paid a years worth of additional interest compared to someone using a HELOC. This is in addition to the benefit of being able to route all your income/expenses through the HELOC as you mentioned. Based on the numbers you provided, I see no reason why you wouldn't be able to be approved for a first position HELOC. It just comes down to how much you want to add the pool and terms of the HELOC you can obtain.

No problem. If you did the cash to HELOC workaround you wouldn't have to worry about a seasoning period (I don't think) since you wouldn't involve the bank until after closing on the property (which you would then own free and clear). In my experience the only hold up was the delay in getting my name tied to the property in the state records.

Not to my knowledge, although you would think it wouldn’t matter to the bank. One specific branch was doing it in Hawaii for a short period of time, but then they stopped.

One way to get around this is to find some way to come up with enough money to finalize the sale through cash (e.g. - borrow money) and then just refi that money out via the HELOC to repay that debt. One extra hoop to jump through but it puts you in the same place. You just want to be sure you qualify for the HELOC and what the terms will be prior to doing so. Hope that helps.

@James Wisniewski

Then you should have no problem converting it to a first position HELOC. You could also ask what their terms are regarding LTV and things like that to nail down the reason they are saying you cannot get a first position HELOC. Additionally you would most likely need to qualify using a higher rate than the HELOC would initially start off at since it is variable and they want to be conservative. If neither of these two items are an issue then I can't see why they wouldn't let you do it.

@James Wisniewski

Sometimes the banks won't understand your intent and assume you mean second position rather than first and then tell you that you can't get a HELOC for the amount you want. Do you have a decent amount of equity in your property?

@Brent Coombs

I present you the following posts (within this thread) where you have not been just "tempering those assertions":

1) Jane posted that she was interested in paying down her mortgage balance faster using the strategy. You jumped in and advised that she should also be looking at using the HELOC for future investments instead of just to pay down the balance. Great, no problems up until this point. She then says she can't seem to get a HELOC for over $50K to which you said:

In reality, her problem may have just been that she was trying to get a second position mortgage, rather than a first position.  But instead, you proceeded to try and re-direct her away from the strategy.  Not because you've analyzed her situation or her options, but because you were saying "extra principal only payments will yield similar results."  See how you fall into example 1 of my previous post?

2) David seemed to have a grasp of the strategy, but was thinking of going on a roundabout way of getting the first position HELOC. You immediately got on his case and said:

Do you know what interest rates he could get on a HELOC? Or what his future plans are? Maybe he wants to start looking for a rental and getting approved for the HELOC would help him do that while dumping in his savings to benefit from a lower daily balance than he would have with the mortgage.

Bottom line, to make a determination on what is best for people, you have to take in all the factors and you are jumping to conclusions way too fast based on your tunnel vision that low interest mortgage > variable first lien HELOC.

What you're talking about is the second part of the discussion. Once we get past the fact that, on an even playing field, the HELOC strategy wins out, people need to crunch their own numbers, research what kind of rates are out there, do their due diligence on the risks, and then identify if the strategy is for them. But they can't get there if every time they ask a question about it people like you criticize them and tell them it's just a play on numbers and they're not actually saving anything.

@Brent Coombs

The issue I have is that when people keep saying they’re going to employ the strategy or show any interest you keep jumping in and saying “why would you get out of your low interest mortgage?”   If we’re truly on the same page that question should be answered by the two scenarios I presented in my previous post.  

@Brent Coombs

That was the HELOC balance.  Not the HELOC limit.  In the example, the $50K was being used to pay down the HELOC immediately after obtaining it.  Therefore the available balance will be at least $50K - the same amount that was available in your bank account.    The difference is that for whatever period of time that money is sitting in your HELOC it is essentially earning you the percentage of your HELOC since your balance is that much less.  You can't fully replicate this with the mortgage because it is not revolving.  

The part that you're saying you agree with has been my main point for the entirety of this argument.  Given equal interest rates, the first position HELOC strategy will put you in a better spot financially than keeping the mortgage. The two comparisons that keep coming up are:

1) You pay extra to the mortgage to try and keep up with the first position HELOC strategy. Depending on what percentage of your excess income you put towards additional principal payments, the difference can range from a small amount to a significantly large amount but keeping the mortgage will never pay less interest nor will you ever have access to more funds. Additionally there is an opportunity cost associated with this since whatever extra money you allocated towards principal only payments are not available to be used without refinancing or selling. This is for the people who say "just pay extra to the mortgage".

2) If you want to make the interest savings the same while keeping the mortgage you need to zero your bank account and take out a personal loan, CC debt, or a second position HELOC as you said a couple posts ago. Interest savings in this comparison are essentially a wash, but the first position HELOC provides much more convenience, flexibility, and investing capability given that all your finances will run in and out of that HELOC and you'll have access to more funds due to the limitations of the backup funds you mentioned. This is for the people who say "you can realize the same savings by keeping the mortgage - there's no magic here."

If you're saying you have no issue with both comparisons and agree that the first position HELOC strategy is better in both cases then we may have just wasted hours of hours of our lives arguing about something we actually agreed on.