All Forum Posts by: Nick Moriwaki

I think you're on the right track; the intent is flip your finances upside down where ALL your cash flow goes towards paying down your debt (minimizing your interest) and then only taking out money (e.g. - bills) and paying interest for that when it is needed.  This allows the money to work for you (saving you 5% or whatever your interest rate is) instead of sitting in a checking account.  It is the same as putting extra to your principal with the difference being you can put a lot extra to your principal.  

Additionally, you CAN use the available space in your HELOC to buy more properties if that is your intended goal. If you pay less interest and pay more of the balance off faster, you'll be able to clear enough space faster to use that as a down payment for another place. And you won't need to pull the money out until it is needed to close so that money can stay in the HELOC that whole time.

Also, not sure why all the threads related to the HELOC strategy all have arguments about how the interest is calculated. The interest may be calculated the same, but the balance going forward will be very different. The strategy revolves around the ability to pay everything you have towards your balance, which is not possible with a mortgage and thus the balance will go down a lot faster with a HELOC. Comparing the balance of the loans is not the way to look at it - it is the total interest paid for $X debt to be paid off that needs to be the focus. Unless I am missing something, the goal should be to pay as little interest as possible to achieve your goal. Whether that's paying off one place or 10.

@Sean Cole

I am talking about two different things, mainly because I am more a proponent of #1.  But the question refers to #2, which is why I address it in responses to @Jeff Goddard and @Stephen Renehan. Can you explain what you mean by "if the flexibility is worth it"? By using a HELOC and paying your entire income to it you pay less interest overall and gain financial flexibility to tap into all the money you are paying. What benefits are you gaining by sticking with a conventional mortgage besides a fixed payment? Please refer to my example earlier in this thread regarding a $100K mortgage with $100K in savings and swapping this for $0 debt, $0 savings, and a HELOC to provide funds as needed.

@Stephen Renehan

The basis for the HELOC strategy is that you pay it fundamentally different than a mortgage. Because it is a revolving line, you can easily put all your money towards it and then take out what you need when you need it. This lowers the daily balance by which the monthly interest is calculated and this effect over time will drastically reduce the total interest paid.

Paying extra to your principal will achieve similar results, but as an investor I would think this is the worst way to go because you are tying up your money and need to refinance in order to get access to it.  

@Mike Landry, you're exactly right, the benefit is the guaranteed return on investment of interest savings with the ability to liquidate it at any given time. I don't doubt you could easily get higher returns elsewhere, but I would ask if the returns are guaranteed and easily liquidated. Also, the money you save is what I like to call hidden income since money you save is the same as money you earn, but you don't have to pay taxes on it. I think these factors are pretty strong in favor of the HELOC if we're looking at it from an ROI perspective.

Sorry shouldn't have mentioned that for the purposes of this discussion. Here in Hawaii we have great promo rates so moving the entire balance into a HELOC frees up a lot of extra money to put towards the HELOC and you can do a lot of damage to the balance in the promo period. Most people in Hawaii will attest that if you have a mortgage here you don't have very much extra to feed to the mortgage if you aren't able to liquidate it easily. If I had a choice, I would finance through a HELOC initially.

The point of the scenario was to demonstrate that you could save X number of interest payments prior to actually using the money.  Heck, in 5 years when you need to dip into your emergency fund not only will you have your income from the past 5 years, you'll also have 5 years of interest payments you didn't have to pay on top of that.  If that's not enough, then you wouldn't have had enough running it your way either.  Then wouldn't you be stuck trying to pull out money at 6% - 15% as well?

@Riley Gilson @Chris May

I was directed here from a very similar thread that is currently ongoing so I too haven't read all the posts, but I can attest to the loophole in DTI using a HELOC, especially here in Hawaii where we have introductory promo rates as low as 1%. However, as @David Dachteracautioned, banks sometimes look at the HELOC differently.  One bank here only look at my interest only payment to calculate my DTI and another used a calculated interest only payment on a maxed out HELOC balance.  This can drastically affect your DTI if you are trying to run the numbers in advance.  

@Mike Landry

Understood on the first point of paying an extra $1500/month, but that money does not become unusable as it does for paying extra to a mortgage. I understand you can refi and get access to it again later, but essentially it disappears into paying down your mortgage balance. With a HELOC that is not the case, you can easily tap into any money put in prior.

I, personally, do not use a HELOC to pay down a mortgage. Instead I move the entire balance over into a HELOC. To me, this is a much easier scenario to model since you cab easily calculate remaining interest to be paid (remaining payments * mortgage payment - mortgage balance) and compare it to an excel spreadsheet for your paydown of the HELOC. Because it is a revolving line, I am free to put everything I make/already have into the HELOC to reduce accruing interest and can then take it out later if I want to use it.

An easy way to look at it would be if you have $100K in savings and a $100K mortgage. You could pay off the mortgage with the savings, but if that's all you had, you wouldn't even be able to cover your every day expenses. Now if you had a HELOC balance of $100K, you could, and should, put the $100K towards the HELOC to zero it out. This would reduce the daily interest that the account accrues while still providing the flexibility to use any portion of the $100K at any time you choose. Every day that money sits in your HELOC and not in your savings results in interest not paid to the HELOC (i.e. - money saved). And even with a zeroed savings you wouldn't be at risk because you have the HELOC to provide any funds you need for every day expenses.

The fundamental difference is that you CAN pay extra every month towards principle. The strategy is dependent on putting ones entire income towards the balance to reduce interest paid monthly. The end result is paying less interest for the same amount of debt. If one plans not to put their entire income towards the HELOC then the strategy will not work.

@Jeff Goddard

If you are using the HELOC to "chunk" the mortgage, you run all your finances (including the mortgage) through the HELOC. So for example, if your monthly income is $4000 and your mortgage is $1000 and average personal monthly expenses is $1500, you would be net positive about $1500 a month and a 6 month chunk should be $9000. This means after 6 months you should be close to a zero balance.

So to start, you would make a $9000 principle only payment from your HELOC to your mortgage. After your 1st month your HELOC balance should be at about $7500 ($9000 + $4000 - $1000 - $1500). Then after the 2nd month, your balance should be around $6000. And so on and so forth until you get it down to 0 in about 6 months. Then you would do it all over again. So you are still making your monthly mortgage payment and using the excess monthly income to pay down the HELOC.

This, of course, is a simplified calculation that ignores the monthly interest you need to pay for which I calculate to be approximately $35 to start, but that number will only go down every time you make payments to the HELOC. So essentially you would be able to reap the benefits of a $9000 chunk payment for under $200. Hopefully that clears things up for you.

The bank will loan up to $250K with little to no fees (not even an appraisal) if your property value is high enough.  Again, may only be a Hawaii thing.

@Account Closed, just to clarify, you are not really "prepaying" the same way you would prepay a mortgage.  It is simply putting your money there to suppress the amount of interest paid monthly.  The money can easily come out just as easily as it went in, unlike prepaying a mortgage.  This, I would think, would be desirable for an investor given that you can pay down the balance a lot faster giving you access to more available funds to use in the near future and not build it up extremely slowly (if at all) when paying $2500/month for 30 years.  This is why I think it is most useful here in Hawaii.  I can see people in the mainland not buying into it when the properties are valued at $100K - $200K and you can easily build up your bank account when paying sub $1000/month.