All Forum Posts by: Nick Moriwaki

For those following this thread the strategy plays out like this. With a first position HELOC, you can dump all your money (including your bank account) to lower the HELOC balance. For those saying "just match the HELOC payment", this is not possible with the mortgage (you would be zeroing out your bank account monthly).

The difference in being able to apply more money to the HELOC functions exactly like making a big chunk payment to a mortgage, which significantly reduces the interest accrued over time. This goes against another commonly made argument that the HELOC saves next to nothing.

And lastly, the HELOC is a revolving line that allows you access to all the money you put in to come back out. This keeps your money available to take advantage of other opportunities as they present themselves (even sooner than with the mortgage). Another commonly made argument that doesn't apply to this strategy.

Here is a spreadsheet that shows the difference between 3 common scenarios

1) Making minimum payments to a mortgage

2) Making additional payments to a mortgage

3) Using a HELOC in first position to replace the mortgage.

Originally set with $200K balance @ 5%, $2000/mo cash flow (not including the mortgage payment), and a $50K bank account. The bank account numbers are to demonstrate how different the finances will look when using the HELOC method. The spreadsheet also allows for changing up the variables (bank account, cash flow, HELOC interest rates, etc...) to model different scenarios. Hope this helps anyone having trouble grasping the strategy.

"FYI, my example is getting a HELOC that replaces the mortgage at the time of closing, not having enough equity to open a HELOC then make the transaction myself."

I don't know where I said I was getting approved for both at the same time. And it's not implied in my spreadsheet either. My scenario is replacing the mortgage with the HELOC instead of getting the $20K HELOC in second position.

Now that I hope that that's clear (and the other discussions have died down), I'm still looking for arguments against my scenario.  I rounded the monthly payment to resemble a mortgage that was paid for approximately 18 months before being converted.  Also, I don't use the promotional rates because it's not what makes the strategy work.  No disclaimers needed.

@Mindy Jensen  - I believe this is different than what most others have presented.  You don't need to stay on top of your finances, you save more than just pennies, and you don't forgo the ability to invest in future opportunities.  Thoughts?  

You can use my spreadsheet to see the numbers.  Ignore everything but the mortgage column.  Initially it starts with a $200K mortgage and $186K of mortgage over the life of the loan.  If you change the balance to $190K (paying the $10K), you can see how the interest and principal column changes (i.e. - jumping payments).  The updated total interest paid changes to $155K, the $21K difference you keep referring to.  

The initial premise of this was that you normally don't have the equity to get approved for a large HELOC if you are keeping the mortgage. In that event you could still realize the savings but your emergency fund is limited by the HELOC amount you are approved for, whereas my emergency fund starts at a minimum of $50K in the example (if max HELOC approved is $200K then I dump in the $50K). FYI, my example is getting a HELOC that replaces the mortgage at the time of closing, not having enough equity to open a HELOC then make the transaction myself. For example, if the property in the example is worth $275K then my scenario opens up a $220K HELOC (80% LTV) with a balance of $200K then dropping it to $150K with the cash instead of keeping the mortgage and opening up a $20K HELOC as buffer.

The other alternative is to use a PLOC with the HELOC and the mortgage to achieve a larger buffer but again, the much simpler and more flexible way is just to get the max HELOC. Granted this is riskier based on HELOC balance and the size of the PLOC you can get.

Also, the background to the example was that people in the thread continuously said the blanket statement of "just use cash to do the same thing, you don't need the HELOC". My example was a counter example where you can't just use cash to keep up with the HELOC payments.

Well, the HELOC allows you to do what I laid out in the spreadsheet. The mortgage version (ARM) does not since you would still not be able to zero your bank account.

The interest rate after the promotion reverts back to the Fed rate + a percentage (I think 2%) but never less than 4.5%.  And there are limits on rate increases year to year and the cap based on the initial variable rate if I remember correctly.  

I believe the reason lies with the way most people in Hawaii have their finances structured. Because the housing prices are so high here, most people carry sizable mortgages with a decent amount of equity. With the promotional rates, the banks entice people to take out decent sized HELOCs (second position) for renovations and such. Because the HELOCs require interest only payments and the starting interest is so low, people just pay small amounts not realizing how the future rates will affect them (also not knowing how easy it is to move from bank to bank). This is similar to how I imagine people get into credit card debt by seeing the minimum payment amount of $80 and not realizing how astronomical that is on say, $5000 of debt. I think a large majority of people know to stay away from credit card debt, but don't realize that HELOCs function the same way. Additionally, since the banks make you sign up for auto pay to obtain the HELOC, I'm guessing they're hoping that you just forget about monitoring the payments when the interest rate reverts back to the variable rate. Also, conventional thinking is that variable rates are the devil, so no one would even consider swapping their entire $500K mortgage balance for a HELOC even with the promotional rates.

Again, this is all speculation on my part, but I'm happy to take advantage of it whatever the reason is.    

I don't quite follow what you're saying about the liquid funding, but let me know if you still think so after looking at the spreadsheet.  

You are correct about the interest rates though. The spreadsheet allows for modifying the rate each year to see how vulnerable you are. There are usually clauses in HELOC paperwork that limits the rate increase from year to year so it limits the risk a little.

This is the "wait there's more" part, at least for Hawaii people.  Pretty much all HELOCs come with a promotional rate as long as you basically set up auto pay.  These rates are sometimes dependent on how long you want it to be locked in for (e.g. - 0.75% for 1 year, 1.75% for 2 years, 2.75% for 3 years).  Others are fixed increments - 1% first year, 2% second year, then variable.  The great thing is you can leverage your options against the bank to see if they will increase the length of time they will give you the promo rate since you can always just refinance to another bank that will. 

Pair this with what I laid out in the spreadsheet and you can do some major damage to the amount of interest you pay on your loan. 

Justin - see my spreadsheet on page 10 of this thread. The HELOC strategy I lay out is the same thing others are mentioning, except the chunk is the entire mortgage (i.e. - mortgage goes away and only carry the HELOC). Then instead of keeping a positive checking account balance I keep a smaller HELOC balance by dumping the money from the checking into the HELOC. I don't lose access to that money since it's in a revolving line and my balance is smaller than any mortgage balance given the same parameters so therefore the interest accrued is less. This compounds over time for a significant savings. Take a look.

Chris - I guess I see where you guys are coming from now in regards to the HELOC chunk strategy. To sum up, if the HELOC is less than the cash available, you can always match what the HELOC is paying towards the loan. To be honest, I never really dug too deep into it since I was always a proponent for converting the mortgage to a HELOC.

However I still haven't heard a good counter for my variation that swaps a mortgage for a HELOC. In this scenario, the counter-argument of "just match the HELOC" doesn't hold since you would be advocating for zeroing your bank account every month. So since there is the ability to pay more to the balance there is a net interest savings.

I guess instead of saying that the "interest is calculated daily" I should say "since every day the interest is calculated on a smaller balance" then I save on total interest.  Therefore I save on interest, and can invest in anything the person with the mortgage can.  Thoughts?

I'm on board that the interest calculated is the same.  Once we get past that, isn't that where the debate begins?  I guess I can wait until you finish insulting each other if that helps, but I don't see why you would try to keep steering me to an argument that I agree with you on.  

How is what the original post said not what I am describing? Just look at the spreadsheet - my checking account is my HELOC. That's why the bank account stays at 0. My available money is what I can pull from my HELOC, not what's in my bank account. Because the interest is calculated daily, I can pay down principal much faster than a traditional mortgage. Seems like this is perfectly in line with what was originally posted.

My point is that you can save more interest than conventional mortgage paydown strategies, which people keep saying they would rather do. You've argued that the full conversion to the HELOC is the same as doing the same with a mortgage. Interest savings wise, yes. Risk wise, not even close. Aside from the fact that it not even possible, except on a spreadsheet to execute, the concept of someone emptying their bank account and then taking their paycheck and dumping that into their mortgage every month is not something I can comprehend. Shouldn't a valid counter-argument be one that is actually realistic?