Hi, I just watched The Kwak Brother's video on the HELOC debt acceleration strategy which they claim it can pay off your mortgage in 5-7 years. Does anyone know if it actually works? I am planning on doing around 5% down with owner occupancy financing (house hacking). Would this strategy work for me? I know that I cannot really get a HELOC until I have at least 20% equity in the property so should I bite the bullet and do 20% down instead? And open a HELOC as soon as possible? I would love to know if this strategy works and if it's worth implementing for my situation. Thanks.

The advantage I see with a heloc is I can make payments to it whenever I want/can throughout the month because it's with a bank I have an acct with. Simple to log into my acct and do a 'principal only' transfer so cash sitting idle as minimized. But I did this backwards. I paid off the mortgage, then got the heloc as a 1st. Better terms than a 2nd. i used the heloc to pay off a variable commercial loan (at a much higjer rate than my primary mortgage) and have been paying it down aggressively before my 3yr low fixed rate on that goes variable and doubles next year. It's ease of making payments is front and center for me. Establish your heloc, if you get one, with a local bank/CU you already have an acct with. The fees to establish were low and I like to support financial institutions that give back to my community. To answer the question though- financially it does not make sense to pay down a lower rate mortgage with debt from a higher rate heloc. I used a 4.3% Heloc to pay off a 6% callable, variable commercial loan. The math is obvious. These days helocs are more like 8%+. If your mortgage rate is less, and it certainly should be, it won't work to your advantage other than front and center mindset - maybe.

There is nothing magic about a heloc. The whole key is that you making extra payments on your mtg, using the heloc funds which you pay interest on exactly the same as you pay on your mtg balance,, then paying back the heloc. You can do the Same exact thing by just paying extra toward your mtg each month. The only advantage to the heloc is as a reserve in case you you need the money for something else.

Bottom line is it’s loaded heavier in the first 10 years regardless. That how amortization works. Simple interest or daily interest is the same and not front loaded.

@Jimmy Lieu The whole key is you’re paying an extra $300-$700/mo toward the mtg....it extra money that comes out of your pocket either way.

Thank you for clarifying... yes, I don't see how a HELOC would result in faster repayment because it accrues interest at a similar rate. The only way I could see this working is if the HELOC interest rate is lower.

Does the HELOC debt acceleration method actually work? Does the HELOC debt acceleration method actually work?

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Marco Anemone

Bolingbrook Illinois

Marco Anemone

Bolingbrook Illinois

Replied November 05, 2023 15:56

@Jimmy Lieu. Here is a simple mathematical question you should ask yourself that may help you answer your own question.

If the entire monthly P&I mortgage payment is applied completely to the principal (effectively at 0% interest) would you be able pay off the loan in 5 to 7 years? I think not. So if 100% of the payment goes towards the principal and it still doesn't work, then I submit to you that using a HELOC won't either.

Example:

$300,000 loan at 7% interest over 30 years equals monthly P&I payments of $1,996 for 30 years.

If the lender said to you "hey we're going to apply the entire payment towards the principal and forgive the interest", it would still take you 12.5 year to pay it all down ($300,000÷$1,996=150.3 month or 12.52 years) . Not 5, or even 7 years.

Now, if you can find a HELOC that will pay you interest instead, well then maybe. But keep me posted if you do.

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