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Updated over 6 years ago, 04/25/2018
HELOC to pay for mortgage
- Rental Property Investor
- Baltimore County Maryland and Tampa Florida
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I have not used a HELOC, so I can't speak to which bank would offer you what you want. However, the local bank I used for my mortgages is Susquehanna, which is now BB&T. Have you also read other threads on here about HELOCs to be sure that's the route you want to take?
https://www.biggerpockets.com/forums/92/topics/50067-truth-in-equity-helocs
#1 Foreclosures Contributor
- Real Estate Professional
- West Palm Beach, FL
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#1 Foreclosures Contributor
- Real Estate Professional
- West Palm Beach, FL
Just make extra payments on your mtg with the same Extra money you would pay back your heloc with.
What do you mean by “Can’t use it like a checking account?” Do you mean that you want a reusable line of credit like a credit card? Don’t confuse Home Equity Lines of Credit (HELOC) and Home equity loans (which function exactly like a one-time use mortgage). Laws may differ in Maryland (I can’t imagine they would differ THAT much though..) but I just took out a HELOC myself for that exact reason. HELOCs typically function exactly like a credit card except thy are secured by the property you are borrowing against, whereas a normal credit card is unsecured. I took out a HELOC against my primary residence to pay for an investment property as well as the upgrades and it functions like a credit card. Basically, I have a set limit that I can’t go over, and I only pay interest on the amount of credit I use, when I use it. So if I use $10,000 worth of credit, I only have to pay interest on $10,000 and once I pay that $10,000 off, I am able to borrow against this line of credit again just like I would with a credit card. If that is what you are trying to do, I would say look at other banks, if they are saying it is not “reusable” like a credit card (or checking account) they likely aren’t aware of what it is you want and are offering you the wrong product.
On a related note, if you are in fact able to secure a HELOC, using it to pay off your mortgage may not be advisable in our current interest rate environment. HELOCs typically have adjustable interest rates that are tied to the prime rate, while mortgages typically have a fixed rate. If your mortgage has a fixed rate, you may be better off just making extra mortgage payments instead of taking out a HELOC to pay off the mortgage and risking the rising interest rate on the HELOC.
This is just my experience with HELOCs, I’m not licensed to give any kind of financial advice, check with your accountant or financial advisor to ensure you are utilizing the correct financial products to reach your goals.
Originally posted by @YiBing T.:
Why don't you just take the HELOC that you already have and use it to buy another rental property. We just applied for HELOC with that goal, Just don't tell banks what you want to use it for. We also thought about that concept to pat off our primary with HELOC, but came to a conclusion that we didn't want to park a large amount of cash into something that will not bring us any cash flow.
@YiBing T. Nice to see someone from my local area. I have a few properties in the area and one in Montgomery Village. As for HELOC to pay off your mortgage, the concept really caught my attention, so I did a lot of research and ran various scenarios using an amortization table using the HELOC method vs making extra payments. In the end, what I concluded is that you're better off just making extra payments, since the payoff comes in very close together. I'd even argue that making an extra payments beats the HELOC method slightly. As for getting a HELOC, I have had success with Navy Federal Credit Union. Good Luck.
Thank you all for the feedback. I was contemplating if I should use the cash to pay off or reinvest. Since I am fairly new to real estate, it is kind of a catch 22 where you want to save on the interest, but at the same time you also want to save for the next rental deals.
I did quite a bit of research when I heard about the HELOC to pay off you mortgage and then using that account as your main account to funnel all your income and expenses in/out of etc etc.....the principle is that you will have on average a lower balance that your are paying interest on each month etc.....and read a lot about comparing that method vs just applying extra principle to your mortgage. The conclusion I came to is that its way easier to just pay extra towards your standard mortgage. The other method requires you to be very disciplined with using the account for everything...and in the end it really doesn't work better than just paying extra to your mortgage each month. The difference...if any...is minimal at best and way more work.
If you are looking to pay off your mortgage quicker, just make extra payments......
Originally posted by @Ned J.:
I did quite a bit of research when I heard about the HELOC to pay off you mortgage and then using that account as your main account to funnel all your income and expenses in/out of etc etc.....the principle is that you will have on average a lower balance that your are paying interest on each month etc.....and read a lot about comparing that method vs just applying extra principle to your mortgage. The conclusion I came to is that its way easier to just pay extra towards your standard mortgage. The other method requires you to be very disciplined with using the account for everything...and in the end it really doesn't work better than just paying extra to your mortgage each month. The difference...if any...is minimal at best and way more work.
If you are looking to pay off your mortgage quicker, just make extra payments......
HI Ned,
You made really good points about the pay check parking strategy and yes you do have to have very good discipline. When I discuss this with clients I try to make sure its suitable because not everyone is suited to do it. Another thing that helps maximize the strategy is the amount of cash inflows a person has each month or the amount of inflows because on a revolving line the interest is calculated daily or on an average daily balance like what depending on the LOC (line of credit).
on the All in One or AIO loan from CMG the interest is calculated daily and swept or added to your balance at 12AM each day so all your paychecks, rental checks from rentals, or stock dividends, distributions from your business, or etc can be used to lower your balance by 12AM each day and lower your total interest costs.
Most HELOC's or lines of credit calculate interest on the average daily balance which is like all balances within the last 30 days divided by 30 which is not as efficient as the AIO's daily sweep but close.
The third method of interest calculation is the 30 year fixed which amortizes or calc's interest every 30 days or month so extra principal paid into this loan after the 1st of the month doesnt lower the incremental interest on the reduced balance till next month. This causes the borrower to pay compounded interest as their extra principal that month is not working for them this month and "sits," in queue to be recalcuated on the 1st of the next month.
This is not to say its bad or good because some people only get paid 1-2 times per month and have no extra cash flow coming in and dont have a lot of free cashflow at the end of the month so this might be the best strategy for their particular scenario.
To best maximize HELOC pay check parking or AIO daily sweep function a borrower that Im looking for is either:
- making a lot more than they spend per month like 1.25 - 2.0X income to expenses of the take home pay or more
- or has a lot of flows like mentioned above
- or combination of the above to super charge it
Originally posted by @YiBing T.:
Thank you all for the feedback. I was contemplating if I should use the cash to pay off or reinvest. Since I am fairly new to real estate, it is kind of a catch 22 where you want to save on the interest, but at the same time you also want to save for the next rental deals.
When you're not new to Real Estate, it's not a catch 22 at all! "Next rental deals" win, every time!