Paying Down Mortgage with HELOC?

Question

Hello, I'm trying to understand whether paying off my mortgage balance using a HELOC would make sense.  I am feeling confused about it, because the terms of each are so different.  The mortgage is a long-term, fixed rate loan charging compounding interest; the HELOC is a shorter-term, variable rate line of credit charging simple interest.  Can anyone offer guidance here for how to analyze?

Wayne Brooks · Answer

@Ryan H. There are many threads here about that. A couple of quick points....

Both loans calculate/charge interest Exactly the same way....your interest charge for any given month is the Balance times the annual interest rate divided by 12. An amortized loan is Not compounding interest.

The heloc “works” because you are Actually paying more than your scheduled monthly payment every month

You can achieve the Same thing by simply paying extra principal toward your loan.

If you had an amortized loan and a heloc, with the same balance and interest rate, and made the same exact payment to each loan, they would both get paid off at Exactly the same time

The Only advantage to the heloc is that you  have access to borrow money if you need it....since you’re putting more cash into your loan every month above the scheduled payment.

Any other “theories” or manipulation of the numbers to justify why the heloc is better are just simply BS.

Steve Vaughan · Answer

Leveraging a Heloc to pay down a higher rate is fine.  Doing it to accelerate a 2.75% fixed rate is just dumb.

Don't you have a higher rate and higher risk loan to pay down?

Kevin Sobilo · Answer

@Ryan H., there isn't quite enough information to give you a definitive answer to this. I would say 90% of the time, the move would be to keep the long term loan.

As long as your long term loan has a decent rate, why would you want to pay it off early early?!? You should be making money on the investment property after paying the loan. You are building equity by paying down the loan over time as well.

A HELOC is best for short term needs. For example, if you buy a distressed property, rehab it, and flip it for a nice profit. Using a HELOC makes sense because that process might only take you several months and then you can pay off the HELOC and not pay any interest until the next opportunity comes around.

Joe Villeneuve · Answer

You're looking at the wrong numbers.  Look at the difference in cash flow, realizing that as you decrease your CF, you are increasing your cost.  Your tenant is already doing this paydown for you...for free.

Sean Sloop · Answer

HELOCs generally have higher interest rates. So it would be like paying down debt by accumulating worse debt

Bill F. · Answer

Just to get on the same sheet of music, you want to pay of a fixed rate 2.75% loan with a variable rate,  4% interest loan, when real rates are teetering on being negative?

Michael K Gallagher · Answer

The most famous guy who pushed this whole thing was and is Clayton Morris, the guy who fled to Portugal after getting caught in a huge RE scam in Indy.  I'd tread carefully with anyone pushing this method. I can see where it might be worth while when interest rates are 6-7% and the HELOC is substantially lower....but at the rates they are now I personally don't see much of a point...the benefit of the leveraged debt being so cheap now is to be able to earn more on your money elsewhere.

Charles Situ · Answer

As others said, there isn’t enough information to provide a decision. Is the HELOC on the same investment property or is it on your primary residence? What are the rates on the 1st mortgage vs the HELOC?

I agree that generally HELOC is for short-term needs. But perhaps you want to pay off the first mortgage with the HELOC and just want to have flexibility to pay a variable dollar amount whenever you like and not have late fees if you don’t make a minimum in any one month—you just pay interest instead. Maybe you want this because your total cash flows fluctuate a lot and don't want to have keep a lot of cash reserves.

You may hear some investors using HELOC as a strategy for purchasing NEW properties. I think that works well if you have lot of equity in your home and don’t have a lot of cash. Having an HELOC in place allows to you participate as a cash investor, if the size of the HELOC is large enough, to win deals since the HELOC is easy to draw on—no waiting around a month or more for lender to approve a loan. It also avoids a few thousand dollars on closing cost for a new loan. Generally opening a new HELOC has very small closing costs (appraisal is the primary portion). I have even seen some lenders forgo all the fees/cost if borrowers draw a certain amount the first few months.

Ryan H. · Answer

The mortgage is a 30-year fixed @ 2.75%.  The HELOC is an interest-only @ 3.99-6.65% variable.

Caroline Gerardo · Answer

HELOC is usually 15 year payment and maximum cap is 18% What is the rate and term of the loan you intend to pay off?

Paying Down Mortgage with HELOC?

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