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Heloc to pay off mortgage faster
Originally posted by @Yoochul C.:
Ok, this is what I do. Lets just say I have a $30k rainy day fund. I use HELOCS for down payments on rentals that I purchase. lets say I use $40k for a down payment. I wire the funds from my HELOC to title. I use the 30K to offset my $40k, leaving 10K in my HELOC. Did my rainy day fund disappear? no. It is still accessible if I lose my job. With my excess savings and cashflow, I'll pay off the HELOC, grow my savings back up to the $30k and repeat. Its just financial discipline.
Now if i were to use the 30k rainy day fund to make a one time principal payment to my mortgage, then I don't have a rainy day fund anymore. I can't get that back from my lender. Am I doing anything wrong?
The challenge is that the bank might change the limit on HELOC credit line (with of without advance notice, coincidentally with another downturn etc.) so one can be short of of "reserves" he/she thought was there for a rainy day.
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Sergey
The only way to pay off a mortgage faster is to prepay the principal. I contract out with a lending company for $500,000 principal to be paid in 360 payments over 30 years, an average of $1,389 a month. If I want to pay that off in 20 years they will want that $500,000 at $2083 a MONTH That's $694 MORE a month. No Thank-you!
Yeah, the math works but it seems like splitting hairs to me. Just pay extra on it like it was a 15 year or refinance to a 15 year mortgage and spend your time and effort on something more lucrative.
As @Chris Mason alluded to, it is very reminiscent of a shell game. Get the HELOC and use it to make down payments on investment properties instead.
Are you saying that you rather have $51000 in equity that, in case of an emergency, you can partially pull out through an expensive refinancing than $43000 cash in the bank?
I'm not sure how it works in your area, but here in Hawaii if an application is for less than $250,000, the fees are minimal. You don't even need an appraisal. This is on top of having excellent promotional rates (something I don't bring up here since it skews peoples perception of how the strategy works). The fees and interest rates definitely need to be factored in, but my example was to demonstrate that the HELOC will outpace regular and even accelerated mortgage payments if used correctly. This is in response to all the people saying that you save little to nothing by implementing the strategy. The fees and interest rates can be modeled in the spreadsheet I provided, but I wanted to make it as simple as possible for a direct comparison.
What did you mean by "not being able to extract 100% equity"? In what ways are you generally extract 100% equity? And to clarify on your last point, I'm not paying money to use a loan to pay a loan. My example was substituting the HELOC in place of the mortgage.
How experienced are you with using HELOCs? Is what you're saying from personal experience? My contract with the bank is for a set number of years for a set amount so I'm not quite sure how they would do that, but if you're speaking from experience I should definitely look into it.
With a HELOC there is no refinancing required. If I have a limit of $150,000 and a balance of $99,000 I just write a check for $51,000. No additional fees, no questions asked. Like I, and others have said, the HELOC is no different than a checking account in that way. So to answer your question, yes I would rather have $51,000 of liquid equity than $43,000 in the bank. How would you go about getting $51,000 if you only have $43,000 cash in the bank? I'm thinking your "expensive refinancing" comment applies to the mortgage scenario rather than the HELOC. I'll take incurring the interest on the $51,000 over that any day. Oh and that doesn't even factor in the time savings to get the money if it were a true emergency.
We are moving in circles. You Heloc needs to be paid back, you cash reserve does not, making the cash reserve scenario much more comforting in times of an emergency. But I said this already. Your Heloc doesn't pay you interest, in fact it costs you interest, not good at times of financial strains. In the cash reserve scenario you not only have the cash reserve as an emergency fund, but also a much greater amount left to use in the Heloc.
Ok., I am leaving the loop.
Suit yourself. We are only going in loops because of false information you are providing. In your post you claimed that my $51,000 would only be able to partially be pulled out through an expensive refinancing. Neither of which is true.
My scenario said an emergency payment of $50,000 needed to be paid in month 24. Using my HELOC model, I would just write a $50,000 check as soon at the moment the funds are needed since I have the available balance. Yes, I would start accruing interest on that $50,000, but I still don't know what you would do in the mortgage scenario with only $43,000.
I don't see how this can be any more of an equal comparison. We both start at exactly the same place, make exactly the same amount of money, and pay the exact same amount for personal expenses. The only difference is the vehicles we use to manage our debt.
And to make an additional point, for those who keep saying "just pay extra to your mortgage it does the same thing", the month 24 bank account for those people paying $300 extra is just over $36,000. You would be in an even more liable situation.
#4 Off Topic Contributor
- Investor
- Round Rock, TX
This topic has come up a number of times many years ago. Here is a great article from a Professor Emeritus from The Wharton School:
The UFF Plan: Another Good Fairy of Rapid Payoff
This is a reputable source. I didn't read this whole thread and most posters on BP are woefully under-qualified to have a detailed finance discussion with about annuities.
The Cliff's Notes version to me is that:
1. There isn't any such thing as a free lunch
2. Consuming all of your spare cash to prepay a mortgage while relying on a HELOC is fraught with risk. Make sure you understand your loan documents well if you do this. Lenders are notorious for calling credit lines exactly when they're needed
Item 2's complication is compounded by the fact that 30-year conforming money is ALMOST FREE right now in real terms. 30-year conforming money can easily be obtained in the 3% range and a glimpse at the annual inflation rate:
Billions Price Project Inflation Rate
shows that rates are vacillating around 2%. So the net real interest rate on 30-year money is around 1% right now. If you can't find suitable investments for almost any horizon that exceed this cost of capital you probably should be posting on another website or call it quits.
Originally posted by @Nick Moriwaki:
It would be the same, but in what scenario would you ever pay your entire net income to a mortgage and leave yourself with no reserves? You can't access it (quickly) once you've put it in. That is the point of the strategy. You are reallocating your money into the HELOC at no risk.
I am not sure how you can support the statement that there is no risk. HELOC is secured against property value. The bank could review your HELOC line of credit and could reduce the amount or even call the loan. It depends on the terms of the specific loan and market factors. A few years ago when property values dropped to half as much in some cases, banks went back and reduced limits and called loans.
@Nick Moriwaki and @Yoochul C. one of the key concepts you guys need to understand is that there is no liquidity in a HELOC. The definition of liquidity is defined by how quickly you can convert an asset to cash. A HELOC is not an asset, it is a loan.
Actually, the only person providing information in this discussion is you. And the merit of these has been pointed out often enough.
Originally posted by @Joe Splitrock:
Originally posted by @Nick Moriwaki:
It would be the same, but in what scenario would you ever pay your entire net income to a mortgage and leave yourself with no reserves? You can't access it (quickly) once you've put it in. That is the point of the strategy. You are reallocating your money into the HELOC at no risk.
I am not sure how you can support the statement that there is no risk. HELOC is secured against property value. The bank could review your HELOC line of credit and could reduce the amount or even call the loan. It depends on the terms of the specific loan and market factors. A few years ago when property values dropped to half as much in some cases, banks went back and reduced limits and called loans.
That is interesting that they can do that despite having a signed contract. Depending how that all works, that would be the argument to use against the strategy, not that it doesn't save money.
In regards to liquidity, maybe I incorrectly used the term. My point is that with a HELOC you are able to instantly draw out money as quickly as another person can take money out of a checking account. If that is what you are disputing then I am confused.
Originally posted by @Nick Moriwaki:
Originally posted by @Joe Splitrock:
Originally posted by @Nick Moriwaki:
It would be the same, but in what scenario would you ever pay your entire net income to a mortgage and leave yourself with no reserves? You can't access it (quickly) once you've put it in. That is the point of the strategy. You are reallocating your money into the HELOC at no risk.
I am not sure how you can support the statement that there is no risk. HELOC is secured against property value. The bank could review your HELOC line of credit and could reduce the amount or even call the loan. It depends on the terms of the specific loan and market factors. A few years ago when property values dropped to half as much in some cases, banks went back and reduced limits and called loans.
That is interesting that they can do that despite having a signed contract. Depending how that all works, that would be the argument to use against the strategy, not that it doesn't save money.
In regards to liquidity, maybe I incorrectly used the term. My point is that with a HELOC you are able to instantly draw out money as quickly as another person can take money out of a checking account. If that is what you are disputing then I am confused.
I am just saying to understand the terms of your HELOC. The bank controls the limit and has conditions on when they can adjust it. When housing prices started falling several years ago, banks froze credit limits and if the HELOC term expired even called the loans in some cases. My argument on not using the HELOC as an emergency fund has to do with risk. Of course if I have $30,000 sitting in a savings account, the interest is much lower than what I could save by paying down my mortgage. You could argue in that keeping money in a bank account is a bad investment, but you I am trading return in exchange for lowering my risk.
The point here is that revolving credit is not a substitute for cash in an emergency fund.
Yeah, it definitely sounds like a way to increase your risk and hide the fact that you're actually just applying more money towards your outstanding debt per paycheck.
Seems to be a long scheme that still trips up investors through shoddy math.
I'd love to see them try it though.
@Drew Cameron Why would you want to pay off your mortgage faster? Unless you have really poor terms it's one of your safest hedges against inflation you can get. Use your HELOC like others suggest as a sweep account. I've been doing this for 2.5 years now and have dramatically turned my financial landscape around.
Principal - buy things on your credit card like normal, get your points/rewards. Use your HELOC to pay off that CC balance every month on the due date. Then every dollar you receive as income goes onto your HELOC to minimize the daily interest cost. All major companies and wealthy families do this.
And don't use your HELOC as a down payment on another property. You're just asking for trouble by doing that.
Good luck!
Any chance you have a home equity loan with fixed rate instead? Those do have set terms and rate.
My experience comes from a personal interest-only HELOC. According to my HELOC note agreement additional advances can be denied or amount of credit line can be reduced in following cases:
1) Value of secured property declines significantly
2) There is a reasonable believe that borrower won't be able to fulfill repayment obligations
3) Maximum APR reached
4) When a government body decides that taking addition advances constitutes unsafe banking practice
+ 3 other minor clauses
Few people I personally know have HELOCs open with pretty much the same terms.
The most risky part (at least in my HELOC note agreement) is the following: if any time unpaid balance on the account exceeds amount of credit limit then the excess becomes due immediately. This means that if HELOC has a balance of 100K secured by a property, equity falls significantly and the lender decides to lower credit limit to 50K, guess what: 50K becomes due the very next day.
This to me does not qualifies HELOC as "reserves". It is a secured revolving debt. Also, with "due on credit overdraft" clause is even riskier than a credit card.
-
Sergey
Originally posted by @Sergey Y.:
Any chance you have a home equity loan with fixed rate instead? Those do have set terms and rate.
My experience comes from a personal interest-only HELOC. According to my HELOC note agreement additional advances can be denied or amount of credit line can be reduced in following cases:
1) Value of secured property declines significantly
2) There is a reasonable believe that borrower won't be able to fulfill repayment obligations
3) Maximum APR reached
4) When a government body decides that taking addition advances constitutes unsafe banking practice
+ 3 other minor clauses
Few people I personally know have HELOCs open with pretty much the same terms.
The most risky part (at least in my HELOC note agreement) is the following: if any time unpaid balance on the account exceeds amount of credit limit then the excess becomes due immediately. This means that if HELOC has a balance of 100K secured by a property, equity falls significantly and the lender decides to lower credit limit to 50K, guess what: 50K becomes due the very next day.
This to me does not qualifies HELOC as "reserves". It is a secured revolving debt. Also, with "due on credit overdraft" clause is even riskier than a credit card.
-
Sergey
Exactly!! Even on item 2 if someone lost their job, that would be sufficient criteria to pull the line of credit. Just more reason that nobody should be using a HELOC as a 6 month emergency fund. At least with a credit card if you file bankruptcy, the cannot take your house.
I've seen lots of people use this strategy to pay loans early without paying a cent more each month. I've had so many inquiries I wrote a little explanation / summary. I get nothing for this post.
MORTGAGEACCELERATORS
These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan.
The general premise is to have your mortgage in the form of a home equity line of credit (Heloc), preferably in the first position. All your paychecks are deposited directly into the home equity account. You only transfer money from the equity line to your checking account once or twice a month to pay bills and get cash for general expenses. Since interest is compounded on the daily principal balance of your equity line, you will pay far less interest over the life of the loan because your paycheck income sits in your equity line rather than your checking account.
Illustration of concept
Several years ago I managed a law firm. Money market rates were 10% or more and. Passbook savings accounts paid around 8% interest. Business checking paid around 4%
Rather than depositing client payments into our checking account, we deposited all client payments directly into a money market checking account. We only transferred money from the money market account to our regular business account twice a month to pay bills. We would have paid bills with checks directly from the money market account but the bank had a high per-check fee. So we wrote only two money market checks a month to fund our general business checking account. We earned a very nice amount of interest by having our deposits sit in the money market account until needed to pay bills.
Mortgageaccelerator systems work on the same principal as in the illustration above. But instead of parking your paychecks where they will earn interest, you are parking them where you avoid incurring interest on your home loan. This makes sense because current rates for home equity lines of credit are around 7%-8% and money market accounts only pay around 3.5%. Even if you were able to secure an equity line a few years ago with a fixed interest rate of 5% or 6%, using a mortgageaccelerator system still saves money.
This is not a gimmick. This type of loan a powerful tool that must be used carefully. You must be very disciplined and in a positive cash flow situation for any accelerator to work properly. If you lack financial discipline, this type of loan can be disastrous.
Originally posted by @Olivia C.:
I've seen lots of people use this strategy to pay loans early without paying a cent more each month. I've had so many inquiries I wrote a little explanation / summary. I get nothing for this post.
MORTGAGEACCELERATORS
These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan.
Usually?
The only way to pay off a mortgage faster is to prepay the principal. I contract out with a lending company for $500,000 principal to be paid in 360 payments over 30 years, an average of $1,389 a month. If I want to pay that off in 20 years they will want that $500,000 at $2083 a MONTH That's $694 MORE a month. No Thank-you!
Originally posted by @Olivia C.:
I've seen lots of people use this strategy to pay loans early without paying a cent more each month. I've had so many inquiries I wrote a little explanation / summary. I get nothing for this post.
MORTGAGEACCELERATORS
These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan.
The general premise is to have your mortgage in the form of a home equity line of credit (Heloc), preferably in the first position. All your paychecks are deposited directly into the home equity account. You only transfer money from the equity line to your checking account once or twice a month to pay bills and get cash for general expenses. Since interest is compounded on the daily principal balance of your equity line, you will pay far less interest over the life of the loan because your paycheck income sits in your equity line rather than your checking account.
Illustration of concept
Several years ago I managed a law firm. Money market rates were 10% or more and. Passbook savings accounts paid around 8% interest. Business checking paid around 4%
Rather than depositing client payments into our checking account, we deposited all client payments directly into a money market checking account. We only transferred money from the money market account to our regular business account twice a month to pay bills. We would have paid bills with checks directly from the money market account but the bank had a high per-check fee. So we wrote only two money market checks a month to fund our general business checking account. We earned a very nice amount of interest by having our deposits sit in the money market account until needed to pay bills.
Mortgageaccelerator systems work on the same principal as in the illustration above. But instead of parking your paychecks where they will earn interest, you are parking them where you avoid incurring interest on your home loan. This makes sense because current rates for home equity lines of credit are around 7%-8% and money market accounts only pay around 3.5%. Even if you were able to secure an equity line a few years ago with a fixed interest rate of 5% or 6%, using a mortgageaccelerator system still saves money.
This is not a gimmick. This type of loan a powerful tool that must be used carefully. You must be very disciplined and in a positive cash flow situation for any accelerator to work properly. If you lack financial discipline, this type of loan can be disastrous.
I don't understand how you can say this doesn't count as prepaying your loan. You're making prepayments, and then just borrow more. If you just took the leftover portion of your paycheck and paid that to your HELOC on the first of the month, the effect is almost the same.
I modeled it out on a previous post in this thread and the savings in one year on a 50k loan was negligible.
Originally posted by @Chris May:
Originally posted by @Olivia C.:
I've seen lots of people use this strategy to pay loans early without paying a cent more each month. I've had so many inquiries I wrote a little explanation / summary. I get nothing for this post.
MORTGAGEACCELERATORS
These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan.
The general premise is to have your mortgage in the form of a home equity line of credit (Heloc), preferably in the first position. All your paychecks are deposited directly into the home equity account. You only transfer money from the equity line to your checking account once or twice a month to pay bills and get cash for general expenses. Since interest is compounded on the daily principal balance of your equity line, you will pay far less interest over the life of the loan because your paycheck income sits in your equity line rather than your checking account.
Illustration of concept
Several years ago I managed a law firm. Money market rates were 10% or more and. Passbook savings accounts paid around 8% interest. Business checking paid around 4%
Rather than depositing client payments into our checking account, we deposited all client payments directly into a money market checking account. We only transferred money from the money market account to our regular business account twice a month to pay bills. We would have paid bills with checks directly from the money market account but the bank had a high per-check fee. So we wrote only two money market checks a month to fund our general business checking account. We earned a very nice amount of interest by having our deposits sit in the money market account until needed to pay bills.
Mortgageaccelerator systems work on the same principal as in the illustration above. But instead of parking your paychecks where they will earn interest, you are parking them where you avoid incurring interest on your home loan. This makes sense because current rates for home equity lines of credit are around 7%-8% and money market accounts only pay around 3.5%. Even if you were able to secure an equity line a few years ago with a fixed interest rate of 5% or 6%, using a mortgageaccelerator system still saves money.
This is not a gimmick. This type of loan a powerful tool that must be used carefully. You must be very disciplined and in a positive cash flow situation for any accelerator to work properly. If you lack financial discipline, this type of loan can be disastrous.
I don't understand how you can say this doesn't count as prepaying your loan. You're making prepayments, and then just borrow more. If you just took the leftover portion of your paycheck and paid that to your HELOC on the first of the month, the effect is almost the same.
I modeled it out on a previous post in this thread and the savings in one year on a 50k loan was negligible.
It is still technically "paying" but since you have the option to pull out the money you put in (without incurring additional fees besides the interest) it's not the same as putting the leftovers of your paycheck into the HELOC. In a realistic sense, how would you even go about doing that without knowing exactly how much you'll spend day to day?
Say you had a HELOC balance of $50,000 and a bank account of $50,000. You could "pay" $50,000 to the HELOC balance and zero out both accounts. The next day you could take that money back out and put it back into your bank account and end up with the exact same starting numbers. But, for that day your HELOC balance was $0 and therefore the interest you pay for that day is $0. Had you left the $50,000 in your bank account and not put it towards the HELOC you would be charged $6.85 of interest (50000 * 0.05 / 365) for that day. It doesn't work exactly like that (average daily balance, time you put the money in/take the money out, etc...), but the point is that you cant do the same with a mortgage because you would need to pay money to get that excess money out.
Originally posted by @Sergey Y.:
Any chance you have a home equity loan with fixed rate instead? Those do have set terms and rate.
My experience comes from a personal interest-only HELOC. According to my HELOC note agreement additional advances can be denied or amount of credit line can be reduced in following cases:
1) Value of secured property declines significantly
2) There is a reasonable believe that borrower won't be able to fulfill repayment obligations
3) Maximum APR reached
4) When a government body decides that taking addition advances constitutes unsafe banking practice
+ 3 other minor clauses
Few people I personally know have HELOCs open with pretty much the same terms.
The most risky part (at least in my HELOC note agreement) is the following: if any time unpaid balance on the account exceeds amount of credit limit then the excess becomes due immediately. This means that if HELOC has a balance of 100K secured by a property, equity falls significantly and the lender decides to lower credit limit to 50K, guess what: 50K becomes due the very next day.
This to me does not qualifies HELOC as "reserves". It is a secured revolving debt. Also, with "due on credit overdraft" clause is even riskier than a credit card.
-
Sergey
Point well taken. However, I see this as a precaution not to be too agressive with the strategy, not that the strategy doesn't work, as most people are claiming.
Originally posted by @Nick Moriwaki:
Originally posted by @Sergey Y.:
Any chance you have a home equity loan with fixed rate instead? Those do have set terms and rate.
My experience comes from a personal interest-only HELOC. According to my HELOC note agreement additional advances can be denied or amount of credit line can be reduced in following cases:
1) Value of secured property declines significantly
2) There is a reasonable believe that borrower won't be able to fulfill repayment obligations
3) Maximum APR reached
4) When a government body decides that taking addition advances constitutes unsafe banking practice
+ 3 other minor clauses
Few people I personally know have HELOCs open with pretty much the same terms.
The most risky part (at least in my HELOC note agreement) is the following: if any time unpaid balance on the account exceeds amount of credit limit then the excess becomes due immediately. This means that if HELOC has a balance of 100K secured by a property, equity falls significantly and the lender decides to lower credit limit to 50K, guess what: 50K becomes due the very next day.
This to me does not qualifies HELOC as "reserves". It is a secured revolving debt. Also, with "due on credit overdraft" clause is even riskier than a credit card.
-
Sergey
Point well taken. However, I see this as a precaution not to be too agressive with the strategy, not that the strategy doesn't work, as most people are claiming.
If this strategy works as you claim EXACTLY how can you be too aggressive?
Originally posted by @Account Closed:
Originally posted by @Nick Moriwaki:
Originally posted by @Sergey Y.:
Any chance you have a home equity loan with fixed rate instead? Those do have set terms and rate.
My experience comes from a personal interest-only HELOC. According to my HELOC note agreement additional advances can be denied or amount of credit line can be reduced in following cases:
1) Value of secured property declines significantly
2) There is a reasonable believe that borrower won't be able to fulfill repayment obligations
3) Maximum APR reached
4) When a government body decides that taking addition advances constitutes unsafe banking practice
+ 3 other minor clauses
Few people I personally know have HELOCs open with pretty much the same terms.
The most risky part (at least in my HELOC note agreement) is the following: if any time unpaid balance on the account exceeds amount of credit limit then the excess becomes due immediately. This means that if HELOC has a balance of 100K secured by a property, equity falls significantly and the lender decides to lower credit limit to 50K, guess what: 50K becomes due the very next day.
This to me does not qualifies HELOC as "reserves". It is a secured revolving debt. Also, with "due on credit overdraft" clause is even riskier than a credit card.
-
Sergey
Point well taken. However, I see this as a precaution not to be too agressive with the strategy, not that the strategy doesn't work, as most people are claiming.
If this strategy works as you claim EXACTLY how can you be too aggressive?
The same way you can be too aggressive with any strategy and pushing it too far too fast. If the risk is that the banks could adjust your limit or variable rates will spike then you need to make sure if that happens then your profits aren't compromised. That could mean chunking away at your mortgage using a smaller HELOC at first or waiting an extra few months before purchasing another investment property. The more aggressive you are the more the more you can save (earn), but that also means if the something happens you're at a higher risk. Is that not true with all strategies?
You will only benefit if the interest rate on the HELOC is less than the interest rate on the fixed mortgage. Otherwise, make additional principal payments on you fixed mortgage.