Heloc to pay off mortgage faster

[Drew Cameron]

I recently came across a new strategy that I don't quite understand and it sounds too good to be true. The principal is simple. Use your heloc to pay your mortgage and funnel all your funds in and out of it like a checking account. The interest updates daily so you can pay down principal balance much faster than on a traditional mortgage. With a decreasing principal balance the payments go down each month as you pay it off. Plus you can get rid of other payments by funneling them into your account as well. Has anyone else heard of this? Or has anyone used this successfully?

[Christopher Brainard]

- Or you could be financially responsible and make additional principal payments to your current mortgage. This is a very simple strategy that can greatly reduce your balance over the life of your loan, but very few people take advantage of it. 

HELOCs often have slightly higher interest rates, so unless you have significant financial assets sitting in your checking again (which isn't good to begin with), I don't think a few hundreds dollars lower average balance is going to have much of an impact and may result in higher amounts of paid interest. I would also venture to say that funneling all your payments into a HELOC is more likely to result in putting them "out of sight, out of mind", resulting in more expenditures in your day to day life and hurting your overall financial well being.

There is no magic bullet or secret strategy when it comes to finances, but a little discipline can go a long way.

-Christopher

[Wayne Brooks]

Borrowing money, to pay back money you borrowed.....yeah sounds like a hell of an idea.

[Robert Ebeling]

Yes I've heard of that from VIP financial education. You accelerate your amortization schedule by making large payments.

[Dan Schwartz]

A friend of mine was selling a system that did this back in the depths of the recession.  That's 7-8 years ago, so I don't remember the name of the program.  But I created an excel spreadsheet to act in the same capacity, and yes it pays off the mortgage early and with less total interest payments.

But so does putting every available dollar of income you have towards the mortgage. That's essentially what this does. You are left with no net savings in your savings account, because every penny has been put towards the mortgage, albeit through the scheme of the HELOC.

It works, but I pass. 

[Carlos N.]

I've been researching heloc accelerator strategy. It make a lot of sense it uses all your surplus income (not saving, but I would help) to pay down you principal on a daily basis & you have access to your equity to pay bills. BUT YOU NEED TO SPEND LESS THAN YOU BRING HOME. The only issue I'm having is that banks don't provide this type of loan for the initial purchase. Even though the property comes with built in equity + your down payment. It's no surprise, this type of product does not make them enough money. To take advantage of this strategy I would need to take out a convention loan then refinance into a HELOC 1st lean position account.

Can anyone recommend a bank?

Thanks in advance

[Aaron Howell]

Its a strategy that can work if you're disciplined. The premise works on the fact that the HELOC has simpler interest compared to the 30 year amortized mortgage. You're knocking out huge chunks of Mortgage with the Heloc and thereby eliminating huge chunks of principle so you never accumulate interest on that portion of compounded mortgage.

You don't need to pay for a program to do this for you (put your credit card away) but basically you need to understand the principle and be able to apply it.

[Chris Mason]

Hell yeah, let's push some HELOCs! /s

[Wayne Brooks]

Jesus people, are you guys that dense?  There's no magical difference between interest on a heloc and interest on a Mtg balance, they are both simple interest.  It so obvious....you save over all payments on a Mtg by paying extra toward the principle, period.  You don't need to borrow the money to do this, and then pay the Same Amount (plus interest) back to pay off the heloc! Geeze.....

[Maricela Chavez]

I have a 30 year fha loan on a rental I purchased. I have owned it since 2004, I get offers to refi all the time. I pay 600 towards principal each month. It will be paid off in 4 years. If it sounds too good to be true it usually is. If you pay more towards principal you pay faster, end of story.

[Chris Mason]

Originally posted by @Maricela Chavez:

I have a 30 year fha loan on a rental I purchased. I have owned it since 2004, I get offers to refi all the time. I pay 600 towards principal each month. It will be paid off in 4 years. If it sounds too good to be true it usually is. If you pay more towards principal you pay faster, end of story.

 About 85% of the time when someone walks in, or I pick up the phone, and it's someone that wants to refi, I tell them not to and if anyone tells them they should, run the numbers by me and I'll show you why you shouldn't. 

And FHA from 2004 that you're paying $600 extra on each month, however, I'm thinking you may want to look at refinancing that into a 10 year fixed conventional mortgage product.... and keep making the exact same payments you are making now. 

I'm guessing you will shave 6-18 months off of it and be debt free that much sooner.

(I'm only licensed in CA, don't hit me up for this service if the property is in Georgia)

[Soh Tanaka]

The way I look at this is that this is pretty much the same as just using your monthly left over money towards the principal. The math will be different depending on the size of the HELOC and the monthly cash flow.

The benefit of HELOC is you can apply large amount of money first, instead of putting small amount of money month after month, which is the way you have to do if you don't have HELOC. The downsize is that you have to pay interest. People talk about the benefit of HELOC, which is you can access it again after you paid it back, but you can just pay down the principal with your extra money every month, and if you need some cash, just set up a HELOC and use it only if you need it. This way, you are only paying the HELOC interest when you need it.

I know successful real estate investors who like to pay off mortgages or buy houses cash, but at the end of the day, strictly financially speaking, it makes sense to use the extra money to buy more properties than paying down the principal. 

[Yoochul C.]

Originally posted by @Wayne Brooks:

Jesus people, are you guys that dense?  There's no magical difference between interest on a heloc and interest on a Mtg balance, they are both simple interest.  It so obvious....you save over all payments on a Mtg by paying extra toward the principle, period.  You don't need to borrow the money to do this, and then pay the Same Amount (plus interest) back to pay off the heloc! Geeze.....

Have you noticed that an amortized loan payment doesn't change whether you make extra principal payments and a HELOC monthly payment goes down as you pay off principle? Thats the difference between an amortized loan and a simple interest HELOC.

Therefore, using some portion of your HELOC to pay off the amortized loan is moving from one loan to another. The way it reduces your mortgage over time is that you use the HELOC to as a checking account. Any and all savings is used to pay off the HELOC. The theory is that if you ever do need cash for an unexpected bill, you would just use the HELOC for the additional cash. Over time, the HELOC amount will go down. The excess money you save goes to pay off the HELOC. Once the HELOC is paid off over time, you repeat the process.

It doesn't reduce a 30 year loan to 5 like some people state but it does shave a good portion of your loan. 

[Mike Landry]

Have you noticed that an amortized loan payment doesn't change whether you make extra principal payments and a HELOC monthly payment goes down as you pay off principle? Thats the difference between an amortized loan and a simple interest HELOC.

Therefore, using some portion of your HELOC to pay off the amortized loan is moving from one loan to another. The way it reduces your mortgage over time is that you use the HELOC to as a checking account. Any and all savings is used to pay off the HELOC. The theory is that if you ever do need cash for an unexpected bill, you would just use the HELOC for the additional cash. Over time, the HELOC amount will go down. The excess money you save goes to pay off the HELOC. Once the HELOC is paid off over time, you repeat the process.

It doesn't reduce a 30 year loan to 5 like some people state but it does shave a good portion of your loan. 

 Wrong! You obviously don't understand mortgages and how it works. Quick example. 3% interest on a 10,000 heloc and a 10,000 30 year fixed acrues the same amount of interest. 

As far as using your heloc as a checking acount...if you are paid 10,000 per month and are able to not touch your heloc (@5% interest) for 29 days you would save a woppping $40 in interest. Hardly with your time if you make 10,000 a month. 

[Yoochul C.]

Originally posted by @Mike Landry:

Have you noticed that an amortized loan payment doesn't change whether you make extra principal payments and a HELOC monthly payment goes down as you pay off principle? Thats the difference between an amortized loan and a simple interest HELOC.

Therefore, using some portion of your HELOC to pay off the amortized loan is moving from one loan to another. The way it reduces your mortgage over time is that you use the HELOC to as a checking account. Any and all savings is used to pay off the HELOC. The theory is that if you ever do need cash for an unexpected bill, you would just use the HELOC for the additional cash. Over time, the HELOC amount will go down. The excess money you save goes to pay off the HELOC. Once the HELOC is paid off over time, you repeat the process.

It doesn't reduce a 30 year loan to 5 like some people state but it does shave a good portion of your loan. 

 Wrong! You obviously don't understand mortgages and how it works. Quick example. 3% interest on a 10,000 heloc and a 10,000 30 year fixed acrues the same amount of interest. 

As far as using your heloc as a checking acount...if you are paid 10,000 per month and are able to not touch your heloc (@5% interest) for 29 days you would save a woppping $40 in interest. Hardly with your time if you make 10,000 a month. 

You really need to do the math. Making the same payment on a amortized mortgage and the same payment on a HELOC for the life of the loan would result a lot less interest paid on a HELOC assuming at $10,000 loan at the same interest. The interest on the amortized loan is front ended whereas the HELOC is simple interest.

[Mike Landry]

Originally posted by @Yoochul C.:

Originally posted by @Mike Landry:

Have you noticed that an amortized loan payment doesn't change whether you make extra principal payments and a HELOC monthly payment goes down as you pay off principle? Thats the difference between an amortized loan and a simple interest HELOC.

Therefore, using some portion of your HELOC to pay off the amortized loan is moving from one loan to another. The way it reduces your mortgage over time is that you use the HELOC to as a checking account. Any and all savings is used to pay off the HELOC. The theory is that if you ever do need cash for an unexpected bill, you would just use the HELOC for the additional cash. Over time, the HELOC amount will go down. The excess money you save goes to pay off the HELOC. Once the HELOC is paid off over time, you repeat the process.

It doesn't reduce a 30 year loan to 5 like some people state but it does shave a good portion of your loan. 

 Wrong! You obviously don't understand mortgages and how it works. Quick example. 3% interest on a 10,000 heloc and a 10,000 30 year fixed acrues the same amount of interest. 

As far as using your heloc as a checking acount...if you are paid 10,000 per month and are able to not touch your heloc (@5% interest) for 29 days you would save a woppping $40 in interest. Hardly with your time if you make 10,000 a month. 

You really need to do the math. Making the same payment on a amortized mortgage and the same payment on a HELOC for the life of the loan would result a lot less interest paid on a HELOC assuming at $10,000 loan at the same interest. The interest on the amortized loan is front ended whereas the HELOC is simple interest.

 The math has been done. This has been coming up a LOT lately. See link to previous threads. Interest is NOT front loaded. You pay more because you owe more.

Heloc to pay down mortgage myth

[Yoochul C.]

Its the difference between a compounded interest in simple interest.

[Mike Landry]

Enlighten me? show me the math? 

Simple interest is calculated only on the principal amount of a loan. Compound interestis calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as “interest on interest.

[Wayne Brooks]

@Yoochul C. No, it is not.  A 30 year amortized loan IS a simple interest loan....the interest portion of your fixed payment is 1/12th of the interest rate applied to the Current outstanding balance.  The simple fact is you are paying extra payments toward your loan...which reduces your outstanding principal balance....which reduces the monthly interest expense.....which means more of your fixed monthly payment goes toward principal(1/12th of 4% on $180,000 is less than 1/12th of 4% on $200,000).  What you are Actually doing by making extra lump sum payments, is moving yourself further down the payment schedule (say from payment # 20 to payment #40, depending on how much extra principal you pay down). Just take a look at a full amortization schedule on a 30 year loan....you can see exactly "how far down the schedule", looking at the remaining balance, that a $20k principal payment puts you. If you forget about the interest you are paying on your heloc, it's the same thing as borrowing from Mommy to pay extra on your mtg, then paying Mommy back.....has nothing to do with the mystical magic of a heloc.  What a waste of energy this thread has become. I won't beat my head against the wall any more.

[Yoochul C.]

Ok, I think you guys are missing the point. The HELOC is used as a savings account, using it to pay down the HELOC with your income. I assume you spend less than you bring in. So using all the savings to pay off the HELOC would result in paying off your loan faster. Making extra payments on a conventional loan, you can't get that money back. Yeah waste of energy.

[Wayne Brooks]

So open up a heloc if you want to have an emergency back up, no problem.  But, it has no magic to do with actually paying your mtg down quicker.

[Account Closed]

It works! For 5,000.00 I will tell you the secret lol... j/k... It only Forces discipline and prepayment! Other than that the savings is minimal and your property should be on a long term note if possible at today's rates. Don't pay off your note, this is not wise for many reasons. Instead buy rental property producing more income. This method only works if you use it in conjunction with timing of bills and credit cards. Lots of hassle for 20$ a year but my trip to hawaii every 3 years from the credit card bonus points maybe worth it. Much safer and wiser to keep a savings account in case they call the note and ask the 2008 folks how that went. best of luck

[Nick Moriwaki]

Originally posted by @Soh Tanaka:

The way I look at this is that this is pretty much the same as just using your monthly left over money towards the principal. The math will be different depending on the size of the HELOC and the monthly cash flow.

The benefit of HELOC is you can apply large amount of money first, instead of putting small amount of money month after month, which is the way you have to do if you don't have HELOC. The downsize is that you have to pay interest. People talk about the benefit of HELOC, which is you can access it again after you paid it back, but you can just pay down the principal with your extra money every month, and if you need some cash, just set up a HELOC and use it only if you need it. This way, you are only paying the HELOC interest when you need it.

I know successful real estate investors who like to pay off mortgages or buy houses cash, but at the end of the day, strictly financially speaking, it makes sense to use the extra money to buy more properties than paying down the principal. 

I think you're on the right track; the intent is flip your finances upside down where ALL your cash flow goes towards paying down your debt (minimizing your interest) and then only taking out money (e.g. - bills) and paying interest for that when it is needed.  This allows the money to work for you (saving you 5% or whatever your interest rate is) instead of sitting in a checking account.  It is the same as putting extra to your principal with the difference being you can put a lot extra to your principal.  

Additionally, you CAN use the available space in your HELOC to buy more properties if that is your intended goal. If you pay less interest and pay more of the balance off faster, you'll be able to clear enough space faster to use that as a down payment for another place. And you won't need to pull the money out until it is needed to close so that money can stay in the HELOC that whole time.

Also, not sure why all the threads related to the HELOC strategy all have arguments about how the interest is calculated. The interest may be calculated the same, but the balance going forward will be very different. The strategy revolves around the ability to pay everything you have towards your balance, which is not possible with a mortgage and thus the balance will go down a lot faster with a HELOC. Comparing the balance of the loans is not the way to look at it - it is the total interest paid for $X debt to be paid off that needs to be the focus. Unless I am missing something, the goal should be to pay as little interest as possible to achieve your goal. Whether that's paying off one place or 10.

[John Casmon]

.....or just use the HELOC to acquire another property and those proceeds to pay off the HELOC along with the original mortgage.

[David Dachtera]

@Drew Cameron,

We just had rather a protracted thread on this topic.

Trouble is that folks who have not been exposed to the topic misinterpret it as transferring the mortgage balance to a HELOC, which is, of course, incorrect.

@Robert Ebeling interpreted it correctly: "You accelerate your amortization schedule by making large payments."

[Chris May]

Originally posted by @David Dachtera:

@Drew Cameron,

We just had rather a protracted thread on this topic.

Trouble is that folks who have not been exposed to the topic misinterpret it as transferring the mortgage balance to a HELOC, which is, of course, incorrect.

@Robert Ebeling interpreted it correctly: "You accelerate your amortization schedule by making large payments."

Seriously? Still spouting this mathematical nonsense?

I'm convinced you're selling this scam to people and need to perpetuate the lie.