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Heloc to pay off mortgage faster
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
Please reread this thread in its entirety. We've proven this is false, repeatedly. You don't save any money doing this.
I am out of math arguments on this strategy in it's advertised core principles so I will only comment on few points/questions to wrap my point up:
> I also don't understand what you are saying about the unfair advantage. The advantage you speak of is the foundation of the HELOC strategy.
Unfair advantage is savings account of $12K (in your example for HELOC scenario) which by itself brings significant savings of interest over the course of the loan w/o any HELOC involved. Apples-to-apples comparison with all things equal (rate and extra/excess payment) would be "mortgage+income excess" vs "mortgage+HELOC+income excess" (in Chris' spreadsheet those would be scenario #2 and #3) and latter is mathematically proven to have marginal benefits.
> There is (relatively) no risk in leaving the bank account at $0 because at all times you have access to your available balance.
Wrong: you have access to "reserves" in a form of your HELOC credit line as long as bank or government thinks so. Please, see my post on HELOC terms and risks above.
> Side question: Isn't a person already in big trouble if they don't have excess of income over their expenses?
Not really. Break-even person who knows that fixed mortgage payment is due every month will be disciplined enough not to get into bigger trouble like maxing out HELOC and dumping it all into 1st mortgage principle thinking that eventually some "magic" in this strategy will help to dissolve it.
> Complexity - How do you determine how much extra to put into the mortgage when making extra payments?
Oh, this one is super easy: you can put as little as you can or as much as it is left from your monthly expenses. No limits and no risks.
> With a HELOC I would whip out my check book and write a $50,000 check in less than 5 minutes
Sure, unless your check gets bounced because your HELOC credit line got downgraded or suspended. Please, see my post on HELOC terms and risks above.
-
Sergey
Oh, I have one HELOC-involved strategy for which you don't need to buy a book, go to a seminar, join a club or stare at 1.5hr YouTube sales pitch video:
If somebody already has a HELOC and already has some outstanding balance on it you can save some money on interest you pay on balance owed by using your HELOC as impound account for property taxes (or any other future expected payments) you have to budget for and set aside anyways. At 6% APR you will save $5/mo on each $1K you temporary put into HELOC. Sorry, no magic here.
-
Sergey
Originally posted by @Sergey Y.:
I am out of math arguments on this strategy in it's advertised core principles so I will only comment on few points/questions to wrap my point up:
> I also don't understand what you are saying about the unfair advantage. The advantage you speak of is the foundation of the HELOC strategy.
Unfair advantage is savings account of $12K (in your example for HELOC scenario) which by itself brings significant savings of interest over the course of the loan w/o any HELOC involved. Apples-to-apples comparison with all things equal (rate and extra/excess payment) would be "mortgage+income excess" vs "mortgage+HELOC+income excess" (in Chris' spreadsheet those would be scenario #2 and #3) and latter is mathematically proven to have marginal benefits.
> There is (relatively) no risk in leaving the bank account at $0 because at all times you have access to your available balance.
Wrong: you have access to "reserves" in a form of your HELOC credit line as long as bank or government thinks so. Please, see my post on HELOC terms and risks above.
> Side question: Isn't a person already in big trouble if they don't have excess of income over their expenses?
Not really. Break-even person who knows that fixed mortgage payment is due every month will be disciplined enough not to get into bigger trouble like maxing out HELOC and dumping it all into 1st mortgage principle thinking that eventually some "magic" in this strategy will help to dissolve it.
> Complexity - How do you determine how much extra to put into the mortgage when making extra payments?
Oh, this one is super easy: you can put as little as you can or as much as it is left from your monthly expenses. No limits and no risks.
> With a HELOC I would whip out my check book and write a $50,000 check in less than 5 minutes
Sure, unless your check gets bounced because your HELOC credit line got downgraded or suspended. Please, see my post on HELOC terms and risks above.
-
Sergey
Sergey,
I believe you are missing the point of the comparison. The point of the spreadsheet is to start two scenarios at the same point, run the strategy as it were intended to be run and then analyze the risks/benefits throughout. The $12,000 was only thrown into the balance to further the point of putting everything to the balance. It doesn't need to be done and it doesn't make or break the strategy. Just an additional option. If you are telling me that you get to dictate the terms of the opposing strategy or what you're comparing, then yes, of course it won't work.
I keep hearing the following counter-scenarios thrown out:
1) Mortgage paying 100% excess income
Savings are negligible, but risk is multitudes higher for the mortgage since your bank account isn't going up, while the HELOC available balance is going up constantly. I would think most people would agree that leaving yourself with only an emergency fund and strip all financial flexibility is not a smart thing to do. Financial flexibility is not compromised with the HELOC since you'll have access (if needed) to the excess money (minus interest) put in.
2) Mortgage paying extra (not 100%)
Depending on the extra, savings could be substantial (up to $57,000). Otherwise the mortgage has a direct relationship of risk to interest savings. And it will never outpace the HELOC since the HELOC is paying 100% of it's excess money all the time, again without compromising financial flexibility.
3) Mortgage paying minimum + other investment
If the other investment is earning more than the interest than the HELOC is charging then the HELOC scenario could also participate in that other investment as well (real estate or otherwise). And the HELOC would be able to do it sooner than the mortgage since it accrues available balance faster than the mortgage.
Otherwise, the HELOC will save more interest than the other investment will earn. Even if they are equal, the HELOC will outperform the investment since you won't get taxed on the interest savings whereas you'll get taxed on your investment's earnings.
Bottom line, every counter-scenario thrown out has its own risks/rewards. I'm not disagreeing with some of what you are saying in regards to risk, but it comes with a pretty substantial reward compared to mortgages.
And I still haven't gotten an answer from you or Chris in regards to what you would do if the $50,000 were needed. If the mortgage route were so risk free, shouldn't I not be able to provide such a scenario? A scenario in which the mortgage route is screwed and the HELOC is only in trouble if there is a housing market crash or similar?
@Chris May I read the thread and there were a lot of different arguments made. Most of which made my head spin. But consider this simple logic.
If you had a savings account into which you were making regular deposits would you prefer to have that account pay interest on the balance daily or monthly?
The inverse of growing a savings account is paying down a loan. The same math applies.
Originally posted by @Robert Steele:
@Chris May I read the thread and there were a lot of different arguments made. Most of which made my head spin. But consider this simple logic.
If you had a savings account into which you were making regular deposits would you prefer to have that account pay interest on the balance daily or monthly?
The inverse of growing a savings account is paying down a loan. The same math applies.
Two observations I've made over the last month after 3 threads and literally hundreds of posts debating this topic:
- There are an endless number of variants of this strategy, and we've proven them all to be mathematically flawed. Every time one is proven wrong, another person pops up with a new twist that is then also proven incorrect. There is only one variant that "works" and the actual interest savings were immaterial (~$320 over the entire life of a 150k loan). When you break it down, the strategy only saves interest expense because you're paying at the beginning of the period instead of the end and HELOC interest is calculated based on the daily average balance. It has nothing to do with this myth of daily vs monthly interest or compounded vs simple interest.
- I'm shocked by the number of people on this website that don't understand how interest calculation works. I would expect that from the general population, but on a site for real estate investors? Astonishing.
Again, we've debated this topic endlessly and it just plain doesn't save any money on interest. There are benefits to a HELOC, but interest savings isn't one of them.
Originally posted by @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?
There are pros and con's to this.
You can utilize this strategy with pretty much any line of credit, HELOC or HOA loan (Home ownership accelerator from CMG mortgage) to capitalize on this.
The downsides are of course the variable rate feature of LOC's and HELOC's, however the HOA is a "hybrid," variant of the HELOC or LOC because the rate is capped unlike similar LOC's or HELOC's where its prime/libor/CMT + Margin, and these can go up to 18% usually depending on state to state.
The HOA usually has a cap of 4-6% above your start similar to an ARM - adjustable rate mortgage. It combines features of a HELOC where it factors money daily (how you save your interest), it takes the max ceilings and floors for rates like a ARM mortgage, and it also acts as a checking/savings account in that you can store and draw money from it for the life of the term (usually 30 years) unlike a HELOC where its 10 year draw and 20 year Principal and interest no more draw after year 10.
Where the benefit comes in is opportunity cost of interest since interest is factored daily you could park your pay checks, savings, and other cash instruments into this LOC or HOA loan and save on the all differential in daily interest charges that would normally be paid with a standard 30 year fixed mortgage or other typical mortgage that factors interest/amortization "monthly." So it sounds marginal but it works very well by slowing down compound interest in the favor of the bank back to the favor of the borrower. The banks know that these 30 year FRM (fixed rate mortgages) only factor interest monthly so paying extra like the above comment mentioned "does," save you interest but its only factored 12 times a year so instead of daily savings differenials you're waiting all the way till the next month for your lump sum payment of lets say $2000.00 to affect your amortization of your loan.
The HOA product was originally started in Australia/UK and gradually came over but is still lesser known gem when used correctly.
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
Isn't this only the tip of the iceberg for using the HELOC? I see the thinking, but if this were the only advantage of the HELOC, I would probably agree with most of the others that there is only a marginal benefit over the long run.
My premise during this thread has been to try and redirect people from focusing on the point above and to see that with the HELOC you are able to pay (a lot) extra to your balance without forgoing the opportunity to recoup that money at any time without needing to go to the bank and pay additional fees. What is your take on this?
I'm surprised this thread is still going. It's just a shoddy idea based on flawed math or ridiculous assumptions.
Early in the thread, someone even assumed you could get a Home Equity line for 100% of the house value, even though it only had 20% equity.
The extra risks of a HELOC such as the bank calling it due unexpectedly is just not worth it, even if the math wasn't broken as well.
If you want to pay off a mortgage faster, pay more towards it. Don't rely on internet mathemagicians.
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
No, this is exactly what I am saying someone should not do. When you are talking about putting your savings into a HELOC, you are actually putting that money into your mortgage pay down. I understand it travels through the HELOC, but it is no different than paying it directly to mortgage pay down - then having a HELOC on the side. The problem with this strategy is that the bank can reduce your HELOC line or even potentially call the loan. The equity is then trapped in your house until you sell it or refinance it. You cannot store savings in a HELOC. A HELOC is a loan. You are paying down principal on your mortgage and taking out a loan.
Here is what can go wrong. You use your life savings for mortgage paydown and start using your HELOC for living expenses. Your paycheck goes into the HELOC so everything is fine for a while. Then the economy tanks. You lose your job. Now you have to make payments on your home loan and HELOC. You are using your HELOC to pay your bills, including paying your HELOC! Then the bank decides that due to you losing your job and your home value decreasing, they cut your HELOC line of credit down to what you owe today. Now you are stuck without any income and with a HELOC that has no available credit. You still have bills including your mortgage and a HELOC payment. You have no savings because it was put into principal pay down. You try to sell your home and your home value has dropped to less than you owe. You are trapped and stop paying your mortgage so your home goes into foreclosure.
Does this story sound unrealistic? I just happened to thousands of people less than 10 years ago! This is exactly how many people lost their homes so for you to suggest this is a "smart" way to run your finances is crazy. People need a cash emergency fund and yes it may be earning 1% interest, but it is an emergency fund.
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
No, this is exactly what I am saying someone should not do. When you are talking about putting your savings into a HELOC, you are actually putting that money into your mortgage pay down. I understand it travels through the HELOC, but it is no different than paying it directly to mortgage pay down - then having a HELOC on the side. The problem with this strategy is that the bank can reduce your HELOC line or even potentially call the loan. The equity is then trapped in your house until you sell it or refinance it. You cannot store savings in a HELOC. A HELOC is a loan. You are paying down principal on your mortgage and taking out a loan.
Here is what can go wrong. You use your life savings for mortgage paydown and start using your HELOC for living expenses. Your paycheck goes into the HELOC so everything is fine for a while. Then the economy tanks. You lose your job. Now you have to make payments on your home loan and HELOC. You are using your HELOC to pay your bills, including paying your HELOC! Then the bank decides that due to you losing your job and your home value decreasing, they cut your HELOC line of credit down to what you owe today. Now you are stuck without any income and with a HELOC that has no available credit. You still have bills including your mortgage and a HELOC payment. You have no savings because it was put into principal pay down. You try to sell your home and your home value has dropped to less than you owe. You are trapped and stop paying your mortgage so your home goes into foreclosure.
Does this story sound unrealistic? I just happened to thousands of people less than 10 years ago! This is exactly how many people lost their homes so for you to suggest this is a "smart" way to run your finances is crazy. People need a cash emergency fund and yes it may be earning 1% interest, but it is an emergency fund.
Just because you can do the strategy with a "HELOC," or other form of line of credit doesnt mean you should and of course there is always risk the bank might adjust your line or freeze it thats why I said "depending on terms of your LOC/HELOC."
There is a product that cannot be cancelled or frozen that acts as a HELOC/LOC, an ARM mortgage product, and has features of a checking account with account number/routing number so you can accomplish the strategy with out the risk you're talking about. If you looked at my threads above then you can read more about the HOA - home ownership accelerator product from CMG mortgage.
So now that issue is addressed, regarding your other issue of imprudent use or bad luck... this product is not prescribed to everyone we're assuming a fiscally responsible audience for this product (not on this blog). The HOA product is meant for people who make more than they spend each money that want wants to optimize their expenses to maximize their net cash flow.
The person using this product typically doesnt have just one flow of income so if they lost their job it wouldnt necessarily be the end plus if the person was fiscally responsible they would only have this LOC up to 75% LTV anyway so its not like youre over leveraged. Also another fact is its always recommended you keep few months in actually cash anyway but you transact through the HOA or line of credit to reduce interest exposure.
This response is akin to comparing financial advice from Kyiosaki versus Ramsey/Orman. One person provides advice for the fiscally savvy and entrepreneurs and the other provides advice for the poor/broke/middle class.
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
No, this is exactly what I am saying someone should not do. When you are talking about putting your savings into a HELOC, you are actually putting that money into your mortgage pay down. I understand it travels through the HELOC, but it is no different than paying it directly to mortgage pay down - then having a HELOC on the side. The problem with this strategy is that the bank can reduce your HELOC line or even potentially call the loan. The equity is then trapped in your house until you sell it or refinance it. You cannot store savings in a HELOC. A HELOC is a loan. You are paying down principal on your mortgage and taking out a loan.
Here is what can go wrong. You use your life savings for mortgage paydown and start using your HELOC for living expenses. Your paycheck goes into the HELOC so everything is fine for a while. Then the economy tanks. You lose your job. Now you have to make payments on your home loan and HELOC. You are using your HELOC to pay your bills, including paying your HELOC! Then the bank decides that due to you losing your job and your home value decreasing, they cut your HELOC line of credit down to what you owe today. Now you are stuck without any income and with a HELOC that has no available credit. You still have bills including your mortgage and a HELOC payment. You have no savings because it was put into principal pay down. You try to sell your home and your home value has dropped to less than you owe. You are trapped and stop paying your mortgage so your home goes into foreclosure.
Does this story sound unrealistic? I just happened to thousands of people less than 10 years ago! This is exactly how many people lost their homes so for you to suggest this is a "smart" way to run your finances is crazy. People need a cash emergency fund and yes it may be earning 1% interest, but it is an emergency fund.
Just because you can do the strategy with a "HELOC," or other form of line of credit doesnt mean you should and of course there is always risk the bank might adjust your line or freeze it thats why I said "depending on terms of your LOC/HELOC."
There is a product that cannot be cancelled or frozen that acts as a HELOC/LOC, an ARM mortgage product, and has features of a checking account with account number/routing number so you can accomplish the strategy with out the risk you're talking about. If you looked at my threads above then you can read more about the HOA - product from CMG mortgage.
So now that issue is addressed, regarding your other issue of imprudent use or bad luck... this product is not prescribed to everyone we're assuming a fiscally responsible audience for this product (not on this blog). The HOA product is meant for people who make more than they spend each money that want wants to optimize their expenses to maximize their net cash flow.
The person using this product typically doesnt have just one flow of income so if they lost their job it wouldnt necessarily be the end plus if the person was fiscally responsible they would only have this LOC up to 75% LTV anyway so its not like youre over leveraged. Also another fact is its always recommended you keep few months in actually cash anyway but you transact through the HOA or line of credit to reduce interest exposure.
This response is akin to comparing financial advice from Kyiosaki versus Ramsey/Orman. One person provides advice for the fiscally savvy and entrepreneurs and the other provides advice for the poor/broke/middle class.
I just did a google search on "home ownership accelerator" and the title of the first result is Stupid Investment of the Week. It is a click-bait title, but basically the article points out that this is not a fixed rate loan and it leaves the user open to risk. I would argue why not just take out a 30 year loan and pay extra principal towards it? I am sure some people could use this loan product responsibly, but I wouldn't call it something that someone fiscally savvy or an entrepreneur would use.
I am also doubtful that Kiyosaki would recommend this type of loan. Anyone who is an advanced investor isn't going to be taking out a variable rate loan to pay off their home mortgage as fast as possible. First of all, Kiyosaki would point out that your home is not an asset:
http://www.richdad.com/Resources/Rich-Dad-Financia...
Secondly and most importantly you can get a much better rate of return by investing your money other places. Interest rates are under 4% for fixed rate 30 year mortgages and even something as simple as buying ATT stock returns over 5% dividend. But any smart investor is going to get double digit returns on their cash, which can be found many places including rental properties, my favorite.
One thing we can agree on is that a 6 months cash emergency fund is critical. People need to be ready for the unexpected. You mention 75% LTV so you are not over leveraged, but keep in mind if a property value drops in value then so does your LTV. If your property value drops 25%, then your 75% LTV becomes 100% LTV and there is no equity.
Everyone thinks they are a savvy investor, even the poor/broke/middle class will spout off financial advice like they are Warren Buffet. It really all comes down to risk tolerance.
Ultimately there are many paths to success, so let this discussion just educate on different view points and let the reader decide.
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
No, this is exactly what I am saying someone should not do. When you are talking about putting your savings into a HELOC, you are actually putting that money into your mortgage pay down. I understand it travels through the HELOC, but it is no different than paying it directly to mortgage pay down - then having a HELOC on the side. The problem with this strategy is that the bank can reduce your HELOC line or even potentially call the loan. The equity is then trapped in your house until you sell it or refinance it. You cannot store savings in a HELOC. A HELOC is a loan. You are paying down principal on your mortgage and taking out a loan.
Here is what can go wrong. You use your life savings for mortgage paydown and start using your HELOC for living expenses. Your paycheck goes into the HELOC so everything is fine for a while. Then the economy tanks. You lose your job. Now you have to make payments on your home loan and HELOC. You are using your HELOC to pay your bills, including paying your HELOC! Then the bank decides that due to you losing your job and your home value decreasing, they cut your HELOC line of credit down to what you owe today. Now you are stuck without any income and with a HELOC that has no available credit. You still have bills including your mortgage and a HELOC payment. You have no savings because it was put into principal pay down. You try to sell your home and your home value has dropped to less than you owe. You are trapped and stop paying your mortgage so your home goes into foreclosure.
Does this story sound unrealistic? I just happened to thousands of people less than 10 years ago! This is exactly how many people lost their homes so for you to suggest this is a "smart" way to run your finances is crazy. People need a cash emergency fund and yes it may be earning 1% interest, but it is an emergency fund.
Just because you can do the strategy with a "HELOC," or other form of line of credit doesnt mean you should and of course there is always risk the bank might adjust your line or freeze it thats why I said "depending on terms of your LOC/HELOC."
There is a product that cannot be cancelled or frozen that acts as a HELOC/LOC, an ARM mortgage product, and has features of a checking account with account number/routing number so you can accomplish the strategy with out the risk you're talking about. If you looked at my threads above then you can read more about the HOA - product from CMG mortgage.
So now that issue is addressed, regarding your other issue of imprudent use or bad luck... this product is not prescribed to everyone we're assuming a fiscally responsible audience for this product (not on this blog). The HOA product is meant for people who make more than they spend each money that want wants to optimize their expenses to maximize their net cash flow.
The person using this product typically doesnt have just one flow of income so if they lost their job it wouldnt necessarily be the end plus if the person was fiscally responsible they would only have this LOC up to 75% LTV anyway so its not like youre over leveraged. Also another fact is its always recommended you keep few months in actually cash anyway but you transact through the HOA or line of credit to reduce interest exposure.
This response is akin to comparing financial advice from Kyiosaki versus Ramsey/Orman. One person provides advice for the fiscally savvy and entrepreneurs and the other provides advice for the poor/broke/middle class.
I just did a google search on "home ownership accelerator" and the title of the first result is Stupid Investment of the Week. It is a click-bait title, but basically the article points out that this is not a fixed rate loan and it leaves the user open to risk. I would argue why not just take out a 30 year loan and pay extra principal towards it? I am sure some people could use this loan product responsibly, but I wouldn't call it something that someone fiscally savvy or an entrepreneur would use.
I am also doubtful that Kiyosaki would recommend this type of loan. Anyone who is an advanced investor isn't going to be taking out a variable rate loan to pay off their home mortgage as fast as possible. First of all, Kiyosaki would point out that your home is not an asset:
http://www.richdad.com/Resources/Rich-Dad-Financia...
Secondly and most importantly you can get a much better rate of return by investing your money other places. Interest rates are under 4% for fixed rate 30 year mortgages and even something as simple as buying ATT stock returns over 5% dividend. But any smart investor is going to get double digit returns on their cash, which can be found many places including rental properties, my favorite.
One thing we can agree on is that a 6 months cash emergency fund is critical. People need to be ready for the unexpected. You mention 75% LTV so you are not over leveraged, but keep in mind if a property value drops in value then so does your LTV. If your property value drops 25%, then your 75% LTV becomes 100% LTV and there is no equity.
Everyone thinks they are a savvy investor, even the poor/broke/middle class will spout off financial advice like they are Warren Buffet. It really all comes down to risk tolerance.
Ultimately there are many paths to success, so let this discussion just educate on different view points and let the reader decide.
Risk tolerance right, and liquidity is the other key word. The 30 year fixed has no liquidity. I originate loans all day, with all the particulars you need to get a loan done, even one small slip up, accident, loss job, credit misstep, or numerous other compliance related issues you'll not be able to get a loan. This is not to mention the 25-40 days to get funded and record to receive your eventual wire from your cash out or line of credit when you do need the money.
HOA is variable yes so obviously its not a product for the masses and no one ever pitched it to be. This was supposed to be an innovative strategy that "could," be used with RE investing. Some will agree and some will not, but when your in a tight squeeze and need hard money for a deal or a refinance at 12-16% and 2-4 points you'll remember that with proper planning you could be paying around 2.625 - 3.125% for the HOA product interest only to bridge you into that deal. When the deal is turned you could refinance with a 30 year perm product to repay the HOA back down to original LTV position.
Liquidity is the least thought about aspect till its actually needed and lack of liquidity is arguably the main reason for why sellers take cents on the dollar when selling.
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
No, this is exactly what I am saying someone should not do. When you are talking about putting your savings into a HELOC, you are actually putting that money into your mortgage pay down. I understand it travels through the HELOC, but it is no different than paying it directly to mortgage pay down - then having a HELOC on the side. The problem with this strategy is that the bank can reduce your HELOC line or even potentially call the loan. The equity is then trapped in your house until you sell it or refinance it. You cannot store savings in a HELOC. A HELOC is a loan. You are paying down principal on your mortgage and taking out a loan.
Here is what can go wrong. You use your life savings for mortgage paydown and start using your HELOC for living expenses. Your paycheck goes into the HELOC so everything is fine for a while. Then the economy tanks. You lose your job. Now you have to make payments on your home loan and HELOC. You are using your HELOC to pay your bills, including paying your HELOC! Then the bank decides that due to you losing your job and your home value decreasing, they cut your HELOC line of credit down to what you owe today. Now you are stuck without any income and with a HELOC that has no available credit. You still have bills including your mortgage and a HELOC payment. You have no savings because it was put into principal pay down. You try to sell your home and your home value has dropped to less than you owe. You are trapped and stop paying your mortgage so your home goes into foreclosure.
Does this story sound unrealistic? I just happened to thousands of people less than 10 years ago! This is exactly how many people lost their homes so for you to suggest this is a "smart" way to run your finances is crazy. People need a cash emergency fund and yes it may be earning 1% interest, but it is an emergency fund.
Just because you can do the strategy with a "HELOC," or other form of line of credit doesnt mean you should and of course there is always risk the bank might adjust your line or freeze it thats why I said "depending on terms of your LOC/HELOC."
There is a product that cannot be cancelled or frozen that acts as a HELOC/LOC, an ARM mortgage product, and has features of a checking account with account number/routing number so you can accomplish the strategy with out the risk you're talking about. If you looked at my threads above then you can read more about the HOA - product from CMG mortgage.
So now that issue is addressed, regarding your other issue of imprudent use or bad luck... this product is not prescribed to everyone we're assuming a fiscally responsible audience for this product (not on this blog). The HOA product is meant for people who make more than they spend each money that want wants to optimize their expenses to maximize their net cash flow.
The person using this product typically doesnt have just one flow of income so if they lost their job it wouldnt necessarily be the end plus if the person was fiscally responsible they would only have this LOC up to 75% LTV anyway so its not like youre over leveraged. Also another fact is its always recommended you keep few months in actually cash anyway but you transact through the HOA or line of credit to reduce interest exposure.
This response is akin to comparing financial advice from Kyiosaki versus Ramsey/Orman. One person provides advice for the fiscally savvy and entrepreneurs and the other provides advice for the poor/broke/middle class.
I just did a google search on "home ownership accelerator" and the title of the first result is Stupid Investment of the Week. It is a click-bait title, but basically the article points out that this is not a fixed rate loan and it leaves the user open to risk. I would argue why not just take out a 30 year loan and pay extra principal towards it? I am sure some people could use this loan product responsibly, but I wouldn't call it something that someone fiscally savvy or an entrepreneur would use.
I am also doubtful that Kiyosaki would recommend this type of loan. Anyone who is an advanced investor isn't going to be taking out a variable rate loan to pay off their home mortgage as fast as possible. First of all, Kiyosaki would point out that your home is not an asset:
http://www.richdad.com/Resources/Rich-Dad-Financia...
Secondly and most importantly you can get a much better rate of return by investing your money other places. Interest rates are under 4% for fixed rate 30 year mortgages and even something as simple as buying ATT stock returns over 5% dividend. But any smart investor is going to get double digit returns on their cash, which can be found many places including rental properties, my favorite.
One thing we can agree on is that a 6 months cash emergency fund is critical. People need to be ready for the unexpected. You mention 75% LTV so you are not over leveraged, but keep in mind if a property value drops in value then so does your LTV. If your property value drops 25%, then your 75% LTV becomes 100% LTV and there is no equity.
Everyone thinks they are a savvy investor, even the poor/broke/middle class will spout off financial advice like they are Warren Buffet. It really all comes down to risk tolerance.
Ultimately there are many paths to success, so let this discussion just educate on different view points and let the reader decide.
Risk tolerance right, and liquidity is the other key word. The 30 year fixed has no liquidity. I originate loans all day, with all the particulars you need to get a loan done, even one small slip up, accident, loss job, credit misstep, or numerous other compliance related issues you'll not be able to get a loan. This is not to mention the 25-40 days to get funded and record to receive your eventual wire from your cash out or line of credit when you do need the money.
HOA is variable yes so obviously its not a product for the masses and no one ever pitched it to be. This was supposed to be an innovative strategy that "could," be used with RE investing. Some will agree and some will not, but when your in a tight squeeze and need hard money for a deal or a refinance at 12-16% and 2-4 points you'll remember that with proper planning you could be paying around 2.625 - 3.125% for the HOA product interest only to bridge you into that deal. When the deal is turned you could refinance with a 30 year perm product to repay the HOA back down to original LTV position.
Liquidity is the least thought about aspect till its actually needed and lack of liquidity is arguably the main reason for why sellers take cents on the dollar when selling.
"Liquidity is the least thought about aspect till its actually needed and lack of liquidity is arguably the main reason for why sellers take cents on the dollar when selling"
Exactly! I don't understand why people keep comparing paying more to a mortgage to paying more to the HELOC. One is liquid, the other is not. But I'm confused at your point about needing 25-40 days to wire your cash from your line of credit. Are there HELOCs or any other LOCs that require extra time/processing to access available balance?
And one other thing to keep in mind when arguing that there are better investments out there to use your excess funds on. Additional income results in more taxes whereas you don't get taxed on money saved. In other words, after factoring taxes paid, a stock paying out 5% would be a <1% marginal gain over storing that money in a LOC charging 4%.
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
No, this is exactly what I am saying someone should not do. When you are talking about putting your savings into a HELOC, you are actually putting that money into your mortgage pay down. I understand it travels through the HELOC, but it is no different than paying it directly to mortgage pay down - then having a HELOC on the side. The problem with this strategy is that the bank can reduce your HELOC line or even potentially call the loan. The equity is then trapped in your house until you sell it or refinance it. You cannot store savings in a HELOC. A HELOC is a loan. You are paying down principal on your mortgage and taking out a loan.
Here is what can go wrong. You use your life savings for mortgage paydown and start using your HELOC for living expenses. Your paycheck goes into the HELOC so everything is fine for a while. Then the economy tanks. You lose your job. Now you have to make payments on your home loan and HELOC. You are using your HELOC to pay your bills, including paying your HELOC! Then the bank decides that due to you losing your job and your home value decreasing, they cut your HELOC line of credit down to what you owe today. Now you are stuck without any income and with a HELOC that has no available credit. You still have bills including your mortgage and a HELOC payment. You have no savings because it was put into principal pay down. You try to sell your home and your home value has dropped to less than you owe. You are trapped and stop paying your mortgage so your home goes into foreclosure.
Does this story sound unrealistic? I just happened to thousands of people less than 10 years ago! This is exactly how many people lost their homes so for you to suggest this is a "smart" way to run your finances is crazy. People need a cash emergency fund and yes it may be earning 1% interest, but it is an emergency fund.
Just because you can do the strategy with a "HELOC," or other form of line of credit doesnt mean you should and of course there is always risk the bank might adjust your line or freeze it thats why I said "depending on terms of your LOC/HELOC."
There is a product that cannot be cancelled or frozen that acts as a HELOC/LOC, an ARM mortgage product, and has features of a checking account with account number/routing number so you can accomplish the strategy with out the risk you're talking about. If you looked at my threads above then you can read more about the HOA - product from CMG mortgage.
So now that issue is addressed, regarding your other issue of imprudent use or bad luck... this product is not prescribed to everyone we're assuming a fiscally responsible audience for this product (not on this blog). The HOA product is meant for people who make more than they spend each money that want wants to optimize their expenses to maximize their net cash flow.
The person using this product typically doesnt have just one flow of income so if they lost their job it wouldnt necessarily be the end plus if the person was fiscally responsible they would only have this LOC up to 75% LTV anyway so its not like youre over leveraged. Also another fact is its always recommended you keep few months in actually cash anyway but you transact through the HOA or line of credit to reduce interest exposure.
This response is akin to comparing financial advice from Kyiosaki versus Ramsey/Orman. One person provides advice for the fiscally savvy and entrepreneurs and the other provides advice for the poor/broke/middle class.
I just did a google search on "home ownership accelerator" and the title of the first result is Stupid Investment of the Week. It is a click-bait title, but basically the article points out that this is not a fixed rate loan and it leaves the user open to risk. I would argue why not just take out a 30 year loan and pay extra principal towards it? I am sure some people could use this loan product responsibly, but I wouldn't call it something that someone fiscally savvy or an entrepreneur would use.
I am also doubtful that Kiyosaki would recommend this type of loan. Anyone who is an advanced investor isn't going to be taking out a variable rate loan to pay off their home mortgage as fast as possible. First of all, Kiyosaki would point out that your home is not an asset:
http://www.richdad.com/Resources/Rich-Dad-Financia...
Secondly and most importantly you can get a much better rate of return by investing your money other places. Interest rates are under 4% for fixed rate 30 year mortgages and even something as simple as buying ATT stock returns over 5% dividend. But any smart investor is going to get double digit returns on their cash, which can be found many places including rental properties, my favorite.
One thing we can agree on is that a 6 months cash emergency fund is critical. People need to be ready for the unexpected. You mention 75% LTV so you are not over leveraged, but keep in mind if a property value drops in value then so does your LTV. If your property value drops 25%, then your 75% LTV becomes 100% LTV and there is no equity.
Everyone thinks they are a savvy investor, even the poor/broke/middle class will spout off financial advice like they are Warren Buffet. It really all comes down to risk tolerance.
Ultimately there are many paths to success, so let this discussion just educate on different view points and let the reader decide.
Risk tolerance right, and liquidity is the other key word. The 30 year fixed has no liquidity. I originate loans all day, with all the particulars you need to get a loan done, even one small slip up, accident, loss job, credit misstep, or numerous other compliance related issues you'll not be able to get a loan. This is not to mention the 25-40 days to get funded and record to receive your eventual wire from your cash out or line of credit when you do need the money.
HOA is variable yes so obviously its not a product for the masses and no one ever pitched it to be. This was supposed to be an innovative strategy that "could," be used with RE investing. Some will agree and some will not, but when your in a tight squeeze and need hard money for a deal or a refinance at 12-16% and 2-4 points you'll remember that with proper planning you could be paying around 2.625 - 3.125% for the HOA product interest only to bridge you into that deal. When the deal is turned you could refinance with a 30 year perm product to repay the HOA back down to original LTV position.
Liquidity is the least thought about aspect till its actually needed and lack of liquidity is arguably the main reason for why sellers take cents on the dollar when selling.
I am very aware of what it takes to get a loan and it has gotten much harder in recent years - not by choice of the lenders! The point is that once you have a fixed loan, it cannot be taken away unless you default. Some other loan products like HELOC are not guaranteed, so if you lose your job or the house value decreases, you can get in trouble. That is something that people need to understand.
Whether it is a 30 year or 15 year or HOA, they all have equal liquidity. That is because liquidity is how quickly you can turn an asset into cash. The asset is the home, so regardless of what types of loans you have, the liquidity is measured by how quickly you could sell the home. It is really market dependent. A loan is not liquid. If you take out money through a loan, that is access to credit. In that respect an HOA is no different than a credit card. A credit card could be considered better from the standpoint it is unsecured so lower risk. Of course it has a higher interest rate.
I would just recommend people be careful with variable rate and interest only loans.
Originally posted by @Nick Moriwaki:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Albert Bui:
Originally posted by @Robert Steele:
They've been offering mortgage products like this in Australia for decades. They are very popular because it's a smart way to optimize paying the least amount of mortgage interest that you possibly can. Think of it like your mortgage is one huge HELOC.
Unfortunately we don't have that product here but you can use the same mechanism to your advantage if your goal is to make extra payments on your mortgage.
Let's say you have spare income each month that you want to use to pay down your mortgage. Everyone agrees that this saves you interest right?
Let's also say you have a HELOC that represents 6 times this amount.
What you do is pay 6 months of extra mortgage payments using the HELOC. You then use the extra mortgage payment you were going to make to pay down the HELOC each month. Maybe you pay a fraction of it each week if you get paid weekly.
This works because of the different way that the interest is calculated. Yes they are both simple interest but the mortgage is calculated monthly and the HELOC is calculated daily. Don't believe me? Try making an extra mortgage payment the day after your mortgage payment is due. You won't save any interest until the next month. But because a HELOC is calculated daily you start saving interest from day one.
This strategy works but it is not for everyone. There is a risk that your HELOC rate could rise dramatically. So it would be prudent to have another 6 months mortgage payments in a savings account in case the worse happens and you need to pay off that HELOC immediately. However the interest savings over the life of loan are considerable.
That is true Robert on a fixed rate mortgage or FRM the interest after a lump sum payment of extra principal is not factored in till next month so that gap of time or days of interest you would have saved with a daily factoring type product like the HOA loan or a HELOC/LOC would have been lost. These aren't mainstream products so naturally many are quick to judge with out doing the math or utilizing the strategy themselves prior to judging.
Some people actually think making an extra payment on a fixed rate mortgage is the same as a line of credit or HOA loan.
I think the point that has been made is although the HELOC and mortgage may calculate interest differently, regardless of where the balance is sitting, you are still paying interest. So, the concept that you avoid interest by putting a balance on your HELOC is flawed. You could make the argument that with proper timing and paying down the HELOC each month, that you could save some interest. When I have calculated the difference it really doesn't work out to much at all. Over the life of a loan you may save $100, so the question is if it is worth the risk to have a running balance on your HELOC.
Some suggest using a HELOC to pay all your bills which means you would always have a negative balance you are paying off. In other words running your finances in the negative at all times, so you never have a penny to your name.
There are certain assumptions that go into the strategy of which are:
- you have a HELOC or LOC type product/loan you can use that has features you'll need to utlize this strategy
- you have a current loan balance on your property whether its a primary residence or rental property or second home/other
- you have cash reserves you would otherwise keep sitting in a checking and savings account earning sub 1% which is typical
- This cash savings or liquidity could be used to lower your balance in your LOC/HELOC and the differential in your balance - your savings emptied into the line X your annual rate / 12 months is your monthly savings
- you use your HELOC/LOC product for all your deposits like pay checks, rental receipts, self employment income, business income, a place where you drop your cash after distributions from other entities (saves interest since it lowers your balance even further
The bottom line is interest is either "paid out," or "earned."
If you keep it in your checking you forgo your opportunity at saving lets say 4-5% on your HELOC from mortgages or balances you're currently paying on or you can utilize the money in an investment and earn some interest but the problem of liquidity always arises as you'll inevitably need some money in a readily accessible area you can get a hold of within 24-48 hours via wire/withdrawal etc.
The LOC/HELOC (depending on the terms of the product) accomplishes this as you can withdrawal very quickly and or wire the money out where you need it while accomplish the high opportunity use of your money.
No, this is exactly what I am saying someone should not do. When you are talking about putting your savings into a HELOC, you are actually putting that money into your mortgage pay down. I understand it travels through the HELOC, but it is no different than paying it directly to mortgage pay down - then having a HELOC on the side. The problem with this strategy is that the bank can reduce your HELOC line or even potentially call the loan. The equity is then trapped in your house until you sell it or refinance it. You cannot store savings in a HELOC. A HELOC is a loan. You are paying down principal on your mortgage and taking out a loan.
Here is what can go wrong. You use your life savings for mortgage paydown and start using your HELOC for living expenses. Your paycheck goes into the HELOC so everything is fine for a while. Then the economy tanks. You lose your job. Now you have to make payments on your home loan and HELOC. You are using your HELOC to pay your bills, including paying your HELOC! Then the bank decides that due to you losing your job and your home value decreasing, they cut your HELOC line of credit down to what you owe today. Now you are stuck without any income and with a HELOC that has no available credit. You still have bills including your mortgage and a HELOC payment. You have no savings because it was put into principal pay down. You try to sell your home and your home value has dropped to less than you owe. You are trapped and stop paying your mortgage so your home goes into foreclosure.
Does this story sound unrealistic? I just happened to thousands of people less than 10 years ago! This is exactly how many people lost their homes so for you to suggest this is a "smart" way to run your finances is crazy. People need a cash emergency fund and yes it may be earning 1% interest, but it is an emergency fund.
Just because you can do the strategy with a "HELOC," or other form of line of credit doesnt mean you should and of course there is always risk the bank might adjust your line or freeze it thats why I said "depending on terms of your LOC/HELOC."
There is a product that cannot be cancelled or frozen that acts as a HELOC/LOC, an ARM mortgage product, and has features of a checking account with account number/routing number so you can accomplish the strategy with out the risk you're talking about. If you looked at my threads above then you can read more about the HOA - product from CMG mortgage.
So now that issue is addressed, regarding your other issue of imprudent use or bad luck... this product is not prescribed to everyone we're assuming a fiscally responsible audience for this product (not on this blog). The HOA product is meant for people who make more than they spend each money that want wants to optimize their expenses to maximize their net cash flow.
The person using this product typically doesnt have just one flow of income so if they lost their job it wouldnt necessarily be the end plus if the person was fiscally responsible they would only have this LOC up to 75% LTV anyway so its not like youre over leveraged. Also another fact is its always recommended you keep few months in actually cash anyway but you transact through the HOA or line of credit to reduce interest exposure.
This response is akin to comparing financial advice from Kyiosaki versus Ramsey/Orman. One person provides advice for the fiscally savvy and entrepreneurs and the other provides advice for the poor/broke/middle class.
I just did a google search on "home ownership accelerator" and the title of the first result is Stupid Investment of the Week. It is a click-bait title, but basically the article points out that this is not a fixed rate loan and it leaves the user open to risk. I would argue why not just take out a 30 year loan and pay extra principal towards it? I am sure some people could use this loan product responsibly, but I wouldn't call it something that someone fiscally savvy or an entrepreneur would use.
I am also doubtful that Kiyosaki would recommend this type of loan. Anyone who is an advanced investor isn't going to be taking out a variable rate loan to pay off their home mortgage as fast as possible. First of all, Kiyosaki would point out that your home is not an asset:
http://www.richdad.com/Resources/Rich-Dad-Financia...
Secondly and most importantly you can get a much better rate of return by investing your money other places. Interest rates are under 4% for fixed rate 30 year mortgages and even something as simple as buying ATT stock returns over 5% dividend. But any smart investor is going to get double digit returns on their cash, which can be found many places including rental properties, my favorite.
One thing we can agree on is that a 6 months cash emergency fund is critical. People need to be ready for the unexpected. You mention 75% LTV so you are not over leveraged, but keep in mind if a property value drops in value then so does your LTV. If your property value drops 25%, then your 75% LTV becomes 100% LTV and there is no equity.
Everyone thinks they are a savvy investor, even the poor/broke/middle class will spout off financial advice like they are Warren Buffet. It really all comes down to risk tolerance.
Ultimately there are many paths to success, so let this discussion just educate on different view points and let the reader decide.
Risk tolerance right, and liquidity is the other key word. The 30 year fixed has no liquidity. I originate loans all day, with all the particulars you need to get a loan done, even one small slip up, accident, loss job, credit misstep, or numerous other compliance related issues you'll not be able to get a loan. This is not to mention the 25-40 days to get funded and record to receive your eventual wire from your cash out or line of credit when you do need the money.
HOA is variable yes so obviously its not a product for the masses and no one ever pitched it to be. This was supposed to be an innovative strategy that "could," be used with RE investing. Some will agree and some will not, but when your in a tight squeeze and need hard money for a deal or a refinance at 12-16% and 2-4 points you'll remember that with proper planning you could be paying around 2.625 - 3.125% for the HOA product interest only to bridge you into that deal. When the deal is turned you could refinance with a 30 year perm product to repay the HOA back down to original LTV position.
Liquidity is the least thought about aspect till its actually needed and lack of liquidity is arguably the main reason for why sellers take cents on the dollar when selling.
"Liquidity is the least thought about aspect till its actually needed and lack of liquidity is arguably the main reason for why sellers take cents on the dollar when selling"
Exactly! I don't understand why people keep comparing paying more to a mortgage to paying more to the HELOC. One is liquid, the other is not. But I'm confused at your point about needing 25-40 days to wire your cash from your line of credit. Are there HELOCs or any other LOCs that require extra time/processing to access available balance?
And one other thing to keep in mind when arguing that there are better investments out there to use your excess funds on. Additional income results in more taxes whereas you don't get taxed on money saved. In other words, after factoring taxes paid, a stock paying out 5% would be a <1% marginal gain over storing that money in a LOC charging 4%.
Liquidity is how fast an asset can be sold in the market and converted to cash. The asset is the home. A HELOC is a loan secured by the home. A HELOC is not an asset and it is not liquid because it is a loan.
You are misunderstanding the definition of liquidity. I can go down to Walmart and take out cash against my credit card. I have overdraft protection on my checking account, so I can write a check for $20K more than I have in my account and get cash at the bank in ten minutes. Still none of these are liquid. To sell my home and get cash, it would take 6 weeks unless I sold it under market to a cash buyer. What you are referring to in a HELOC is access to credit.
As far as your other point about calculating taxes into investments, you are correct that it needs to be part of the calculation. You also need to consider that when you pay down a mortgage, you lose the mortgage interest deduction, so you need to include that in your comparison. There is also stock appreciation, so there is added return when you sell. Ultimately I am not recommending stocks, although I do own some. Rental properties are the best tax-advantaged investment in my opinion.
Originally posted by @Nick Moriwaki:
"Liquidity is the least thought about aspect till its actually needed and lack of liquidity is arguably the main reason for why sellers take cents on the dollar when selling"
Exactly! I don't understand why people keep comparing paying more to a mortgage to paying more to the HELOC. One is liquid, the other is not. But I'm confused at your point about needing 25-40 days to wire your cash from your line of credit. Are there HELOCs or any other LOCs that require extra time/processing to access available balance?
And one other thing to keep in mind when arguing that there are better investments out there to use your excess funds on. Additional income results in more taxes whereas you don't get taxed on money saved. In other words, after factoring taxes paid, a stock paying out 5% would be a <1% marginal gain over storing that money in a LOC charging 4%.
I meant it takes 25-40 days to get a HELOC started and funded.
Originally posted by @Joe Splitrock:
Originally posted by @Nick Moriwaki:
Liquidity is how fast an asset can be sold in the market and converted to cash. The asset is the home. A HELOC is a loan secured by the home. A HELOC is not an asset and it is not liquid because it is a loan.
You are misunderstanding the definition of liquidity. I can go down to Walmart and take out cash against my credit card. I have overdraft protection on my checking account, so I can write a check for $20K more than I have in my account and get cash at the bank in ten minutes. Still none of these are liquid. To sell my home and get cash, it would take 6 weeks unless I sold it under market to a cash buyer. What you are referring to in a HELOC is access to credit.
As far as your other point about calculating taxes into investments, you are correct that it needs to be part of the calculation. You also need to consider that when you pay down a mortgage, you lose the mortgage interest deduction, so you need to include that in your comparison. There is also stock appreciation, so there is added return when you sell. Ultimately I am not recommending stocks, although I do own some. Rental properties are the best tax-advantaged investment in my opinion.
Liquidity in the explained above is how fast cash can be accessed utilizing the property or rental property not the text book definition which is semantics. A home in a down market is not very liquid either, 6 weeks to sell would be a pipe dream unless if you were in the current sellers market or sold it for cents on the dollar, but then again in a sellers market where you can sell in "6 weeks," its not typical to get your LOC's frozen or reduced either.
The argument that a credit card is just like a HELOC is like apples and oranges sure they are both fruits.
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Nick Moriwaki:
Liquidity is how fast an asset can be sold in the market and converted to cash. The asset is the home. A HELOC is a loan secured by the home. A HELOC is not an asset and it is not liquid because it is a loan.
You are misunderstanding the definition of liquidity. I can go down to Walmart and take out cash against my credit card. I have overdraft protection on my checking account, so I can write a check for $20K more than I have in my account and get cash at the bank in ten minutes. Still none of these are liquid. To sell my home and get cash, it would take 6 weeks unless I sold it under market to a cash buyer. What you are referring to in a HELOC is access to credit.
As far as your other point about calculating taxes into investments, you are correct that it needs to be part of the calculation. You also need to consider that when you pay down a mortgage, you lose the mortgage interest deduction, so you need to include that in your comparison. There is also stock appreciation, so there is added return when you sell. Ultimately I am not recommending stocks, although I do own some. Rental properties are the best tax-advantaged investment in my opinion.
Liquidity in the explained above is how fast cash can be accessed utilizing the property or rental property not the text book definition which is semantics. A home in a down market is not very liquid either, 6 weeks to sell would be a pipe dream unless if you were in the current sellers market or sold it for cents on the dollar, but then again in a sellers market where you can sell in "6 weeks," its not typical to get your LOC's frozen or reduced either.
The argument that a credit card is just like a HELOC is like apples and oranges sure they are both fruits.
As a lender then you should know and use financial terms properly. It is not semantics, it is the proper use of the term. Loans are not liquid and a HELOC is a loan. That is a matter of opinion, just Google it if you don't understand.
You are right that in a down market 6 weeks would not be typical, but in a down market is when the LOC are frozen as property values fall. Where you in the lending business 8 years ago when the crash started? LOC will get frozen or pulled for thousands of people. That is one of the things that happened during the crash and it lead to foreclosures. Interest only loans where also a huge problem.
Originally posted by @Albert Bui:
Originally posted by @Joe Splitrock:
Originally posted by @Nick Moriwaki:
Liquidity is how fast an asset can be sold in the market and converted to cash. The asset is the home. A HELOC is a loan secured by the home. A HELOC is not an asset and it is not liquid because it is a loan.
You are misunderstanding the definition of liquidity. I can go down to Walmart and take out cash against my credit card. I have overdraft protection on my checking account, so I can write a check for $20K more than I have in my account and get cash at the bank in ten minutes. Still none of these are liquid. To sell my home and get cash, it would take 6 weeks unless I sold it under market to a cash buyer. What you are referring to in a HELOC is access to credit.
As far as your other point about calculating taxes into investments, you are correct that it needs to be part of the calculation. You also need to consider that when you pay down a mortgage, you lose the mortgage interest deduction, so you need to include that in your comparison. There is also stock appreciation, so there is added return when you sell. Ultimately I am not recommending stocks, although I do own some. Rental properties are the best tax-advantaged investment in my opinion.
Liquidity in the explained above is how fast cash can be accessed utilizing the property or rental property not the text book definition which is semantics. A home in a down market is not very liquid either, 6 weeks to sell would be a pipe dream unless if you were in the current sellers market or sold it for cents on the dollar, but then again in a sellers market where you can sell in "6 weeks," its not typical to get your LOC's frozen or reduced either.
The argument that a credit card is just like a HELOC is like apples and oranges sure they are both fruits.
Wiki definition of line of credit, notice it includes revolving credit which is a credit card:
A line of credit is credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, exportpacking credit, term loan, discounting, purchase of commercial bills, traditional revolvingcredit card account, etc. It is effectively a source of funds that can readily be tapped at the borrower's discretion. Interest is paid only on money actually withdrawn. (However, the borrower may be required to pay an unused line fee, often an annualized percentage fee on the money not withdrawn.) Lines of credit can be secured by collateral, or may be unsecured.
Nick Moriwaki explained the benefits really well of using the HELOC method! Good job Nick!
I'm not investor or real state agent only a IT guy and I'm using my PLOC (Personal Line of Credit) to get cash and to accelerate my mortgage applying a lump sum amount. The interest that I've saved is more than 30k and PLOC interest is only 1k using the parking check strategy, is simple math. My ROI has been about 150% and the mortgage will be payoff soon.