Heloc to pay off mortgage faster

[Drew Cameron]

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

[Jeremy Z.]

@Joshua S.

Your own examples show that you pay more interest early than you do toward the last few payments of a HELOC. Assuming the same interest rate, the ONLY reason the interest/principle ratio is lower is because you are paying it off in 1-2 years vs. 30 years. Here is an exercise for you - swap the repayment terms - run the numbers as though you pay the HELOC off over 30 years (you already did this above) and the mortgage off in 1-2 years.

The only reason a mortgage seems front-loaded (has a higher ratio going toward interest early on) is because they let you pay it off over 30 years. Thank goodness they give us this option, because it makes home ownership attainable to more people. Nobody is saying you have to pay it off over 30 years.

the fact remains that if you take a chunk of your mortgage and put it on the HELOC, then every month a greater portion of your money is going toward principal than if you left that chunk on the mortgage.

This is 100% false if you are paying the same amount toward your loan debt each month. Your examples always involve more total money being paid toward the debt each month, a detail you consistently gloss over.

I almost posted earlier this afternoon after having gone back and read a couple of your posts from the previous page. I do think you understand this stuff, even if I find your examples misleading. I think ultimately, we have a different philosophy on what is important when educating people about debt. Here is a quote of yours from a couple pages back:

Imagine someone getting a mortgage and not realizing how much more is going to interest early on in the loan. The term "front-loaded" easily lets them understand that they are paying way more interest early on.

I think people having the false impression that mortgages are calculated differently is a far bigger problem. You yourself had a false impression, as have many others in this forum. A quick Google search of "is mortgage interest front loaded" shows there are widespread misconceptions. As for someone getting a mortgage and not realizing the interest ratio is high early on, I find that less problematic. The information is easy to see using an amortization calculator, and most loan docs now disclose the total interest paid over the life of the mortgage and I think may even include an amortization schedule (at least in my state). And if it still comes as a surprise to someone, what's the harm? It may be a shock, but there is a perfectly valid reason for the high ratio.

Several posts back you challenged me to come up with a better term than "front-loaded", and then said that I couldn't come up with one. The reality is, I just don't think we need to come up with a catch phrase to explain that the interest ratio is high when a loan is paid off over a long period of time. Just do the math and show them. Pull up an amortization schedule. That's better than giving someone false impressions.

But hey, those are just philosophical differences between you and me, and I recognize that we probably aren't going to change each others minds at this point hahaha! Even if we've gotten snarky with each other at times, I still appreciate the discussion and debate.

----

On a separate note - if paying down debt quickly is truly your objective - you really should consider a 15-year mortgage in the future. If you already pay that much toward your mortgage each month, why not get the lower monthly interest expense. The rate is occasionally around .75% lower. Run the numbers - it adds up!

[Brent Coombs]

Originally posted by @Nick Moriwaki:

Originally posted by @Brent Coombs:

@Nick Moriwaki, if you're not "preaching this as a bullet proof strategy for everyone", then you should have no problem with my message that "HELOCs are only suitable for accelerating ones mortgage, if income far exceeds expenses". Right?

And even for folk whose "income far exceeds expenses", the best use of their HELOC is likely not to pay out their low interest mortgage quicker, but to wisely invest - every chance they get!

I've never been against HELOCs per se. I'm only against them being marketed as a way of accelerating mortgage repayments to someone who "doesn’t have money in their bank account or doesn’t have a decent monthly cash flow"! If you accept that, then what is it you don't understand?

And, you do need to understand that on the mainland, HELOCs with lower interest rates than owner-occupied fixed mortgages are unicorns! So why swap a mortgage for a higher interest rate HELOC?

[Oh, I edited my earlier post re. $51.00/m extra available income, if you pay off an extra $10k principal in year one, but you still choose to take 30 years to pay off the remaining $155k principal]. Cheers...

I only have an issue because I don’t see what I’m saying is any less applicable to anyone who you folks are directing your information to and I don’t see you folks saying their income needs to far exceed their expenses.   Yes, the strategy needs cash flow and some cash on the side, but do your investments not  require that?  If so, the same caveat would apply to anything you say as well.

The second part of what you said is what I'm trying to get at. Give me an example of what kind of "investment" you are talking about and we can get started. It's easy to throw around the generic "invest the money instead of paying down the mortgage" but I'm asking for something with numbers. Are you taking half of your bank account and throwing it into the stock market and averaging X% ROI? Are you waiting 3 years and then putting $X down payment on investment property since you want $X for a rainy day fund? What kind of investments are you saying are better. I believe you would say both of those are better. So throw out some hypothetical numbers and we can compare results.

And in no example have I given a HELOC interest rate lower than the mortgage. I've even modeled the interest rate climbing to 12%. So I'm not sure why the need to continuously point that out.

Nick, I have no problem with you or high income earners taking out a HELOC in first position, while having no additional mortgage. And sure, all your extra income will have the effect of being able to pay out that HELOC quicker than required by a typical mortgage. But, that is the sole purpose of this thread!

Once you decide to become a wise investor, and continue to use your HELOC as a revolving line of credit (which I'm not against), then your HELOC will not fulfill the quest of this thread!

ie. Wise/rich investors already know that this thread would be a waste of time for them!

Why? Because they're happy enough to let the balance of their HELOC go down quickly (or not) while waiting to pounce on opportunities (that they're always on the lookout for)!... 

[Nick Moriwaki]

Originally posted by @Brent Coombs:

Originally posted by @Nick Moriwaki:

Originally posted by @Brent Coombs:

@Nick Moriwaki, if you're not "preaching this as a bullet proof strategy for everyone", then you should have no problem with my message that "HELOCs are only suitable for accelerating ones mortgage, if income far exceeds expenses". Right?

And even for folk whose "income far exceeds expenses", the best use of their HELOC is likely not to pay out their low interest mortgage quicker, but to wisely invest - every chance they get!

I've never been against HELOCs per se. I'm only against them being marketed as a way of accelerating mortgage repayments to someone who "doesn’t have money in their bank account or doesn’t have a decent monthly cash flow"! If you accept that, then what is it you don't understand?

And, you do need to understand that on the mainland, HELOCs with lower interest rates than owner-occupied fixed mortgages are unicorns! So why swap a mortgage for a higher interest rate HELOC?

[Oh, I edited my earlier post re. $51.00/m extra available income, if you pay off an extra $10k principal in year one, but you still choose to take 30 years to pay off the remaining $155k principal]. Cheers...

I only have an issue because I don’t see what I’m saying is any less applicable to anyone who you folks are directing your information to and I don’t see you folks saying their income needs to far exceed their expenses.   Yes, the strategy needs cash flow and some cash on the side, but do your investments not  require that?  If so, the same caveat would apply to anything you say as well.

The second part of what you said is what I'm trying to get at. Give me an example of what kind of "investment" you are talking about and we can get started. It's easy to throw around the generic "invest the money instead of paying down the mortgage" but I'm asking for something with numbers. Are you taking half of your bank account and throwing it into the stock market and averaging X% ROI? Are you waiting 3 years and then putting $X down payment on investment property since you want $X for a rainy day fund? What kind of investments are you saying are better. I believe you would say both of those are better. So throw out some hypothetical numbers and we can compare results.

And in no example have I given a HELOC interest rate lower than the mortgage. I've even modeled the interest rate climbing to 12%. So I'm not sure why the need to continuously point that out.

Nick, I have no problem with you or high income earners taking out a HELOC in first position, while having no additional mortgage. And sure, all your extra income will have the effect of being able to pay out that HELOC quicker than required by a typical mortgage. But, that is the sole purpose of this thread!

Once you decide to become a wise investor, and continue to use your HELOC as a revolving line of credit (which I'm not against), then your HELOC will not fulfill the quest of this thread!

ie. Wise/rich investors already know that this thread would be a waste of time for them!

Why? Because they're happy enough to let the balance of their HELOC go down quickly (or not) while waiting to pounce on opportunities (that they're always on the lookout for)!... 

You made pretty much the exact point I was trying to get to. You don't want to completely pay off the HELOC, since then your money wouldn't be working for you. You want to keep utilizing the line of credit (which would maintain a higher balance). But that is not mutually exclusive to paying the debt off quicker with less interest (than someone else in the same situation).

So I guess now I'm starting to realize the potential misunderstanding going on here. The title of the forum is "pay mortgage faster" and critics immediately say there are better ways to invest money instead of paying off your mortgage faster without realizing that I am not saying to put your head down and only pay off the loan. Instead I'm saying that there's a way to use a HELOC that saves interest compared to paying off a mortgage (driving the principal down faster) and does not limit ones flexibility to use his/her money for future investments. It's the best of both worlds in my opinion. 100% utilization of income to maintain a lower average daily balance while allowing for instant refinancing (pulling out of the HELOC) whenever needed. Are we on the same page?

[Joshua S.]

Originally posted by @Jeremy Z.:

@Joshua S.

Your own examples show that you pay more interest early than you do toward the last few payments of a HELOC. Assuming the same interest rate, the ONLY reason the interest/principle ratio is lower is because you are paying it off in 1-2 years vs. 30 years. Here is an exercise for you - swap the repayment terms - run the numbers as though you pay the HELOC off over 30 years (you already did this above) and the mortgage off in 1-2 years.

The only reason a mortgage seems front-loaded (has a higher ratio going toward interest early on) is because they let you pay it off over 30 years. Thank goodness they give us this option, because it makes home ownership attainable to more people. Nobody is saying you have to pay it off over 30 years.

the fact remains that if you take a chunk of your mortgage and put it on the HELOC, then every month a greater portion of your money is going toward principal than if you left that chunk on the mortgage.

This is 100% false if you are paying the same amount toward your loan debt each month. Your examples always involve more total money being paid toward the debt each month, a detail you consistently gloss over.

I almost posted earlier this afternoon after having gone back and read a couple of your posts from the previous page. I do think you understand this stuff, even if I find your examples misleading. I think ultimately, we have a different philosophy on what is important when educating people about debt. Here is a quote of yours from a couple pages back:

Imagine someone getting a mortgage and not realizing how much more is going to interest early on in the loan. The term "front-loaded" easily lets them understand that they are paying way more interest early on.

I think people having the false impression that mortgages are calculated differently is a far bigger problem. You yourself had a false impression, as have many others in this forum. A quick Google search of "is mortgage interest front loaded" shows there are widespread misconceptions. As for someone getting a mortgage and not realizing the interest ratio is high early on, I find that less problematic. The information is easy to see using an amortization calculator, and most loan docs now disclose the total interest paid over the life of the mortgage and I think may even include an amortization schedule (at least in my state). And if it still comes as a surprise to someone, what's the harm? It may be a shock, but there is a perfectly valid reason for the high ratio.

Several posts back you challenged me to come up with a better term than "front-loaded", and then said that I couldn't come up with one. The reality is, I just don't think we need to come up with a catch phrase to explain that the interest ratio is high when a loan is paid off over a long period of time. Just do the math and show them. Pull up an amortization schedule. That's better than giving someone false impressions.

But hey, those are just philosophical differences between you and me, and I recognize that we probably aren't going to change each others minds at this point hahaha! Even if we've gotten snarky with each other at times, I still appreciate the discussion and debate.

----

On a separate note - if paying down debt quickly is truly your objective - you really should consider a 15-year mortgage in the future. If you already pay that much toward your mortgage each month, why not get the lower monthly interest expense. The rate is occasionally around .75% lower. Run the numbers - it adds up!

That's fair, if the P&I ratio is better because I'm paying it off in 1-2 years or because the balance is lower or because Cher came on the radio when I was signing the closing docs and it was magic, whatever explanation you want to put on it is fine with me. The bottom line is that it easily allows me to put more of my money toward principal, which means that IT IS a good way to accelerate your mortgage payoff - case closed. 

Now, playing devil's advocate, AGAIN, if you have the extra money lying around and want to just put $1000 extra toward your mortgage every month then that would be roughly equivalent, but here's something to think about. One of the main objections to the strategy is that you are paying a little more interest to the HELOC to make this an automatic / seamless process, but remember - the $50/month HELOC interest you are paying is basically cancelled out by the fact that your normal monthly payment is also $35 lower once you've removed the $10,000 chunk - so it pays for itself within a few dollars.

And you're right, it's great that they give you the 30 years and all that - again, fine. BUT THE FACT REMAINS that because you are paying it in that way, you end up with payment terms that are heavily front-loaded with interest. I'm glad we can all finally admit that, what a relief. It's not an evil plot or wrong, I'm just saying that if you pay over 30 years then you are paying far more interest up front and I'm trying to avoid that. Using a HELOC as a checking account allows me to do that easily without having to determine how much extra I can afford to put toward it each month and it pays for itself so there's no reason not to do it.

"This is 100% false if you are paying the same amount toward your loan debt each month. Your examples always involve more total money being paid toward the debt each month, a detail you consistently gloss over."

No, I'm not glossing over it, that's the whole point of doing it. No one said let's use a HELOC to pay exactly the same amount toward your debt every month - that's a stipulation you guys are consistently trying to interject. The point of the strategy is that it's an easy way to make sure all of your income is going toward your mortgage (some temporarily, some permanently) so that you can pay it off faster than if you were just paying X amount every month. That's what we've been doing this whole time - COMPARING this strategy where you are able to put all of your income toward your mortgage vs one where you make your regular payments. So, I don't see how I could be glossing over something that I've been saying all along is the major reason to do it.

Yes, philosophically, we just disagree. I think the vast majority of people just go and get a mortgage because "that's what you do" without any thought whatsoever to how much it's costing them in interest. I could be wrong, but I've never had anyone bring it up to me or anything. The majority of people say, "Oh, man, I just got such a great 4% loan....." without considering that it's costing them $200,000 or whatever and they are hardly able to pay down their principal because so much of it is due early on in the loan. Think about it, the only time you ever hear any discussion about mortgage interest is when someone is talking about getting a good rate or waiting for rates to come down or something. I literally don't think I've ever heard anyone talk about the total amount of interest they are paying and I'll bet you haven't either, so I think it's the far bigger issue that people need to be more aware of. You're saying that there's a good reason for it - yes, people can pay for a house over 30 years, which enables them to afford it - but looking at the positives without looking at or trying to mitigate the negatives is foolish, in my opinion. It's like saying that a chainsaw is a great way to cut down a tree, so there's no reason to be careful with it - it's really great at what it was designed to do. A mortgage enables you to afford a house, but it also charges you 67% interest and keeps you in debt for 30 years if you follow the path set out by the bank. If you can't understand how that's a negative, think about it like this: A credit card enables you to afford __________ , but it also charges you 18% interest and keeps you in debt indefinitely if you follow the path set out by the bank. There are more similarities than differences between these two things yet one is "irresponsible" and the other one is the foundation of society. To the huge majority of people a mortgage is just a special credit card you use for your house and you'll always be in debt so who cares blah blah blah. My point is that if people knew that they could use this strategy (or another) to pay off early, people would be in much better financial shape than if they were strapped with debt for their entire lives.

So, yes, we have philosophical differences and that's fine. It was a good talk and I'm glad (hope) we came to a good conclusion that everyone can agree on. Have a good one.

[Brent Coombs]

Originally posted by @Nick Moriwaki:

Originally posted by @Brent Coombs:

Originally posted by @Nick Moriwaki:

Originally posted by @Brent Coombs:

@Nick Moriwaki, if you're not "preaching this as a bullet proof strategy for everyone", then you should have no problem with my message that "HELOCs are only suitable for accelerating ones mortgage, if income far exceeds expenses". Right?

And even for folk whose "income far exceeds expenses", the best use of their HELOC is likely not to pay out their low interest mortgage quicker, but to wisely invest - every chance they get!

I've never been against HELOCs per se. I'm only against them being marketed as a way of accelerating mortgage repayments to someone who "doesn’t have money in their bank account or doesn’t have a decent monthly cash flow"! If you accept that, then what is it you don't understand?

And, you do need to understand that on the mainland, HELOCs with lower interest rates than owner-occupied fixed mortgages are unicorns! So why swap a mortgage for a higher interest rate HELOC?

[Oh, I edited my earlier post re. $51.00/m extra available income, if you pay off an extra $10k principal in year one, but you still choose to take 30 years to pay off the remaining $155k principal]. Cheers...

I only have an issue because I don’t see what I’m saying is any less applicable to anyone who you folks are directing your information to and I don’t see you folks saying their income needs to far exceed their expenses.   Yes, the strategy needs cash flow and some cash on the side, but do your investments not  require that?  If so, the same caveat would apply to anything you say as well.

The second part of what you said is what I'm trying to get at. Give me an example of what kind of "investment" you are talking about and we can get started. It's easy to throw around the generic "invest the money instead of paying down the mortgage" but I'm asking for something with numbers. Are you taking half of your bank account and throwing it into the stock market and averaging X% ROI? Are you waiting 3 years and then putting $X down payment on investment property since you want $X for a rainy day fund? What kind of investments are you saying are better. I believe you would say both of those are better. So throw out some hypothetical numbers and we can compare results.

And in no example have I given a HELOC interest rate lower than the mortgage. I've even modeled the interest rate climbing to 12%. So I'm not sure why the need to continuously point that out.

Nick, I have no problem with you or high income earners taking out a HELOC in first position, while having no additional mortgage. And sure, all your extra income will have the effect of being able to pay out that HELOC quicker than required by a typical mortgage. But, that is the sole purpose of this thread!

Once you decide to become a wise investor, and continue to use your HELOC as a revolving line of credit (which I'm not against), then your HELOC will not fulfill the quest of this thread!

ie. Wise/rich investors already know that this thread would be a waste of time for them!

Why? Because they're happy enough to let the balance of their HELOC go down quickly (or not) while waiting to pounce on opportunities (that they're always on the lookout for)!... 

You made pretty much the exact point I was trying to get to. You don't want to completely pay off the HELOC, since then your money wouldn't be working for you. You want to keep utilizing the line of credit (which would maintain a higher balance). But that is not mutually exclusive to paying the debt off quicker with less interest (than someone else in the same situation).

So I guess now I'm starting to realize the potential misunderstanding going on here. The title of the forum is "pay mortgage faster" and critics immediately say there are better ways to invest money instead of paying off your mortgage faster without realizing that I am not saying to put your head down and only pay off the loan. Instead I'm saying that there's a way to use a HELOC that saves interest compared to paying off a mortgage (driving the principal down faster) and does not limit ones flexibility to use his/her money for future investments. It's the best of both worlds in my opinion. 100% utilization of income to maintain a lower average daily balance while allowing for instant refinancing (pulling out of the HELOC) whenever needed. Are we on the same page?

Yes, we're on the same page. I don't know why it took so long for you to get that. My complaint with your constant mentioning that a HELOC "does not limit ones flexibility to use his/her money for future investments" is only that: using it that way goes against the topic of this thread! 

And you know I'm also against HELOCs being promoted to people who don't have savings or excess cash flow! I just don't get why you seem offended each time I say that. [No need to respond again]...

[Corey G.]

Forgive me because I haven't read all the posts in this thread (it's long), however, I just started looking into this HELOC strategy for mortgage payoff and there seems to be a lot of confusion on why someone would do this. When I first heard of this I was confused as to why someone would do this when they could just make extra payments towards their principal instead? Now I think I understand.

So from what I understand, if I get a HELOC as a first position lien to take over the existing mortgage on my property, it effectively becomes my new mortgage (albeit with a slightly higher variable interest rate). Many banks/credit unions are offering lock in interest rate options I've been seeing for about 6%... if you have good credit and good equity in your property. The HELOC would function as a mortgage but then give me the ability to take money out of it like a credit card when needed (with a lot lower interest rate)

So I make my monthly HELOC payment (which would have been my mortgage payment originally) but then I can easily just tap back into that money if needed for expenses or emergencies. This would allow me to dump all of my savings and paychecks into the HELOC, reducing the interest that accrues daily. Normally I would keep some savings for unexpected bills or in my case, deposits that I hold onto for my tenants. And because every darn cent I have is going into my HELOC, I would have a lower principal than if I made a principal payment towards my original mortgage. I think the difference is people are not considering their emergency funds, savings accounts, or money they keep in a checking account to pay bills each month. Just dump all of that into the HELOC because you can always get it back out later. With a mortgage, I would not spend every dime I have paying principal with unexpected bills around the corner, with a HELOC I could just get it back out.

Then when bills are due, I could then just pay them out of my HELOC, which would in turn raise back up my principal balance (a small amount). Now the whole time the money I was saving for bills was put towards the HELOC principal (it might only be from payday to the bill's due date) the daily interest that would have accrued on that amount (lets say 7 days to 2 weeks) would be smaller. This might seem negligible but I would imagine it would add up with all my bills every month going towards the HELOC first instead of sitting in a checking account and gaining no interest.

Now I would have to be disciplined because it would be easy to go crazy spending that extra money and therefore would not result in any savings. And ultimately for this to work, I need to spend less than I take in each month (not a problem for me). 

The exciting part of this strategy for me is that I would also have a credit line that I could tap into at any moment to use for leveraging other rental properties...me being a property investor and all. So far this is my understanding.

*Edit. I forget something. Because my HELOC is interest only the first 10 years, the payments are naturally less in case I have a month where I don't make as much income. Combine that with the principal being paid down each month, the payments required (of interest) continue to drop each month and are substantially less than the required minimum mortgage payment I'd be stuck with for 30 years. I realize that the more you pay is still best but it is an interesting tidbit. Anything I missed? Any help is appreciated.

[Dominik Makaneole]

Disclaimer.. I haven't read every post on this thread.  I have read the first few pages and the last few pages.  A few years ago I didn't put much thought into this strategy mainly because I didn't have much equity in my properties.  However times have changed I have equity in several properties and I have a job that allows me to payoff a $200K heloc in less than 2 years.  I've been looking at interest rates and the very first one I found is from American Savings Bank.

"The promotional rates for non Kalo Plus or Kalo Deluxe customers are 2.00% for two years, 3.00% for three years, or 4.00% for four years. Automatic payment from an American Savings Bank checking account is required for this promotional rate."

With these promotional rates I do believe it would be worth exploring.  At this time I don't know what the loan origination fee would be or any other fees to make a decision but I do believe it is worth looking into further.

[Justin Bauer]

Its all about control !! I do not think the best use for a helock is to pay off a first mortgage think about how much it cost to get it. its about having a little control over your savings. We should all start thinking years in advance not months. 

[Nick Moriwaki]

Originally posted by @Justin Bauer:

Its all about control !! I do not think the best use for a helock is to pay off a first mortgage think about how much it cost to get it. its about having a little control over your savings. We should all start thinking years in advance not months. 

The concept of replacing your mortgage with a HELOC is not about control. It's about simply reallocating your funds to pay less interest over the course of paying off a debt. People think you need to restructure your way of life when you use the strategy, but it's just not true.

Additionally the cost to obtain a HELOC can be very minimal (DISCLAIMER: THIS MAY JUST BE FOR HAWAII PEOPLE). I know a handful of people who have paid nothing to swap a mortgage for a first position HELOC.

[Josh Powell]

Your income is $5,500 per month and your expenses are $5,000 per month. You pay off a chunk of your mortgage using $10,000 from your HELOC. You have shifted debt from one place to another. Now your salary goes directly into the HELOC. $5,000 of the $5,500 will go back out at various points during the month to pay for the mortgage and CC bills. However, for at least a portion of the month that money will be present in the HELOC, offsetting the $10,000 that was previously paid to the principal on the mortgage. This lowers the average daily interest charged on the HELOC.

This IS the strategy. I've read dozens of pages of arguments from very intelligent investors who have all ignored the actual piece that makes the strategy valuable. This lowering of the interest charged on the HELOC is what makes the strategy viable.

Success is going to vary based on when your salary comes into the account and when payments go out making the strategy highly variable depending on your circumstances.