All Forum Posts by: Jason Chambers

@Roy Skaggs BoH is very familiar with this strategy. I know of a few people that use this strategy with BoH and I initially got the idea from another investor on Oahu. It's a win win for them to offer these kinds of deals because a lot of mortgages are held by main land banks. Switching over to a HELOC keeps money on the island and saves the consumer a lot of money. Just my 2 cents.

There is a lot of competition between the major banks in Hawaii. I'm not looking forward to doing it over again in a couple years but I get the impression that the healthy competition among the banks works in our favor.  BoH doesn't want either of us to go to another bank, much less a mainland bank. I suspect as long as interest rates stay they way they've been we'll be able to continue to enjoy low rates on this kind of financing.

You mentioned credit/loan value. That can be a concern if your numbers aren't right. But so long as you have enough equity in your home, an income that can support a HELOC, and decent credit it shouldn't be much of a problem. It's all in the numbers. @Royce Talbo mentioned using a smaller more traditional HELOC to pay down mortgages. That's something that we did using a personal line of credit (PELOC). We used that to pay down enough of our mortgage to have enough equity to qualify for a 85% LTV HELOC. We did it the same way as we handle our current HELOC. We payed a big chunk out of the mortgage and paid off our car with our PELOC, deposited all our income into the PELOC using it as a checking account, and then we had enough equity in the home to qualify for a large HELOC. And depositing all our income in the PELOC paid it off in less than 4 months.

@Royce Talbo@Royce Talbo

If I remember correctly, it cost us about $1500 to get into the HELOC. It was really affordable and you make it back right away. If you have any other questions, please don't hesitate to ask. By no means am I an expert but I'm always willing to share what has worked for us.

There are quite a few investors in El Paso. Check out the monthly EPIC and REIA meetings. They are great places to meet and network.

http://www.elpasoinvestorsclub.com/

http://www.meetup.com/ElPasoRealEstateInvestorsAssociation/

@Royce Talbo Yes, that's exactly our plan. At 21 months we'll go back to BofH and ask to be locked in at the same or similar low rate. If they don't agree to it then we go somewhere else and do it all over again.

@Royce Talbo what you described about your in laws is another strategy that can be used. We've done it in the past as well with a personal line of credit (PELOC) from Hawaii State FCU. We did that until we had enough equity in the home to move up to a HELOC. So yes, there are banks out there that will give you a line of credit for as high as 90% of the total appraised value of your home. We did ours with Bank of Hawaii. The larger main land banks do it as well and I've seen the highest LTV's at credit unions. And no, we didn't take out more equity than we had in the house. The home appraised at $710,000. We owed $530,000. At 85% LTV, BofH gave us a HELOC worth $600,000 which we used to pay off the mortgage and making BofH the new lien holder. The mortgage no longer exists. Our monthly mortgage used to be $3200 a month, of which $1800 went to amortized interest. Now our minimum, interest only payment on our HELOC is $770 a month. And remember, we charge our tenants $3650 a month all of which goes into the HELOC in addition to cash flow from our other properties and our W2 incomes. Our HELOC is 1.75% simple interest, meaning interest is calculated daily on the remaining balance only. Cheap! Even if you used the strategy your in laws did, you would still pay way less in interest overall because you are dramatically reducing the number of months you're paying on the mortgage every time you take a big chunk out of the principle. We just took it a step further by flipping the entire compound interest mortgage into a simple interest HELOC.

@Elijah F. compound interest is a basic component of an amortized mortgage. Interest is calculated on a monthly basis and the amortization is set in a way that the interest is paid at a much higher rate than the principle during the beginning of the life of the amortization. What you are describing above is the way compound interest works with savings. Simple interest on the other hand is calculated daily based on the remaining balance. I mentioned before that in real numbers a 3-4% interest rate mortgage actually ends up costing you around 80% interest by the time you pay it off (you pay for your house almost 2 times over even at the best mortgage rate). We literally went from a $3200 a month mortgage payment to a $770 monthly, interest only payment on our HELOC. Same house, same remaining principle but significantly cheaper at 1.75% simple interest. Almost $1800 of the $3200 a month mortgage went toward interest. We still charge the tenants $3650. As you can see, our ability to affect principle has grown significantly.

@Andrew K. you bring up a great point and one I should have mentioned before. Most banks do require that you reside in the home to be eligible for a HELOC. Shop around though. We went with Bank of Hawaii and they didn't require us to live in the house.

@Arianne L. you are exactly correct. That's how we do it. 

@Andrew K. there really isn't much comparison between a mortgage and a HELOC because a mortgage charges compound interest and a line of credit is simple interest. They are two very different financial products. Mathematically, mortgages are way more expensive. If you were to pay off a mortgage after 30 years you have paid for the house two times over almost. So even the best mortgage rates, in simple terms, equate to around 75% to 90% interest or more over time. Also remember that the majority of the interest you pay on your mortgage is front loaded and you don't affect much principle until around year 10 or later. I wish I had a chart to share. There are a bunch of online calculators you can run. Run a mortgage calculator along side a HELOC calculator for the same dollar amount. You'll see simple interest is exponentially cheaper. In our case, we'll save over $300,000 in interest payments and pay off the debt in 5-7 years as opposed to 30.

Our HELOC is linked to a checking account with checks and debit cards. Some banks offer automatic overdraft without any fees so you don't have to worry about moving money around all the time. We try to align our bills so they all get paid on the 1st to avoid as much interest as possible. We pay everything we can with our credit cards to rack up points and use the checking account attached to the HELOC to pay them off in full every month. We also have an allotment from out W2 income into the checking account and on payday I move the money over to the HELOC. The bank views it as a payment.

When you pay off your mortgage with a HELOC the bank that gives your the line of credit becomes the new lien holder. They would execute a deed transfer from the bank that previously held the mortgage.

This strategy has been very beneficial for us. Especially considering that interest rates are still really low. It just doesn't make sense for us to stock pile cash in a savings account that isn't accruing much interest. In our case, it makes more sense for us to use our cash flows to pay down debt quickly, debt that has now become significantly cheaper at 1.75% simple interest. The only issue we've run into is the banks want to see large cash reserves when applying for a mortgage especially larger multi family properties like the ones we've been getting into. The VP at the bank we go to for our commercial lending was kinda scratching his head wondering why we don't keep cash. A banker's motto is Cash is King. My motto is I Hate Paying Compound Interest. Our strategy is an effective way to avoid it.

@Royce Talbo I think the part you're missing is that the mortgage no longer exists. You use the HELOC to pay off the mortgage outright. You are only left with the HELOC using the home as collateral. The HELOC is simple interest, a mortgage is compound interest. That's where the huge savings comes into play. Yes we deposit everything into the HELOC every month. The HELOC is like a huge, low interest credit card. You pay it down but the funds are still available.

Another way to think about it...Bank A gives  you a mortgage for your house. Bank B gives you a large line of credit equal to 85% of the appraised value of your house. You take the line of credit from Bank B and pay off the mortgage from Bank A. Mortgage is now gone. You are only left with the line of credit that has a simple interest rate and is WAY cheaper. The cheaper simple interest allows you to pay down the debt much faster. We just take it a step further and deposit everything into it allowing for us to pay down exponentially faster.

@Royce Talbo I'm Sharika's husband. Your description above is accurate. 85% LTV left us with a HELOC of $600,000. We owed BofA $530,000 so we used the HELOC to pay off the house and told BofA to take a hike. Initially that left us with $70,000 left over. We estimate 5-7 years to pay off the HELOC based on the fact that we deposit all our income into it. We essentially use it like a checking account. Our cash flows are pretty high and our W2 incomes with the miltary are pretty solid so we are able to affect principle in fairly large chunks every month. Paying the HELOC down quickly has left us enough room to use it for down payments on several other properties we've purchased recently. At 1.75% interest on the HELOC it costs us very little to use this kind of financing. I'll admit, this isn't for everyone. The numbers have to be right to make all of this work and it takes some discipline to manage.

Did I mention that @Sharika L. is the best business partner ever! She's also my wife! I'm a lucky man.