My husband does a better job of explaining the use of a home equity line of credit and personal line of credit which I will copy and paste below. As far as the sweep system in Hawaii, we paid 5000 for consolation for 2 years. They are a middle man between the banks and provide us training on using the calculator to stay on track of our goals. However, if you are good a money management and figuring out calculators, I don't think paying a company is necessary. Below is my husbands explanation of PLOC and HELOC.
We took out a HELOC on our home in Hawaii and paid that same home off with it. We got our HELOC through Bank of Hawaii. Their customer service and closing time is a little slow but with an introductory rate of 1.75% at 85% LTV you can't beat it. We initially got a PLOC through Hawaii State Federal Credit union to pay down some principal to have enough equity to be able to get the HELOC. Once we pulled the trigger on the HELOC we actually ended up paying off the home, the PLOC, and our car. We use our HELOC like a checking account and deposit all our income into it and since we pay next to nothing in interest we're seriously impacting our principal. And remember, since it's a line of credit, as you pay it down that money becomes available again to invest in other properties. Back to your original question, our home in Hawaii used to be our primary residence but we moved to Texas a couple years ago. We closed our HELOC about 6 months ago and the banks in Hawaii are ok with opening HELOC's on investment properties.
It's the difference between simple and compound interest. We'll use my home as an example. Our mortgage was $3200 a month. Of that, more than $1700 of it was going towards interest. That was at a 3.75% interest rate. Looking at real numbers, 3.75% interest is actually more like 80% interest after 30 years and is front loaded (WHAT A SCAM!) We got a HELOC at 85% LTV and our home appraised for a bit over $700,000 which left us with a $600,000 HELOC. We had a bit over 25% equity in the home (we owed about $530,000). With our introductory, simple interest rate of 1.75% for two years, that left us with a $700 a month, interest only payment. We paid off the mortgage and told Bank of America to take a hike. We now use the HELOC like our checking account and deposit all of our income into it. Having to pay exponentially less interest and depositing all our income into the HELOC allows us to attack principal in large chunks. At this rate we can have the remaining balance paid off in 5-7 years. Remember also that as you pay down your line you still have access to it. So we've been using the available balance to finance some buy and hold properties that are bringing in good cash flows.
I've been asked, "well if it's that easy, why doesn't everyone do it". That's a reasonable question. The simple answer is the numbers have to be right. There needs to be enough equity and monthly cash flow (whether from real estate or from your full time job) to qualify for this type of financing. And not every bank offers fixed rates. We did this with Bank of Hawaii. We initially used a personal line of credit to pay down enough principal for our numbers to work for the HELOC. Keep in mind that even the worst variable rate HELOC beats the best rates on a mortgage (simple vs compound interest). Compound interest is a killer!
Hawaii is a high dollar market but the idea is that same anywhere. Reduce or eliminate the compound interest or the amount of time you have to pay it and attack principal in large chunks.
