All Forum Posts by: Yoochul C.

This is an interesting topic, so I modeled this concept of using a HELOC as a checking account.

My math assumes the following: 50,000 balance on Jan 1, 5% interest rate, 5,000 monthly take home pay, and 3,000 monthly expense (and 2,000 surplus).

Scenario 1: On the 1st of every month, pay entire 5k paycheck to HELOC, spend 3k per month using HELOC spread evenly each day throughout the month.

Result: On December 31 your balance is 27,827. Interest paid is 1,827 for the year.

Scenario 2: On the 1st of every month, pay 2k to HELOC.

Result: On December 31 your balance is 27,900. Interest paid is 1,900 for the year.

Doesn't seem worth the effort to me. Others might disagree. Of course, there are also a million variables so everyone's outcome may be slightly different.

You don't store money in a loan, you owe money. Once you take money from your HELOC to pay down your mortgage, you have transferred that into mortgage equity. You are then taking out a loan each month from your HELOC to pay your expenses. If you lose your job tomorrow you will be in debt without a penny to your name. Every check you write from the HELOC will just put you further in debt. Look at it another way. I could say my credit card is my 6 months living expenses. It is also revolving credit. Using a credit card may be better in some ways because at least it is unsecured debt. If you get in trouble on your HELOC, they can take your home. See my point?

The strategy is fine while you have a job but it is not an emergency fund. Emergency fund is cash.

This is an interesting topic, so I modeled this concept of using a HELOC as a checking account.

My math assumes the following: 50,000 balance on Jan 1, 5% interest rate, 5,000 monthly take home pay, and 3,000 monthly expense (and 2,000 surplus).

Scenario 1: On the 1st of every month, pay entire 5k paycheck to HELOC, spend 3k per month using HELOC spread evenly each day throughout the month.

Result: On December 31 your balance is 27,827. Interest paid is 1,827 for the year.

Scenario 2: On the 1st of every month, pay 2k to HELOC.

Result: On December 31 your balance is 27,900. Interest paid is 1,900 for the year.

Doesn't seem worth the effort to me. Others might disagree. Of course, there are also a million variables so everyone's outcome may be slightly different.

In this situation a HELOC could be used to manage money. The concept is that at any given time you have maximized your principal pay down. The point I disagreed on previously was your belief that a mortgage and HELOC accrue interest differently. If you are using a HELOC to have a line of credit in case of emergency, that is fine.

Just to be clear, a HELOC is not a savings account. You are not keeping funds in the HELOC account. You are paying off a loan balance in the HELOC. When people say to have 6 months living expenses, they are not referring to a loan. You should have 6 months in an FDIC insured savings account.

@Chris May

Your spreadsheet only illustrates that you are missing the point of how the HELOC strategy works since you use the same number as your payment each month.

To implement the strategy the HELOC needs to become an upside down checking account (i.e. - the difference between the HELOC limit and the balance owed is your available funds). Your entire net income would go towards paying down the HELOC balance just like your entire net income goes towards raising your checking account balance. A common misinterpretation of this is that you are paying more, but in all reality all you are doing is reallocating your funds. Sure, it could go to your checking account, but by reallocating it into the HELOC you save X% on interest paid for those funds.

Another misconception is that this is the same as paying extra to your mortgage every month. However, in the "pay more to your mortgage" scenario, getting access those funds takes time, effort, and incurs additional fees. With a HELOC you can move that money over to your checking account in a matter of minutes. Additionally you won't be able to pay nearly as much to your principal as you would using the HELOC strategy since the HELOC strategy utilizes ALL of your net income. I don't know anyone who would advise doing this when paying off a mortgage.

To accurately compare the methods you would need add a net income and a checking account balance into your scenario. The monthly payment towards the HELOC would be net income - interest and run this until the balance is zeroed. Because no money goes to the checking account that value is $0 while there is still a HELOC balance and would begin to increase after the HELOC balance is paid off. The mortgage scenario would be modeled by taking net income - mortgage payment and adding it into your checking account. These scenarios will play out much differently than what you have laid out in your spreadsheet.

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

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