Any advice? - Getting a First Lien HELOC to pay off mortgage near retirement

[cyber888]

Would appreciate any advice. So Fed Jerome Powell says interest rates will stay near zero to 2022. I’m near $100,000 on my mortgage balance. I was thinking of getting a $100,000 Heloc to pay off my mortgage in 2-3 years. From a cashflow perspective .. I can pay the principal faster with Heloc. Right now, my mortgage is $1032/mo. A $100k Heloc w 3.95% interest will have a minimum payment requirement of $475/mo .. and the more principal I pay each month, the lower the required monthly payment. Some people will put all their paycheck into their Heloc and just use a credit card for 30 days w zero interest to take advantage of the daily interest savings on the heloc and they just pay all the credit card balance when due .. this is what I do. Interest for Helocs now are 3.5-4.0%. I’ve always wanted to have an active Heloc account even if I pay off my mortgage, so I could use it in case of housing repair. So even if i pay off all Heloc balance in 2-3 years, I always have a heloc to tap for emergencies. I’ve never had a first lien heloc, so any advice?

 

[euro]

Not sure I understand the plan - why can’t you just make additional payments on your existing mortgage to accelerate payoff? Or are you saying the HELOC rate will be lower than the current mortgage? In that case, you could also refi the mortgage instead and probably get an ever lower rate - then accelerate payoff.
I do get the idea of having a HELOC on your payed off house - I have one too. But you can get that any time in the future, after paying off the mortgage.

 

[cyber888]

Not sure I understand the plan - why can’t you just make additional payments on your existing mortgage to accelerate payoff? Or are you saying the HELOC rate will be lower than the current mortgage? In that case, you could also refi the mortgage instead and probably get an ever lower rate - then accelerate payoff.
I do get the idea of having a HELOC on your payed off house - I have one too. But you can get that any time in the future, after paying off the mortgage.

Yeah, I was thinking about refinancing too, but Helocs have no closing cost and refinancing will have a $5000 closing cost .. and doesnt make sense if I pay off my mortgage in 2 years - will you pay $5000 if u plan to pay off your mortgage in 2 years. Heloc will allow me to pay the principal faster because I could deposit all my salary to the Heloc at the 1st of the month and lower the interest. Then get some money from the Heloc back at the end of the month to pay credit cards. And remember, credit cards have 0% interest for 30 days. Then pay back the Heloc balance again after i get my paycheck at the beginning of next month .. lowering the daily interest again. Basically, im using all my salary to pay off the heloc at the beginning of the month

 

[COcheesehead]

Did you run the numbers on this? It sounds good on theory, but you might end up saving the cost of a Big Mac.

 

[cyber888]

Did you run the numbers on this? It sounds good on theory, but you might end up saving the cost of a Big Mac.

Here’s the illustration and the math. And remember the Feds will keep rates near zero till 2022. Jump to 23:20 on the video if you dont have time to watch all of it.


https://youtu.be/GbGMVskwno8

 

[euro]

Did you run the numbers on this? It sounds good on theory, but you might end up saving the cost of a Big Mac.

I agree - your balance is only 100k and you want to pay off in 2 years, so it will likely not be worth the effort. But if you already crunched the numbers and the savings are worth the work to you, then I say: go for it! Very little risk

 

[Sunset]

Yeah, I was thinking about refinancing too, but Helocs have no closing cost and refinancing will have a $5000 closing cost .. and doesnt make sense if I pay off my mortgage in 2 years - will you pay $5000 if u plan to pay off your mortgage in 2 years. Heloc will allow me to pay the principal faster because I could deposit all my salary to the Heloc at the 1st of the month and lower the interest. Then get some money from the Heloc back at the end of the month to pay credit cards. And remember, credit cards have 0% interest for 30 days. Then pay back the Heloc balance again after i get my paycheck at the beginning of next month .. lowering the daily interest again. Basically, im using all my salary to pay off the heloc at the beginning of the month

So repeatedly doing this every month, without screwing it up will in effect float you nearly 1 months salary interest free savings per year.
So how much is that worth ??
(I'll guess you take home after taxes $60,000 per yr, so that is $5,000 per month, so the effective float is $5,000).
Guess your mortgage is 4% so the max value this is per year is: 5000×.04 = $200.
Now in reality, there are some missed days, but not enough to bother calculating.
So I figure OP could save $200 / yr doing this, based on my Guessed values.

 

[cyber888]

I agree - your balance is only 100k and you want to pay off in 2 years, so it will likely not be worth the effort. But if you already crunched the numbers and the savings are worth the work to you, then I say: go for it! Very little risk

Thanks. I’ve always been hesitant of the variable rate for helocs. But the Feds Chair said they will keep interest rates very near zero to end of 2022 as the recovery will take a long while.

 

[njhowie]

Thanks. I’ve always been hesitant of the variable rate for helocs. But the Feds Chair said they will keep interest rates very near zero to end of 2022 as the recovery will take a long while.

And what was the Fed Chair saying in December 2018 with regard to their interest rate outlook for 2019? What happened in reality?

Is the interest rate on the heloc tied to a fixed formula related to the Fed interest rate or some other metric? Or is the lender free to change the rate as they please? I seriously doubt even with interest rates at zero that we're going to see many credit card issuers lowering their rates, so I'd be cautious with relying too heavily on how the rate on the heloc might change.

If it were me, I would put all my efforts in to paying off the existing mortgage and not deal with the heloc. Having it, you will be enticed to utilize it, possibly to purchase that which you might not otherwise.

Now, as far as the financial shell game with the credit card - I don't see it. Are you currently carrying credit card balances month to month? If so, that's your problem, pay them off and don't charge what you cannot afford to pay off every month. Charging to the card and then paying it 30 days later with the heloc means that you're going to immediately begin paying interest on the heloc at that point. Why would you want to do that?

When you get the heloc, you are using your home as a piggy bank. If your objective is to simply have it there in place of the mortgage to lower your interest rate and more quickly pay off the mortgage with no fees involved, wonderful - take the heloc for exactly the amount of the mortgage balance, continue paying your current monthly mortgage amount (that would have it paid off in 2 to 3 years) towards the heloc, and then close it when paid off.

I don't like taking debt, especially if you are financially able to avoid it.

 

[pb4uski]

To begin with, velocity banking is bunk... so forget that video.

What is you current mortgage interest rate? For the last mortgage payment that you made, how much was principal and how much was interest?

Like others, I'm skeptical that your plan to use a HELOC will have any benefit.

I seem to remember another velocity banking scheme thread here sometime in the last 6 months. See post below.
https://www.early-retirement.org/forums/showthread.php?p=2309859

 

[Peter]

May not apply to all banks, but I was told that a HELOC could not be used to finance a primary residence.

 

[W2R]

Not sure I understand the plan - why can’t you just make additional payments on your existing mortgage to accelerate payoff?

If it were me, I would put all my efforts in to paying off the existing mortgage and not deal with the heloc.

+1 to both of these quotes.

That's what I did from 2002-2006. I had a no-fee HELOC but didn't use it. Instead, I paid off my mortgage in 4 years on a five figure salary while living like a student and saving for my 2009 retirement. But then I do tend to jump into things that way sometimes.

Also you are only allowing yourself two years to get it paid off, not four. Ouch. I would have paid mine off in three years (according to my plan) instead of four, but Hurricane Katrina got in the way.

I think for me, buying a house and getting my mortgage on it paid off ASAP was a form of "divorce therapy". I wanted to regain my lost plans and dreams despite the financial disaster of my 1998 divorce (that left me with nothing but my clothes, books, a broken sofa, and a junk car).

 

[Gumby]

You don't say what your current mortgage interest rate and remaining duration are, so it's hard to know whether you will save any money. One big risk of your plan is that HELOC rates may go up despite what Jerome Powell says now. Your current mortgage rate won't change. If it were me, I would just pay extra principal on the current mortgage. But then I have always valued simplicity in my financial affairs.

 

[brewer12345]

If you are going to pay the mortgage down in 2 years, just do that. However, I would set up a free HELOC anyway. They cost nothing and are a useful free option even if you never use it.

 

[cyber888]

You don't say what your current mortgage interest rate and remaining duration are, so it's hard to know whether you will save any money. One big risk of your plan is that HELOC rates may go up despite what Jerome Powell says now. Your current mortgage rate won't change. If it were me, I would just pay extra principal on the current mortgage. But then I have always valued simplicity in my financial affairs.

Just talked to the bank this morning and the HELOC will be around 3.5% as a first lien HELOC. My current rate is 3.25% but it is an ARM loan which expires in 3 years.

 

[brewer12345]

Just talked to the bank this morning and the HELOC will be around 3.5% as a first lien HELOC. My current rate is 3.25% but it is an ARM loan which expires in 3 years.

Then it makes no sense to pay off the mortgage with the HELOC.

 

[Sunset]

So repeatedly doing this every month, without screwing it up will in effect float you nearly 1 months salary interest free savings per year.
So how much is that worth ??
(I'll guess you take home after taxes $60,000 per yr, so that is $5,000 per month, so the effective float is $5,000).
Your mortgage is 3.25% so the max value this is per year is: 5000×.0325 = $162.50
Now in reality, there are some missed days, but not enough to bother calculating.
.

Updated now that we have some numbers.
The Extra cost of Heloc is $100,000 * .0025 = $250 per year.

Using the Heloc with all the bother and perfectly executed would Cost the OP 250−162 = $88/yr sliding to zero over the 3 years.

Still not worth it.

 

[Katsmeow]

If you want to pay your mortgage off in two years (which for me is not a goal...we just refinanced our mortgage in March) then I would just make extra payments on your existing mortgage since it is already at a low rate.

 

[cyber888]

Then it makes no sense to pay off the mortgage with the HELOC.

It makes sense, because this is a reverse compounding interest. I lower monthly payments by $600/month and pay more towards the principal. And every month, I can lower $50/month and increase more principal payment thereby paying it twice as fast ... just watch the video .. the math works if you have the discipline. The .25% rate is irrelevant .. because it gives you better cashflow

 

[cyber888]

Updated now that we have some numbers.
The Extra cost of Heloc is $100,000 * .0025 = $250 per year.

Using the Heloc with all the bother and perfectly executed would Cost the OP 250−162 = $88/yr sliding to zero over the 3 years.

Still not worth it.

Again, this is not about the interest .. it's having more Cashflow to pay the principal much much faster.

 

[pb4uski]

Answer the questions in post #10 and read the link and you'll have your answer.

Or framed another way, if you pay $x per month towards the mortgage for the next y months, you'll pay off more principal at 3.25% interest than at 3.5% interest. The only difference is that with the mortgage you must pay at least $1,032/month.

 

[obsessed]

It makes sense, because this is a reverse compounding interest. I lower monthly payments by $600/month and pay more towards the principal. And every month, I can lower $50/month and increase more principal payment thereby paying it twice as fast ... just watch the video .. the math works if you have the discipline. The .25% rate is irrelevant .. because it gives you better cashflow

Not quite. The majority of the HELOC payments are interest. Only ~$275 or so of your monthly mortgage payment is interest (@ 3.5% on $100k). The rest is principal and possibly property tax and insurance. If you still have P&I on escrow then you will have to pay that directly as well.

 

[pb4uski]

It makes sense, because this is a reverse compounding interest. I lower monthly payments by $600/month and pay more towards the principal. And every month, I can lower $50/month and increase more principal payment thereby paying it twice as fast ... just watch the video .. the math works if you have the discipline. The .25% rate is irrelevant .. because it gives you better cashflow

No, it doesn't make sense. With payments towards the debt being equal the more you pay in interest the less you pay in principal, and vice versa.

 

[brewer12345]

No, it doesn't make sense. With payments towards the debt being equal the more you pay in interest the less you pay in principal, and vice versa.

.

Pippin:
The closer we are to danger, the farther we are from harm. It's the last thing he'll expect.

 

[l8_apex]

Isn't your current mortgage a tax deduction? HELOCs on your residence are not. How much is your tax burden reduced by your mortgage deduction?