Using HELOC to reduce interest payments and term of 30-year mortgage

[stephenandrew]

Hi--
I just attedned a seminar where, if I understood the process correctly, I was told one could shorten the term of thier mortgage from 30 years to 7 years, not impact their standard of living, and save a bunch of money in interest by essentially paying off thier mortgage with the proceeds from a home equity line of credit. As I understood it, one would take their monthly income/salary, and use it to pay down my HELOC, then as bills come due, use the HELOC to pay them. I guess the theory is that during the month my HELOC balance would be reduced, thus one would reduce their interest expense. Each month I would do this same thing.

Here is a link to the website I was given that shows the supposed advantages. Sample Report

I am kind of skeptical about this---conceptually it seems to make some sense, but I feel like I must be missing something. It sounded too good to be true. Can someone set me straight as to why this is not a good idea?

Thanks!

 

[ziggy29]

You can do the same thing by plowing ALL excess cash flow above and beyond your taxes, bills and living expenses into extra principal payments on your mortgage.

The only difference is that you can't borrow off the primary mortgage to pay down unexpected expenses.

[Edit to add: If you do prudent things like keep an emergency fund, put aside a percentage for long-term investing, et cetera, it will likely take a LOT longer than 7 years unless your house is puny relative to your cash flow.]

 

[REWahoo]

It sounded too good to be true. Can someone set me straight as to why this is not a good idea?

For the same reason a perpetual motion machine sounds too good to be true...

 

[maddythebeagle]

United First Financial - Looking for the truth

Many are a scam that will cost you several thousand to setup....since you heard a pitch at a seminar I would guess that it will cost you....

Some lenders look to have products if you are interested....not sure about fees...

Mortgage Accelerator / Offset Account / Pay off Your Mortgage Sooner Myths and Facts FAQ

 

[Bestwifeever]

If this idea would work I don't know why you would need (to pay) an outside firm to help you accomplish it--in fact if it worked you would get that mortgage paid off that much sooner by not paying the outside firm's (probably hidden) fees.

 

[Khan]

If this idea would work I don't know why you would need (to pay) an outside firm to help you accomplish it--in fact if it worked you would get that mortgage paid off that much sooner by not paying the outside firm's (probably hidden) fees.

Don't Fall for This Mortgage Pitch - Kiplinger.com

 

[Patrick]

Yes it can work, and as Ziggy says, you can do almost the same thing yourself by plowing your excess money into your mortgage. But the HELOC puts the money on your mortgage in advance, which is where the advantage lies.

But don't spend a lot of money on the program. Go here and sign up for the webinars. Listen to a few and you will get the idea of how it works and can do it yourself for free.

Speed Equity® System

This guy claims he invented the system and the others stole his ideas. He wants to distribute it for free. He does offer an online software subscription for a fee, but you don't need it to make the program work.

 

[hankster]

The link that Khan posted says it all. A great money making opportunity for the people who sell the $3,500 "magic" software.

 

[tryan]

Yeah a few years back the push was paying someone to pay your morgage bi-monthly. Went back and forth with the sales person - I told him I could make bi-monthly payments without him ... he said I couldn't. Finally hung up.

Just a re-packaging of an old scheme.

 

[Yossarian]

But the HELOC puts the money on your mortgage in advance, which is where the advantage lies.

I don't follow you. As soon as I pay off my mortgage using my HELOC, I owe HELOC interest. Where is the advantage?

Thanks.

 

[Patrick]

I don't follow you. As soon as I pay off my mortgage using my HELOC, I owe HELOC interest. Where is the advantage?

Thanks.

You don't pay off your mortgage, you make additional principal payments using the HELOC. You have to calculate a budget, then make a principal payment of, say, $10,000. You pay all your bills from the HELOC. All your income goes to the HELOC payment. When the HELOC is paid down, you make another lump sum principal payment, and continue til the mortgage is paid off. It saves you several years of mortgage payments. According to the author, you save money on the "float" of the interest you will pay. You save on the mortgage more than it costs you on the HELOC. This is the gist of how it works. I'm not the expert, just trying to point out that there is a free alternative that works. Please go to the website for more info.

 

[rayvt]

You don't pay off your mortgage, you make additional principal payments using the HELOC.
IOW, you borrow money to make a principal payment on your mortgage. I guess it's better to borrow from a HELOC than from a credit card though......
I can see how that might work right now, with 1st mortgages at 6% and HELOCs at 5.75%, but what happens to your "Prime + 1%" HELOC when the prime rate jumps to 8% or 9%? Borrowing at 10% to pay off a 6% note doesn't make sense.

All your income goes to the HELOC payment. You pay all your bills from the HELOC.
Until your bank freezes your HELOC and won't let you write any more checks. OOPS! How do you pay your bills then? Especially, how do you make your upcoming mortgage payment on the 15th??

According to the author, you save money on the "float" of the interest you will pay. You save on the mortgage more than it costs you on the HELOC.
But saving on the float is a one-time occurrance. You can delay paying a bill by 15 days (due on the 1st but late on the 15th), but the next month you can't delay it another 15 days (you can't slip it from the 15th to the 30th). And you can already make money on the float by putting your paycheck into a Money Market savings account and paying your bills (including the 1st mortgage) as late as possible.
The sum you can float is the total of your bills times the number of days between your paycheck and the late date. It's not cumulative.

For example, if I can save/make money via a 5% HELOC, and my mortgage payment is $1500 PITI, can delay it from the 1st to the 15th and save/make $1500*.05/12/2 = $3.13 each month on the float. Whoopdee-doo!!! I can save more than that by buying one cup of coffee at McDonalds instead of Starbuck. If I can do that with all of my bills, I'll save/make maybe $10 a month on the float. That isn't going to pay off my mortgage 10-20 years early.

I can't see how this strategy could possibly work. On numerous forums I have asked the proponents to walk me through the numbers, and so far they have all either ignored my questions or castigated me for being a defeatist.

I went to the website and clicked on the HOW IT WORKS link. At the top of the page it says "Saved 22 years". That's paying off a 30 year mortgage in 8 years. So I ran some numbers.

To pay off a $200,000 mortgage in 30 years at 6% is $1,199/month.
To pay it off in 8 years at ZERO interest is $2083/month. That's $884 more.
To pay it off in 8 years at 6% is $2628/mo. That's $1429 more.

If you can somehow work the HELOC method and get an effective overall rate of 4%, an 8 year payoff will cost $2438/month. That's $1239 more.

To pay off a $200,000 mortgage you have to pay the entire $200,000 principal plus accrued interest. Simple math is divide the principal balance by the number of months and that tells you the required average principal per month that you must pay. Plus interest.

Where does this extra $1239/mo (or $1429/mo) come from?

I can see no way that an ordinary family is going to be able to make/save/earn $1239 a month by using a HELOC.

 

[Khan]

I can't see how this strategy could possibly work. On numerous forums I have asked the proponents to walk me through the numbers, and so far they have all either ignored my questions or castigated me for being a defeatist.

That's the pattern.

Someone was shilling this on the Simple Living forum.

 

[DJRR]

The only advantage is if you have a truly transactional LOC.

For example, I currently have $200 in my checking account at $0 interest. If I had a transactional account that money would be swept into the LOC and I would not pay interest on the $200 and "saving" the LOC interest.

Same thing for payroll. Today I had $3000 deposited into my MM account. I currently earn ~ 2.5% while waiting for my bills to clear. If that money was swept against my mortgage until my bills cleared I would earn my mortgage rate instead of 2.5%. That is true incremental savings with no additional money or effort.

Everything else is simply prepayments which you can do yourself for free.

The only account I have seen that I believe is worthwhile is the "light green account" from Pacific Trust, but it is only available in California.

Light Green 2nd Mortgage - Pacific Trust Bank

Most offset mortgages require a floating rate first trust which offsets the advantages of the incremental savings.

The light green accounts allows you to keep your fixed rate first but have a fully transactional second trust at a low rate where you can presumably take better advantage of the float on your existing money.

If you are in California it might be worth checking out.

 

[W2R]

You can do the same thing by plowing ALL excess cash flow above and beyond your taxes, bills and living expenses into extra principal payments on your mortgage.

That is exactly how I paid off my house. It took four years of serious LBYM but it was SO worth it, to me.

The only difference is that you can't borrow off the primary mortgage to pay down unexpected expenses.

Most unexpected expenses can be delayed, if push comes to shove. For example, when my central A/C cratered right after I had made a payment to my principle, I endured a New Orleans summer without A/C before accumulating enough from my salary to get it fixed. Again, it was SO worth it, to me, to get my house paid off fast.

[Edit to add: If you do prudent things like keep an emergency fund, put aside a percentage for long-term investing, et cetera, it will likely take a LOT longer than 7 years unless your house is puny relative to your cash flow.]

You can open a HELOC for an emergency fund, and then not use it. I finally figured that out. . I still have it and still haven't used it. I paid off my house in 4 years.

Was my house puny relative to my cash flow? Maybe so. My mortgage payments were about 21% of my salary in 2002 when I bought it (25% of the remainder after my maximum TSP contribution). It is NOT THAT HARD, folks. I am not that good at LBYM.

I think mortgage companies will usually lend up to 28%. I knew when I was house-shopping that my intention was to pay off my house before ER, and my realtor was really great in helping me to choose my house wisely with a price that I could live with. If I had truly, truly wanted/needed a bigger house (I didn't), I could have sold this one in 2006 and used the proceeds as a down payment on a house that was twice as expensive, doing the same thing for another 4 years to have the more expensive house paid off by 2010. The trick is to start with a house that is not too expensive, so that you have payments low enough that you have excess to pay down the principal.

 

[Yossarian]

You don't pay off your mortgage, you make According to the author, you save money on the "float" of the interest you will pay. You save on the mortgage more than it costs you on the HELOC.
But saving on the float is a one-time occurrance..

That's what I was thinking. If you borrow on the HELOC to pay the mortgage, you have just shifted interest obligations. If you pay down the HELOC faster by having deposits made before your next mortgage payment is due, I guess you get some TVM benefit, but it seems it would at most be equal to the your interest rate times one month's payment amount.

 

[Bestwifeever]

I did a search for OP Stephenandrew and it looks like you're on track to pay your mortgage off in 2010--why not stay the course since you are almost there?

 

[Patrick]

All your income goes to the HELOC payment. You pay all your bills from the HELOC.
Until your bank freezes your HELOC and won't let you write any more checks. OOPS! How do you pay your bills then?

I went to the website and clicked on the HOW IT WORKS link. At the top of the page it says "Saved 22 years". That's paying off a 30 year mortgage in 8 years. So I ran some numbers.

To pay off a $200,000 mortgage in 30 years at 6% is $1,199/month.
To pay it off in 8 years at ZERO interest is $2083/month. That's $884 more.
To pay it off in 8 years at 6% is $2628/mo. That's $1429 more.

If you can somehow work the HELOC method and get an effective overall rate of 4%, an 8 year payoff will cost $2438/month. That's $1239 more.

To pay off a $200,000 mortgage you have to pay the entire $200,000 principal plus accrued interest. Simple math is divide the principal balance by the number of months and that tells you the required average principal per month that you must pay. Plus interest.

Where does this extra $1239/mo (or $1429/mo) come from?

I can see no way that an ordinary family is going to be able to make/save/earn $1239 a month by using a HELOC.

Why would the bank freeze your HELOC? They want you to use it so they make interest money.

The big advantage of the strategy is that it forces you to put every extra dime you have against your mortgage principal in advance. If you don't have any extra income above and beyond your bills, the strategy won't work. You need the extra money to pay the principal down. Most people do not use any extra cash they have to pay their mortgage, they put it somewhere else - savings account, impulse buys, vacations, etc.

What you are doing is forcing yourself to put extra money on the mortgage principal by making a lumpsum cash payment, say $5K or $10K from the HELOC. This reduces the balance you owe on your mortgage and interest is saved on that. Each subsequent payment applies a larger increment of that payment to the principal, so more interest is saved. All your income goes to the HELOC payment and all bills are paid from the HELOC. This, in effect, keeps ALL your extra money on your mortgage principal. When the HELOC balance is paid off, you make another lumpsum payment from the HELOC to the mortgage and repeat until the mortgage is paid off.

You can do the same thing by sending all your extra cash in on your mortgage principal, but most companies only let you send in extra payments with a regular payment. So by using the strategy, you get the principal reduction right away, which saves you the interest on that amount.

 

[W2R]

You can do the same thing by sending all your extra cash in on your mortgage principal, but most companies only let you send in extra payments with a regular payment.

Really? I didn't realize it but I guess I was really lucky. Chase Mortgage let me send in extra payments any time I wanted to but I had to mail them in (my regular monthly payment was automatically deducted from my bank account).

Chase even provided the pre-addressed envelope for me to use for lump sum extra payments, and a slip to include stating that this was an extra payment. I always wrote "APPLY TO PRINCIPAL ONLY!!!" in big block letters on both the slip and on my check, just to make sure. It seemed to take them about 5 days from the day I mailed it to receive it and apply it to my mortgage, which was aggravating but that's how long it always seemed to take.

Other than their endless voicemail system, rather than real humans, I was really happy with Chase Mortgage.

 

[Patrick]

Really? Guess I was lucky. Chase Mortgage let me send in extra payments any time I wanted to. They even provided the envelope pre-addressed to a different P.O. box for me to do it with, and a slip stating that this was an extra payment. I always wrote on the slip "APPLY TO PRINCIPAL ONLY!!!" in big block letters on both the slip and on my check, just to make sure.

My old mortgage company would not accept additional principal payments unless I sent them in with my regular payment. They returned my checks with a note saying that they must be submitted together. I suspect it was a way to try to keep people from paying off their mortgages early.

I don't know if my current company accepts them separately or not, since I just send them in together now as a matter of habit.

 

[W2R]

My old mortgage company would not accept additional principal payments unless I sent them in with my regular payment. They returned my checks with a note saying that they must be submitted together. I suspect it was a way to try to keep people from paying off their mortgages early.

I don't know if my current company accepts them separately or not, since I just send them in together now as a matter of habit.

Might be worth asking about! I think it really helps to be able to send in those lump sum payments when the spirit moves you to do so. I would make out the check and send it in that day, and really it was quite a rush.

 

[SecondCor521]

There are only two ways mathematically that this [-]scam[/-] idea can work:

1. If the interest rate on the HELOC is lower than the interest rate on the first mortgage. If I had such a situation I would borrow the max on the HELOC and put it towards the first ASAP.

2. If payments applied to the HELOC immediately reduce the interest accruals. I think, but don't know for sure, that most HELOCs work this way. Even so, the rates on the first and HELOC would have to be very close in order for the beneficial effect of the interest savings from reduced daily accruals on the HELOC to offset the presumably higher rate of the HELOC.

Everything else beyond the above is a shell game.

2Cor521

 

[W2R]

There are only two ways mathematically that this [-]scam[/-] idea can work:

1. If the interest rate on the HELOC is lower than the interest rate on the first mortgage. If I had such a situation I would borrow the max on the HELOC and put it towards the first ASAP.

2. If payments applied to the HELOC immediately reduce the interest accruals. I think, but don't know for sure, that most HELOCs work this way. Even so, the rates on the first and HELOC would have to be very close in order for the beneficial effect of the interest savings from reduced daily accruals on the HELOC to offset the presumably higher rate of the HELOC.

Everything else beyond the above is a shell game.

After I got my HELOC, about a year before I finished paying off my mortgage, I thought about using it that way. I worked it out and for me, it did seem like a shell game. I figured out that I would be paying pretty close to the same amount, but without the protections that a mortgage loan provides. That was in 2006, and during the Katrina evacuation mortgage companies sent out letters to us saying that we didn't have to pay if we didn't want to, for a few months (six?). Then the mortgages were just extended to make up for that. I think one's credit is more at risk if you skip several consecutive payments on a HELOC, maybe? I dunno.

Anyway, I decided not to use my HELOC for that purpose. I wanted to do it so that I would reach my goal earlier, but regretfully realized that my mortgage really wasn't paid off until it was paid off, KWIM? My HELOC was a higher interest rate than my 30-year fixed, and lump payments to the latter immediately reduced my interest rate accruals (well, after a 5-day mail/processing delay). That saved me some which was satisfying but not a huge impact on paying off my mortgage. I only had a small amount left to pay off at that point in any event, and got it paid off later that year.

 

[Gumby]

..

 

[Nords]

Why would the bank freeze your HELOC? They want you to use it so they make interest money.

That's a supremely logical question.

Just don't ask Laurence or any of the other thousands of HELOC holders who've had theirs frozen by nervous banks/brokers...