Author Topic: Convert 30 year mortgage to a Home equity line of credit?  (Read 1617 times)

Dwink22

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Convert 30 year mortgage to a Home equity line of credit?
« on: January 25, 2018, 06:08:01 PM »
Hello all!
Wondering if anyone has ever converted their mortgage to a home equity line of credit. I came across this ad on the web touting the benefits of this ( no pmi, pay off loan in 5-7 years, no closing costs, fixed interest rate...) Sounds too good to be true so probably is, but just thought I would check with you all. Thank you all for your information and help.

HawkeyeNFO

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #1 on: January 27, 2018, 08:15:51 PM »
Bad idea unless your mortgage is at a high rate.  You lose the mortgage interest deduction.

Telecaster

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #2 on: January 27, 2018, 08:22:30 PM »
HELOC interest is tax deductible as well.

However, it is a fool thing to do.  Basically, the way it works is you use the HELOC to pay off the mortgage, and then pay down the HELOC.  But the secret sauce is they tell you to deposit your paycheck and all your savings into the HELOC--which is functionally identically to pre-paying the mortgage.  You can show it is the same thing very easily in Excel. 

There are a lot of reasons not to do this, and no reasons to do it.  So don't. 

Hargrove

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #3 on: January 28, 2018, 08:25:25 AM »
Taking out a HELOC to invest is something many here do, but there are only two things to consider if you're talking about converting your mortage to a HELOC.

What's the REAL cost of the mortgage vs the HELOC (including both now and in the future), and what does it do to your cashflow?

I'm concerned you even mentioned PMI. "No PMI on a HELOC" is like saying "our broccoli is gluten-free." Well, necessarily, yes. You can't get a HELOC without equity, and you have no equity if you're paying PMI.

If you could really convert a mortgage to a HELOC and save a fixed 1% on interest or something, it could make sense. More likely, however, something else happens. Your minimum payment may skyrocket, imperiling your finances if you can't deal with the cashflow change. HELOCs are rarely fixed rates. Refinancing to a great variable rate might be lovely until it goes up. The HELOC may also offer interest-only payments at first, which hides the fact that you're ballooning your debt, and smacks you with a very large payment later, which you may or may not be in a position to cover. If you get a HELOC with slightly lower interest than your mortgage but pay only interest for three years, you swindled yourself (unless we're talking <5% interest range, verified interest savings, and no suddenly huge minimum payment or prepayment penalties or hidden fees).
« Last Edit: January 28, 2018, 08:30:40 AM by Hargrove »

boarder42

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #4 on: January 28, 2018, 08:29:58 AM »
@Hargrove  many here do not take out a HELOC to invest.  We suggest not paying off low fixed rate mortgages.

OP there is no magical way to pay your mortgage down faster. In actuality. You should avoid paying it down faster and instead invest your extra capital.

What are your current mortgage terms.

Hargrove

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #5 on: January 28, 2018, 08:41:37 AM »
@Hargrove  many here do not take out a HELOC to invest.  We suggest not paying off low fixed rate mortgages.

OP there is no magical way to pay your mortgage down faster. In actuality. You should avoid paying it down faster and instead invest your extra capital.

What are your current mortgage terms.

Perhaps I misunderstood the mechanism for re-leveraging, but I thought you were a big proponent of that in the various stripes of "not paying off the mortgage."

Dicey

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #6 on: January 28, 2018, 08:52:52 AM »
@Hargrove  many here do not take out a HELOC to invest.  We suggest not paying off low fixed rate mortgages.

OP there is no magical way to pay your mortgage down faster. In actuality. You should avoid paying it down faster and instead invest your extra capital.

What are your current mortgage terms.

Perhaps I misunderstood the mechanism for re-leveraging, but I thought you were a big proponent of that in the various stripes of "not paying off the mortgage."
Hold on, let me run and make some popcorn...

Hargrove

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #7 on: January 28, 2018, 09:07:27 AM »
Lol I don't think anyone with more than 5 posts thinks boarder42 is all about paying off mortgages. I couldn't find the post I was thinking of, but someone asking about a HELOC in a thread I could find (in context, for paying for renovations), boarder said:

wanna disclose this bank offering no closing costs? i have a couple reno's i'd like to do. and if i can get a 2.86% and no close sign me UP!

i'll probably end up just putting it into VTSAX b/c i'm a cheap ass but still.

So if I'm wrong, I'd gladly stand corrected. :p

boarder42

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #8 on: January 28, 2018, 09:24:34 AM »
Lol I don't think anyone with more than 5 posts thinks boarder42 is all about paying off mortgages. I couldn't find the post I was thinking of, but someone asking about a HELOC in a thread I could find (in context, for paying for renovations), boarder said:

wanna disclose this bank offering no closing costs? i have a couple reno's i'd like to do. and if i can get a 2.86% and no close sign me UP!

i'll probably end up just putting it into VTSAX b/c i'm a cheap ass but still.

So if I'm wrong, I'd gladly stand corrected. :p

That was in response to fixed rate for 12 years. Much different than a HELOC. Most HELOCs are not fixed for 12 years. That post I responded to was likely an HEL not a HELOC as people often confuse these. But yeah I'd stand behind that post again. But thanks for not including the full context.

https://forum.mrmoneymustache.com/ask-a-mustachian/heloc-question/msg1092171/#msg1092171

The poster even said they may be confusing the 2.

I'm waiting for you to stand corrected. @Hargrove
« Last Edit: January 28, 2018, 09:27:00 AM by boarder42 »

englishteacheralex

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #9 on: January 28, 2018, 09:32:20 AM »
I remember a friend talking to us about this very idea one night when we had her over for dinner. She was so excited about it. We had never heard of such a thing, and because we like this friend and respect her, we started googling it and debating it at the same time as she was talking.

I think it took us about ten minutes...VERDICT: SCAM!

It had this ridiculous name--there was a company she was suggesting using and they actually wanted a couple grand to do this for you. I remember that something came over me and I started uncontrollably giggling at the name of the company and how insanely ridiculous it was that they were getting people to give them money to pay off their own mortgage. I just couldn't stop laughing and I felt terrible because I didn't want to make my friend feel bad. She had a sense of humor about it, though.

She never participated in the silly HELOC scam thing, fortunately. Two years later she forwarded me a chain email for that "Secret Sisters Santa" thing with a little note that she was so excited because her friends said it totally worked. It's so weird; she's really smart. Makes me wonder what my own blind spots must be.

Hargrove

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #10 on: January 28, 2018, 09:37:30 AM »
@boarder42, I said in my original post in this thread HELOCs aren't usually fixed. I also said I would gladly stand corrected if I were mistaken about your position, which you would probably know better than I would.

Yes, the poster in fact later says they were told it was a HELOC but it wasn't. On closer inspection, it also looks unlikely that HELOCs would provide the rates to make this make sense; therefore, my statement about "many" using HELOCs is wrong (or should be). I stand corrected. :)
« Last Edit: January 28, 2018, 10:13:40 AM by Hargrove »

HawkeyeNFO

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Villanelle

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #12 on: February 08, 2018, 04:51:46 PM »
We sort of did this. 

We could refi because we moved overseas so the property was no longer owner-occupied, which means no would would refi for the great low rates available to regular properties.  My dad offered to refi (win-win as he gets a guaranteed return and we got the lower, prevailing market loan rate).  But he didn't have quite enough in places he wanted to liquidate, so we used our existing HELOC (which had a zero balance) to refi the rest. 

We got a great rate (2.x%--I don't recall exactly), though it was adjustable.  And paying off early was super easy.  Technically we only had to pay the IO, but if course we paid far, far more than that.  We were able to fix the rate if we wanted, and it wasn't actually that much higher, but it could only go up a max of 1.5% (IIRC) per year, so I wasn't all that worried and figured I'd fix if rates started soaring. 

The loan term with my parents was 18 years.  (They let us pick, and that was the monthly payment we felt most comfortable with.)  The HELOC was paid off in ~2.5 years.

El Marinero

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #13 on: February 09, 2018, 11:27:09 AM »
HELOC interest is tax deductible as well.

No, not deductible anymore.....
https://www.marketplace.org/2017/12/22/business/tax-bill-2017/tax-reform-home-equity-interest-deduction-affect

Glad this point was raised.  Even before the tax bill, the deduction for home equity loans was limited to $100K indebtedness, and only for a primary residence.



Trirod

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #14 on: February 09, 2018, 11:42:13 AM »
HELOC interest is tax deductible as well.

No, not deductible anymore.....
https://www.marketplace.org/2017/12/22/business/tax-bill-2017/tax-reform-home-equity-interest-deduction-affect

Actually, a home equity line can still qualify as deductible in the circumstances being described here.  Under the new tax law, there is no longer any deduction available for home equity interest (as defined).  Home equity interest is defined as any interest on indebtedness secured on a qualifying residence (1st or 2nd home) that does not otherwise qualify as "acquisition indebtedness".  Acquisition indebtedness is debt incurred to acquire or improve a qualifying residence - or to refinance existing acquisition indebtedness.  Therefore a home equity line taken out to refinance a current qualifying mortgage will continue to qualify as deductible under the new law.

The bigger issue is that even if it is deductible, most people will be claiming the standard deduction anyway so it could be a moot point.

Trirod

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Re: Convert 30 year mortgage to a Home equity line of credit?
« Reply #15 on: February 09, 2018, 11:49:28 AM »
Hello all!
Wondering if anyone has ever converted their mortgage to a home equity line of credit. I came across this ad on the web touting the benefits of this ( no pmi, pay off loan in 5-7 years, no closing costs, fixed interest rate...) Sounds too good to be true so probably is, but just thought I would check with you all. Thank you all for your information and help.

I did this many years ago and it worked out well for me.  However, this was in the days when the interest rate on a HELOC was a lot lower than my fixed 15 year mortgage.  It was a lot cheaper to refinance to a HELOC than to get a new 15 year mortgage at a better rate.  I took on a risk that interest rates would rise, but since I know I would likely pay of the HELOC in 2 or 3 years, that risk was manageable.