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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Nederstash on September 06, 2016, 02:01:53 PM

Title: Using HELOC to replace mortgage?
Post by: Nederstash on September 06, 2016, 02:01:53 PM
So I stumbled upon this video. It's from Fox News, so I am healthily skeptical...

Apparently you can use a HELOC to replace your mortgage and save a buttload in interest payments. Has anyone ever tried this?
Title: Re: Using HELOC to replace mortgage?
Post by: Hotstreak on September 06, 2016, 02:49:04 PM
He's suggesting you drain your checking account to $0 and use your HELOC to pay your bills.  The benefit is that all those $$'s you were earning 1% on in your checking are being applied throughout the month to your 4% "mortgage" (which is really a HELOC).  That decreases your monthly interest payments, which eventually leads to your mortgage getting paid off faster.  It relies upon you being able to get a HELOC at a lower rate than your mortgage, and HELOC rates during your repayment period being on average lower than mortgage rates.

Of course, with rates as low as they are you're probably better off investing those extra dollars instead of paying them down on your home.  This whole thing seems gimmicky, with minimal benefits.
Title: Re: Using HELOC to replace mortgage?
Post by: Trudie on September 06, 2016, 03:08:23 PM
My HELOC has a variable rate which is higher than my conventional mortgage.  Would not do it.
Title: Re: Using HELOC to replace mortgage?
Post by: Goldielocks on September 07, 2016, 05:05:26 AM
I did this for 5 years with a Manulife ONE account.

Why?  We were able to get a second mortgage (for renovating costs, up to $150k) at the same low rate as our first position mortgage.  (we did not want to refinance as that trigger HUGE fees here)..  and on that HELOC -- you only paid interest as you withdrew it, only had to pay interest, no principal, etc.   

The manulife ONE account rate (blended with chequing account) was almost 2% lower interest than a regualr HELOC due to their matching first position mortgages.

This technique requires very disciplined person to pay down the principal, as interest only on a large chequing account that fluctuates widely between paychecks is VERY! hard to track by the balance alone.  With this type of account, you don't actually set up an automatic principal payment,  your principal payment is the leftover $ in your account, which by human nature, is usually much lower than otherwise.

I am MMM, and I was not good at it, the balance dropped, but not as fast as it would have on a conventional mortgage / loan or an automated payment transfer plan.

Also, there is a small premium for the service / banking fees that was more than otherwise, and on a variable rate, the company did not drop the rate in step with other prime rate drops, so we ended up with a higher rate than we liked after a couple of years.

It cost money to sever the account and set up a conventional mortgage after 5 years.

End result -- made sense for our special loan / borrowing needs, but I would not recommend it based on the rationale to "use your savings to keep your interest low"...   there simply is not enough $$'s there to do so, given the small extra monthly fees, unless you keep 100's of thousands of dollars in your savings accounts at the bank...  if that is the case, maybe just pay down your mortgage and create a larger HELOC for emergencies.

ETA - We had a strong postive reference by a coworker for this account before we signed up...  I think she must have had a natural savings rate of 50% after moving in with her finace and sharing finances, and consolidating high interest CC debt that she was carrying, for it to have worked for them... in hindsight, they are the first and only positive references I have found. 
Title: Re: Using HELOC to replace mortgage?
Post by: Villanelle on September 07, 2016, 06:16:23 AM
I sort of kind of did this.

Our mortgage rate was a bit high (5.85, I think?) and we couldn't refi because we moved overseas so it was no longer owner occupied.  I mentioned this to my parents in passing, just venting my frustration.  A few weeks later, my dad offered to lend us the money to pay off our mortgage.  We'd borrowed from them before for our first mortgage, and it had worked well, so that wasn't a concern.  However, our mortgage balance was slightly more than dad wanted to liquidate.  We had a HELOC that well more than covered the difference, so we pulled out money from that to make up the difference.  At that point, we had no traditional mortgage, just them money we owed my parents, and the HELOC balance.  In addition to paying my parents every month (with a set interest rate and an official lien on the property), we've aggressively paid off the HELOC balance.  It is a variable rate.  I think it was 2.6 and went up about 6-8 months ago to 2.85.  Still an amazing rate!  And it can't go up more than 1% per year, so there will be no ugly jumps.  Even though it was interest-only, we made it a priority to pay it off quickly. We started with about $60k on it 19 months ago, and we are down to $3k today. 

As I said, we weren't too worried about the interest rate because it was so low that it would have had to go up a lot before this stopped being a good deal, and because it is limited to 1% increase per year.  We knew we had the cash flow to knock it out pretty quickly.  We will beat our goal, which was 3 years but we'll have done all $60k in less than 2 years.    I'm not a huge numbers person like so many here so I haven't bothered running the numbers, but I know we've saved a ton or money, going from 5.85 to 2.6/2.85, and also because that allowed us to refi the rest at a lower rate (though higher than 2.6!) and in to a shorter term, which we wouldn't have been able to do without a way to make up the difference in what my parents were interested in loaning us.  Had it not been a dollar amount we felt very, very confident we'd be able to pay off pretty quickly, the risk of that variable rate would probably have been too much.  But for those with smaller mortgages and/or very high incomes-- allowing them to pay off the HELOC quickly-- and those who have a HELOC that has limitations on interest increases, the risk is fairly mitigated and I think it can make sense.  IOW, I think it would be too risky if it was going to take 20 or 10 or even 7-8 years to pay off or if the rate could risk quickly, but for >5 years and with a limit to the increase, there was very, very little risk as at 1% per year, it would have taken 3 years just to get almost up to what we were paying on the regular mortgage.  (And that doesn't take in to account the fact that over those 3 years, we'd have paid off a ton of principle and would still have been paying less in dollars even at the same interest rate.)
Title: Re: Using HELOC to replace mortgage?
Post by: frugaliknowit on September 07, 2016, 08:20:11 AM
I recently threw a large "bullet" at my mortgage balance (from savings) and semi-simultaneously opened a HELOC as a "backstop" (since paying down the mortgage reduced my cash reserves so much...but NOT to $0...).  The first mortgage is small enough to pay off over the next year or so...

There's no magic involved with the video above.  There's risk:

1.  Helocs are floating rate.
2.  The bank can reduce or eliminate the Heloc due to a drop in property value, or if you read the fine print "for any reason...".  That could be, for example a drop in credit score, loss of job, etc.

Personally, if I became unemployed, drawing from a heloc (and worrying about the bank closing/reducing it and wondering how the freak I am going to pay it back) would compound the stress of trying to find a job.