Author Topic: Using heloc to pay down mortgage  (Read 986 times)

BORN SAVER

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Using heloc to pay down mortgage
« on: October 19, 2018, 06:18:47 AM »
Hey guys my mom her heard about this web site called replace your mortgage. I havenít had the time to research it, but I believe the concept is you use the heloc to pay chunks off of your mortgage. I was wondering have any of you done this. Or is this just some kinds bs scam. If it does work please give me some insight to it.

rothwem

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Re: Using heloc to pay down mortgage
« Reply #1 on: October 19, 2018, 07:39:19 AM »
I’m not sure it would be worth it. I think it would only be worth doing if the heloc rate was lower than the mortgage rate, and with the prime rate increasing, that’s fairly unlikely unless you’ve had your mortgage for ~10 years or so.

It also seems like unless you fully pay down your mortgage with the Heloc, you’re just going to end up with two payments, which doesn’t sound ideal from a cash flow standpoint.

I vote that you do the math and let us know if it’s worth doing.

Nate79

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Re: Using heloc to pay down mortgage
« Reply #2 on: October 19, 2018, 10:51:58 PM »
This is a long well known scam. Seems to circle around every decade or so. I've noticed a lot of posts on this topic recently on Bogleheads. Search and you will find them. Unfortunately it plays on the public's ignorance on the very basics of how a mortgage, or any loan for that matter, works.

The way you pay off a loan is thru extra principle payments. You can't borrow your way out of debt, not matter what a website says that promises to sell you the secret way.

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BORN SAVER

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Re: Using heloc to pay down mortgage
« Reply #3 on: October 20, 2018, 10:40:58 AM »
thanks thats what i was leaning towards.

Goldielocks

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Re: Using heloc to pay down mortgage
« Reply #4 on: October 22, 2018, 04:34:09 PM »
These things are real, and NOT a scam.

I had one of these for 5 years.   Called "Manulife ONE" mortgage.
It is the mortgage / personal banking equivalent of staying "fully invested" in the stock market by using DRIPs.

The interest rate we paid was 0.4% more than a  comparable first lien variable 5-yr mortgage rate.   The interest rate is variable, but the company was a bit slower to drop the rate when the Fed. rate dropped.... usually mortgage rates will drop within a week of the Fed Rate drop.

We only needed to pay off the interest each month.

We used ONE account as a combined chequing / savings / mortgage account.  It worked great, just like an on-line bank account with cheques and everything.  Therefore, all of your emergency savings and all of your paycheck are always being put to use against your interest rate.

The US version of this also appears to eliminate a lot of up front mortgage costs.

The catch?

Slightly higher mortgage rate, plus a $14/mo account fee that was waived by also taking a CC from the same bank. (Multiple product discount).

It is banking (pun!) on the fact that people only want to pay off the minimum each month, in this case, pay off the interest, which is essentially auto-deducted.  After 5 years, your balance can be IDENTICAL to what you started with.

You typically can't get other HELOCS / Mortgages on your home, because they have signed up for the full equity amount, and then some.  (HINT, works great for people wanting a renovation loan, which is why we got one).

Most people save better for short term goals (vacation, car, etc) when they have a separate savings account -- when it is all in "ONE", it is hard to keep the goal in sight.   Eventually the company we used started to provide "sub accounts" to allocate savings, " but it was still all the same pool.   

One driver for the "Sub account" was to allow people to borrow from the HELOC to invest, and those borrowed funds could be tax deductible, and proven to the tax man.

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The advantages.

If you have $10k in a Savings account 1, $3k in savings account 2, and $3k as your average checking account float (which varies from $1k to $5k during the month), and have a 4% interest rate...

Then, with a ONE account or HELOC, you have just put $16k down onto your mortgage, while still having access to it.  That $16k for a conventional mortgage is the LAST $16k that you would pay off, If held for 30 years, that $16k at 4% interest and no inflation actually costs you another $35k in interest over your 30 years.

People who don't pay off their credit cards in full also get to save on those interest rates, which is now effectively 4% because you always pay your cc in full each month.

It maximizes the full use of any bonus money, 3 paycheck months, etc. as soon as the dollars hit your account.  It is the mortgage equivalent of staying "fully invested" in the stock market by using DRIPs.

If you keep expenses lower than income, your mortgage falls quickly.   As your mortgage falls quickly, it snowballs because you pay less interest.  Then, on months when you have more expenses (Christmas!) you can spend more, then immediately starts to fall off again as soon as your expenses are much less than your income..

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I am a MMM frugal personality, and yet I found it hard to ramp up the savings with a ONE account, due to human behaviours.  It works far better for me to "pay myself first" and increase my retirement allocations directly off of my pay.   My DH is doubly so, we discovered that he tends to spend within a float threshold of the chequing account.  When we have more $$, he spends more.

We ended the 5 years having paid off only about an extra $20k, net, versus what we originally borrowed, and that was only because I made an aggressive plan in the last 2 years, and we started to track our daily expenses. (which I hate).

Villanelle

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Re: Using heloc to pay down mortgage
« Reply #5 on: October 23, 2018, 01:56:30 AM »
If cash flow isn't an issue and you get a good rate, I could see how this make sense.  But those conditions, especially the later, may be tough to come by.

We did something similar.  Rates dropped (this was early 2013) but we couldn't refi because our place was no longer owner-occupied.  I was mentioning this to my dad and he offered to lend us some money.  Win-win, as I'd get a lower interest rate than I currently had and he'd get money with an essentially guaranteed solid return.

The only problem was that he didn't have quite enough money in places he wanted to liquidate.  So I used our HELOC, which had no balance and was just sitting as an emergency plan. We had opened it to put a down payment on a second property.  The rate was insanely good--2.18%, IIRC.  It was variable but could also be locked in at any time for something like 1 point more than the adjustable rate, so still super low.  Plan was to pay it off in 5 years and the loan with dad was an 18 year term.  We ended up paying it off in 2.  But we saved a great deal of interest both by getting the lower rate on the majority of the loan, and by getting the super low HELOC rate on that smaller part.

Something similar for someone close to the end of a mortgage might also make a ton of sense.  Owe the last $40k on the house and pay it off in 3 years with your regular mortgage at 4.25%, or in 1.5 years with a HELOC at 2.5%, keeping the payments almost the same so cash flow wouldn't be affected much..  (Numbers totally made up!)