Author Topic: DONT Payoff your Mortgage Club  (Read 178962 times)

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #1500 on: May 23, 2019, 12:00:34 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?
How long are you planning on staying in the house? As solon points out, there is a cost - they're just rolling the usual fees into the balance. The longer you stay, the more it makes sense - saving .875% on the 300K balance will swamp the cost of the 6K + 3.75% eventually, but if you're going to sell in a year or 2, not a good move.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1501 on: May 23, 2019, 12:03:14 PM »
Is there a change in the term, too? I'm having trouble matching those numbers.

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #1502 on: May 23, 2019, 12:13:07 PM »
Is there a change in the term, too? I'm having trouble matching those numbers.

No change in term, both are 30 years. Original balance was $304K, monthly payment is $1562 (P&I) + 420 (Taxes) = $1982. We currently owe just over $302K. New Loan would be $308K for monthly payment of $1426 (P&I) + $420 (taxes) = $1846. I hope I did my math correct :)

I understand the no cost is really adding the costs to the balance hence my quotations :). I was just more curious if it was worth saving $$ if I had no immediate out of pocket costs.


Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #1503 on: May 23, 2019, 12:14:19 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?
How long are you planning on staying in the house? As solon points out, there is a cost - they're just rolling the usual fees into the balance. The longer you stay, the more it makes sense - saving .875% on the 300K balance will swamp the cost of the 6K + 3.75% eventually, but if you're going to sell in a year or 2, not a good move.

That is a great question. We did just buy this house, so I do not have an answer how long we will stay; but that is definitely a good point I need to consider further.

sherr

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Re: DONT Payoff your Mortgage Club
« Reply #1504 on: May 23, 2019, 12:23:42 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?

Two things:
1) Generally speaking the "monthly savings" number is misleading. Your refinance would have a new 30-year term and your current mortgage is something less then that. So you'd be paying less per month, for longer. Not particularly useful for deciding if it's a good decision unless the "less per month" is important because you need more cash now. In your case however you've only had this mortgage for 6 months, so the term extension is not that big of a difference.

2) You'd be paying $6k to lower your interest rate by 0.875%.
302000 * .04625 / 12 = 1163.96 interest you'd pay next month without a refinance
308000 * .0375 / 12 = 962.5 interest you'd pay next month with a refinance plus 6000 / 30 / 12 = $16.67 extra principle payment you'd have to make every month for the lifetime of the loan to adjust for the $6k cost = $979 interest + principal difference

So you're saving about $185 of interest in your first month, but that number will decrease over the lifetime of the loan as the principle decreases. But for the first few years it's close enough for an estimate. So you'd have to stay in your house with this mortgage for about 6000 / 185 = 32.4 months to break even.

I'd say go for it if you think you're going to stay in the house longer than 3 years, otherwise don't bother.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1505 on: May 23, 2019, 12:34:11 PM »
Second question: how certain are you that rates won't fall further?

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #1506 on: May 23, 2019, 12:51:33 PM »
Second question: how certain are you that rates won't fall further?

Ha! Well, with this climate we are in... I will just never know. As much as the Fed/central bank has declared no further interest rate increases for this year, as of now, we will not know until the actual meetings every few weeks, if this will continue to hold true. So, I cannot with any bit of certainty think that the interest rates will continue to fall. :)

We sold our house in December and it had a 3.25% rate.... Oy, I miss giving up that rate.   


sherr

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Re: DONT Payoff your Mortgage Club
« Reply #1507 on: May 23, 2019, 12:52:05 PM »
Second question: how certain are you that rates won't fall further?

That's not much different from trying to time the stock market is it? Also, how much lower than 3.75% are you expecting 30-year rates to get? My rate is an astonishingly-low 2.5%, but that's the 10-year rate on a 10/1 ARM. At the time 30-year Fixed rates were about the same, 3.5% or so.

It all does come down to how long you're going to stay in the house though, or more specifically how long you're going to keep this mortgage with the house. If you're going to be refinancing every 6 months chasing lower rates then you'll never make up the cost.
« Last Edit: May 23, 2019, 12:53:36 PM by sherr »

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #1508 on: May 23, 2019, 12:53:50 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?

Two things:
1) Generally speaking the "monthly savings" number is misleading. Your refinance would have a new 30-year term and your current mortgage is something less then that. So you'd be paying less per month, for longer. Not particularly useful for deciding if it's a good decision unless the "less per month" is important because you need more cash now. In your case however you've only had this mortgage for 6 months, so the term extension is not that big of a difference.

2) You'd be paying $6k to lower your interest rate by 0.875%.
302000 * .04625 / 12 = 1163.96 interest you'd pay next month without a refinance
308000 * .0375 / 12 = 962.5 interest you'd pay next month with a refinance plus 6000 / 30 / 12 = $16.67 extra principle payment you'd have to make every month for the lifetime of the loan to adjust for the $6k cost = $979 interest + principal difference

So you're saving about $185 of interest in your first month, but that number will decrease over the lifetime of the loan as the principle decreases. But for the first few years it's close enough for an estimate. So you'd have to stay in your house with this mortgage for about 6000 / 185 = 32.4 months to break even.

I'd say go for it if you think you're going to stay in the house longer than 3 years, otherwise don't bother.

Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.


sherr

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Re: DONT Payoff your Mortgage Club
« Reply #1509 on: May 23, 2019, 01:02:02 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

CorpRaider

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Re: DONT Payoff your Mortgage Club
« Reply #1510 on: May 23, 2019, 01:09:06 PM »
Thinking about cash-out refi to get back to 5/1 leverage, if rates go much lower...

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #1511 on: May 23, 2019, 01:26:36 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

If you talk to my husband, he would tell you he would die in this house, so yes, he would be here longer than 5 years.  Uh, me, I am having a very hard period of adjustment. It's freaking cold up here, BTW.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1512 on: May 23, 2019, 04:21:54 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

If you talk to my husband, he would tell you he would die in this house, so yes, he would be here longer than 5 years.  Uh, me, I am having a very hard period of adjustment. It's freaking cold up here, BTW.
Maybe work like hell to get to FIRE, then move somewhere warmer? Or be a snowbirds between two low cost areas?

If you even think you might stay five years, then my vote is do it. If you move in less time, the "loss" won't be horribly significant.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1513 on: May 24, 2019, 08:11:04 AM »
Second question: how certain are you that rates won't fall further?

That's not much different from trying to time the stock market is it? Also, how much lower than 3.75% are you expecting 30-year rates to get? My rate is an astonishingly-low 2.5%, but that's the 10-year rate on a 10/1 ARM. At the time 30-year Fixed rates were about the same, 3.5% or so.

It all does come down to how long you're going to stay in the house though, or more specifically how long you're going to keep this mortgage with the house. If you're going to be refinancing every 6 months chasing lower rates then you'll never make up the cost.

I'd say mortgage rate selection is more like worrying about "market timing" during the 3-5 years surrounding retirement. It's a big amount of money relative to your net worth, rather than the little drips that we are conditioned to invest monthly.

And closing costs are large, much larger than the fees associated with investing in today's retail investing market place.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1514 on: May 30, 2019, 09:42:00 AM »
I know that many of you are 100% VTI, and there's quite a bit of discussion about stock investing with all that fiscal space you created with your mortgage.

But I happened to see this interesting blog post from Financial Samurai about using bonds instead of stocks:

https://www.financialsamurai.com/the-case-for-buying-bonds-living-for-free-and-other-benefits/

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #1515 on: May 30, 2019, 02:37:14 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

If you talk to my husband, he would tell you he would die in this house, so yes, he would be here longer than 5 years.  Uh, me, I am having a very hard period of adjustment. It's freaking cold up here, BTW.
Maybe work like hell to get to FIRE, then move somewhere warmer? Or be a snowbirds between two low cost areas?

If you even think you might stay five years, then my vote is do it. If you move in less time, the "loss" won't be horribly significant.

Thanks Dicey!! We are certainly working towards FIRE in 5.5 years and taking the mortgage with us along for the ride. :)

Raenia

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Re: DONT Payoff your Mortgage Club
« Reply #1516 on: June 01, 2019, 05:53:16 AM »
Mortgage officially acquired!  30yr fixed rate, 4.25%, for $219,450.  Monthly payment $1525.07 including PMI and escrow for tax and insurance.  Here we go!

protostache

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Re: DONT Payoff your Mortgage Club
« Reply #1517 on: June 01, 2019, 09:41:26 AM »
Mortgage officially acquired!  30yr fixed rate, 4.25%, for $219,450.  Monthly payment $1525.07 including PMI and escrow for tax and insurance.  Here we go!

Nice! You might consider dropping the escrow when you're able. The bank might make you wait until you get rid of PMI. I like having a stable, consistent payment to budget around. With escrow I found that the bank did not do a good job guesstimating and so our payment changed every year. Now we just pay taxes and insurance out of cash flow when they're due.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #1518 on: June 01, 2019, 10:23:40 AM »
Now we just pay taxes and insurance out of cash flow when they're due.



"Seriously you must jest! How can anyone possibly afford to pay for any housing costs out of pocket!?" - Mainstream Financial News

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1519 on: June 01, 2019, 07:15:14 PM »
Now we just pay taxes and insurance out of cash flow when they're due.
"Seriously you must jest! How can anyone possibly afford to pay for any housing costs out of pocket!?" - Mainstream Financial News
The smart ones who feather their own nest before giving truckloads of moolah to the bank prematurely, that's who!

Raenia

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Re: DONT Payoff your Mortgage Club
« Reply #1520 on: June 02, 2019, 05:33:22 AM »
Mortgage officially acquired!  30yr fixed rate, 4.25%, for $219,450.  Monthly payment $1525.07 including PMI and escrow for tax and insurance.  Here we go!

Nice! You might consider dropping the escrow when you're able. The bank might make you wait until you get rid of PMI. I like having a stable, consistent payment to budget around. With escrow I found that the bank did not do a good job guesstimating and so our payment changed every year. Now we just pay taxes and insurance out of cash flow when they're due.

Thanks for the tip, we'll definitely look into it.  I suspect since this is our first mortgage, they won't trust us to know how to pay bills properly yet, but in a few years they should realize better!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1521 on: June 03, 2019, 07:50:20 AM »
I'll give a +1 to the Don't payoff your taxes through escrow club. Just write the check, once a year. You're a mustachian, this should be no big problem for you.

If you need help, we can turn the posts here into a contest to see who's setting the most money aside in a savings account to pay their tax bill.

Raenia

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Re: DONT Payoff your Mortgage Club
« Reply #1522 on: June 03, 2019, 07:52:51 AM »
I'll give a +1 to the Don't payoff your taxes through escrow club. Just write the check, once a year. You're a mustachian, this should be no big problem for you.

If you need help, we can turn the posts here into a contest to see who's setting the most money aside in a savings account to pay their tax bill.

Oh, I'm not at all worried about saving up for taxes, our property tax isn't even very high.  But the bank required the escrow account as a condition of the mortgage, so I'll have to work with them to see if/when they'll allow us to drop the escrow and pay it ourselves.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1523 on: June 03, 2019, 08:27:09 AM »
We actually had a situation where we were offered a lower interest rate to accept escrow. We showed up at closing, but they'd drawn up the paperwork to have no escrow AND the lower rate. Our closing attorney told us to just sign the papers and not worry about it.

Villanelle

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Re: DONT Payoff your Mortgage Club
« Reply #1524 on: June 03, 2019, 08:40:37 AM »
I've always been in the "don't pay it off camp" but I'm having doubts and need a sanity check.  I just realized that our mortgage balance is less than the amount available on our HELOC (which is also way less--6 figures--than our equity, so little chance of it being canceled).  Our HELOC is about 2.8% interest vs. 4.25 for the mortgage.  However, the HELOC only has about 6 years left on it (at which point it would need to be paid off in full, or perhaps rolled over into a newly issued HELOC, but surely with less favorable terms than we currently have) vs 12 for the mortgage, and it is adjustable.  (We can also lock it, but I'm not sure what that rate is and when I called, they were little help because they said they couldn't tell me that unless I had a balance, which is weird, but whatever.)  So if I paid off the mortgage with that money, I'd pay off the HELOC very aggressively.

What say you?  Leave it alone or shave off about a point and a half in interest and take on the risk of an adjustable rate, which would necessitate an aggressive pay off?

If it matters, the place is currently a rental and it's doubtful we'd ever live in it again.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1525 on: June 03, 2019, 12:09:19 PM »
What about "both and"

Each month, as you pay toward your mortgage, borrow enough to offset principal on your HELOC, keeping your total loan balance steady during the next six years.

Put that extra into $VTI, then--six years later--you can withdraw the principal to slay your remaining balance.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1526 on: June 03, 2019, 02:46:06 PM »
What about "both and"

Each month, as you pay toward your mortgage, borrow enough to offset principal on your HELOC, keeping your total loan balance steady during the next six years.

Put that extra into $VTI, then--six years later--you can withdraw the principal to slay your remaining balance.

Huh??

Could you explain a bit more?

Because this doesn't seem like a good time to borrow extra money to invest...

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1527 on: June 03, 2019, 04:11:08 PM »
I've always been in the "don't pay it off camp" but I'm having doubts and need a sanity check.  I just realized that our mortgage balance is less than the amount available on our HELOC (which is also way less--6 figures--than our equity, so little chance of it being canceled).  Our HELOC is about 2.8% interest vs. 4.25 for the mortgage.  However, the HELOC only has about 6 years left on it (at which point it would need to be paid off in full, or perhaps rolled over into a newly issued HELOC, but surely with less favorable terms than we currently have) vs 12 for the mortgage, and it is adjustable.  (We can also lock it, but I'm not sure what that rate is and when I called, they were little help because they said they couldn't tell me that unless I had a balance, which is weird, but whatever.)  So if I paid off the mortgage with that money, I'd pay off the HELOC very aggressively.

What say you?  Leave it alone or shave off about a point and a half in interest and take on the risk of an adjustable rate, which would necessitate an aggressive pay off?

If it matters, the place is currently a rental and it's doubtful we'd ever live in it again.

I'd look at how adjustable the HELOC is.  There is usually a limit how fast they can adjust upwards.   I'd assume worst case scenario, and assume it will adjust upwards as fast as it can.  That's really the risk in this scenario. 

The next step is to do an A - B comparison.  You could kill the mortgage immediately, and presumably because the HELOC has lower interest, you could make the same payment and pay down the HELOC faster than you could the mortgage.  You just have to be reasonably sure of paying off the HELOC before you get into the danger zone of the HELOC possibly adjusting upwards.  That might require increasing your monthly payment, which means it probably isn't worth doing. 

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1528 on: June 03, 2019, 05:21:21 PM »

Because this doesn't seem like a good time to borrow extra money to invest...

Why do you say this?  Interest rates are near historic lows... why is now not a good time?

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Re: DONT Payoff your Mortgage Club
« Reply #1529 on: June 03, 2019, 06:23:22 PM »
I'd look at how adjustable the HELOC is.  There is usually a limit how fast they can adjust upwards.   I'd assume worst case scenario, and assume it will adjust upwards as fast as it can.  That's really the risk in this scenario. 

Speaking of worst case scenarios- most HELOCs are callable and quite a few people had their financial lives ruined in the great recession by HELOCs called due. Personally for that reason, I would give preference to a fixed rate, non-callable mortgage over a HELOC any day and consider the extra percentage or two money well spent.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1530 on: June 03, 2019, 09:50:19 PM »
Speaking of worst case scenarios- most HELOCs are callable and quite a few people had their financial lives ruined in the great recession by HELOCs called due. Personally for that reason, I would give preference to a fixed rate, non-callable mortgage over a HELOC any day and consider the extra percentage or two money well spent.

HELOCs are almost never called, but they can be frozen.   Since the OP apparently has a low LTV (given that his HELOC size could be larger than his mortgage) and presumably will continue to make payments on time, getting called is pretty remote.  If the OP can't make payments, then he would get foreclosed on anyway.

I agree, a 30-year fixed is the safest option.  The OP needs to evaluate the increased risk of a HELOC with the potential reward. 

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1531 on: June 04, 2019, 08:40:04 AM »
What about "both and"

Each month, as you pay toward your mortgage, borrow enough to offset principal on your HELOC, keeping your total loan balance steady during the next six years.

Put that extra into $VTI, then--six years later--you can withdraw the principal to slay your remaining balance.

Huh??

Could you explain a bit more?

Because this doesn't seem like a good time to borrow extra money to invest...

Six years is a long enough time that $VTI will gain in share price, particularly if you're DCA'ing into it.

But keeping your HELOC balance fairly small will mitigate the risk associated with having the loan called. So I would literally tap the HELOC a few hundred $'s at a time, DCA the extra into VTI, and then--when the loan term is up--have a big enough pot to pay off whatever is due.