HELOC bullshit

I decided to lookup “mortgage payoff” and I came across a “magical trick” to payoff your mortgage using a HELOC.

https://en.wikipedia.org/wiki/Home_equity_line_of_credit

HELOC is basically a line of credit against your house.  If you don’t pay it, they can take your house.  Sounds great, right?

It looks like this technique is most heavily promoted by https://truthinequity.com/

From their website:

The HELOC (Home Equity Line of Credit):  The HELOC is a vital component of the Equity Optimization strategy, but there is much, much more to Equity Optimization than just getting a HELOC.  All HELOC’s are not created equal.  Getting the wrong HELOC could be the difference between success and financial ruin.  We are experts in the national HELOC market; we’ve been sourcing and testing them for over 10 years.  We will help you obtain the right HELOC.

I’m sure you will help me select the debt that’s right for me ™!  They added the douche bag bold, not me.

Anyway, the scheme is this.  Let’s say you have a $100k mortgage.  You take $10k on the HELOC and apply it to your mortgage balance.  Now you have:

  • $90k mortgage balance
  • $10k HELOC balance

You then get your work to direct deposit your paycheck against the balance of your HELOC, and you pay for your groceries, future mortgage payments, and everything else out of the HELOC.

If you spend less than you make (!) each month, you’ll eventually pay the HELOC back down to zero, and then you can do another $10k, etc.  You’ll save some money on the primary mortgage b/c by paying the $10k down early, you accelerate the amortization schedule (the percentage of the payment that goes to interest vs. principal).  This acceleration is obviously offset by the HELOC’s (monthly) interest rate on that $10k.

Things:

  1.  If the rate of interest on the HELOC is greater than the mortgage rate, this is stupid.
  2. Even if the rate of interest is less, the amount of money you save is not that great.
  3. If another financial crisis happens and your HELOC is frozen, you’re kinda fucked unless you have an emergency fund. (see: https://www.citizensbank.com/money-tips/home-equity/home-equity-line-freeze.aspx)
  4. There is nothing particularly magical about this.  It’s just fucking around with a different kind of debt while you pay down your mortgage.

My take: using a HELOC doesn’t take the place of making a budget and executing on it.  If you include extra mortgage principal payment in your budget, the HELOC isn’t going to help you pay off the mortgage that much faster, and the increase risk and complexity it represents isn’t worth it.  It’s just more smoke and mirrors.  The hard part is spending less than you earn.  Focus on that instead of fucking around with complex debt contracts.

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