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February 15, 2010


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Is this a new idea or something? I thought this plan has been around for a long time. In Canada we have the Manulife One account built around this concept, surely you have something similar south of the border.

I've never heard of this before. Looks like I need to read more about it to learn the details of it.

There are risks and costs associated with using a HELOC in such a way. HELOCs can be canceled without notice by banks. Plus there are fees associated with them. The benefits to using the HELOC are relatively small compared to making more frequent (or larger) payments on the mortgage.

^ Michael Goode is right.

Michael --

That's what I did -- made extra payments on my mortgage. However, this appears to be an option for those with less discipline (which is a large portion of the population) and not as much income, correct?

How much equity do you need in your home to even approach this? Seems like you would need to be at or near 50% ownership to be able to borrow enough to pay the mortgage in full.

Definitely seems like a topic that needs more information, so far sounds like one of those too good to be true options.

Good stuff. This is exactly what I did, sort of. Two years ago, I took out $100,000 of my HELOC when the rate went down to 3.25%, and used it to pay $100,000 in principle off my 5.25% main mortgage from my rental.

I'll keep it like that until the HELOC rate goes up to 5.25%, which won't be for another 2-3 to a looong time, imo.

My term for it is "Going Broke To Win Big - Heloc Edition" I wrote about 5 months ago.

The arbitrage saves me about $2,500/yr. Better than a poke in the eye.

This is a neat idea! I'm going to be using my HELOC for some home repairs, and could use this strategy to minimize the amount of interest I'll pay.

Traciatim - I have never heard of this before, and am pretty well versed in financing options - I think it just isn't commonly done in the US. We're weird sometimes...

The biggest risk is that your home equity drops and your HELOC becomes due down to the current equity. In that scenario, you have NO cash built up and are expected to pay the bill; that means refinancing the mortgage and HELOC into a new first mortgage. Basically you don't get ahead.

Can this work? Sure, if market conditions are right, but there are many risks that were not brought up in the article.

The idea has been taken further by other banks (e.g. First Direct, which is a subsidiary of HSBC). They offer "offset" mortgages.

The idea is that you move all your banking activities to them (current/checking accounts, savings accounts, mortgage, etc).

The interest payable on the mortgage is calculated daily (and charged monthly)... but it is calculated on the *difference* between the mortgage balance and the sum of the other accounts.

It's the same as the HELOC idea above but allows you to still maintain separate accounts, which can make budgeting and planning easier.

The end result is that you can save a fortune on mortgage interest simply because any money in any of your accounts is "offset" against the mortgage balance.

I guess I don't follow the math... what am i missing? Above posts seem to infer that it's just like paying more principal down sooner. If so, ok, I get that (although there's the same old debate, do you invest at 8-10% in volatile market or pay down 4.5% mortgage w/ no volatility...)

Any more insight than this on the math? If I have $200k mortgage at 4.5%... and it looks like my bank has a interest only Heloc at 4.25% Is the only savings I gain here the .225% and $2k or $3k lower prinicipal balance if I direct deposit my paycheck and lower my average daily balance? So is it just the $50 or $60/month more which goes to principal? OK, get that, but still don't see how it compensates when/if variable rate goes above the original loan's 4.5% rate...

Help anyone?

"Any more insight than this on the math?"

I think you have it about right. The only two things I'd add are:

1) in the UK, you pay tax on savings income (at up to 40%) so your rate of return on any savings/investments would have to be 40% greater than the interest rate you're paying on the mortgage for saving to be worthwhile if you also owe money.

2) most people I know calculate their overpayments based on what they know they can afford, which means that some months they don't overpay as much as they could/should. With an offset, you're essentially overpaying to the value of *all your income* every month - and then clawing back what you actually need. The math is no different but the psychology is very different.

I think the key point is to deposit your entire check each month, and use the new loan account as your checking and savings accounts as well. So, if your monthly mortgage payment was $1,000/month, and you are now depositing your entire $3,000/month paycheck, $2,000/month extra will be going toward paying off the balance for part of the month (until you pay other bills out of it). This will allow less interest to accumulate on the balance all the time, and you will then have less principal +interest to pay, allowing you to pay off the loan sooner.

To those posting about the bank cancelling your HELOC or making the HELOC due to the current equity value, I don't think they can go as far as is being suggested here.

1. If there is no balance they can cancel it.
2. If there is a balance but you still have an available unused portion of the HELOC they can freeze the unused portion and reduce your available credit down to the balance.

However I do not believe they can call an existing balance due. It's possible I am wrong but everything I have read says they cannot do that (I suppose its possible some HELOCs are written with a clause allowing this but I don't believe most are). If someone posting these comments can provide a link to proof that they can prematurely call a HELOC balance due, please post it, because I would definitely like to find more evidence either way.

This is actually an ingenious and extremely effective means of squeezing every extra dollar out of mortgage debt paydown. I love it's simplicity and efficiency.

HOWEVER, this only works for the extremely disciplined. When doing this you have the whole unused portion of the equity line available to you every month. It can get very easy and very tempting to just spend a little more on x, y, or z or even go out and buy something you would not have had the money for if you had been paying down a traditional mortgage that didn't let you pull the money back out.

The risk for the undisciplined is very similiar to that of paying off credit cards with a mortgage re-fi. The credit cards can be run back up after the re-fi. And in this case, the equity line can be raided after months of successful balance paydown. The equity line is basically one big credit card. Not a problem at all for the disciplined. A disaster that will for sure happen to the undisciplined.

Thus the strategy is only appropriate for a small percentage of people, because most aren't nearly disciplined enough to pull this off successfully.

So as much as I like the concept, it's rarely appropriate for most people.

This is complete crap.

That is the easiest way to explain it. The complicated way involves the facade of arbitrage, the risks associated with the HELOC, etc.

Plus, these programs cost money up front, usually about $3500. And most of them are MLM, like Amway.

Sure it works, but not because of magic. It works because you pay extra principal payments each month. And you can do that on your own without getting a new HELOC and spending $3500 for bogus software you don't even own.

Take the upfront money you would have to spend for these miracles (software plus refinancing charges), apply it to your existing mortgage and pay extra each month and you will actually come out ahead of a typical mortgage accellerator plan.

The one who benefits is the seller of the program, not you.

A local investment advisor was promoting this about three years ago, then when the real estate bubble popped, the commercials stopped.

I think you are mistaken Troy.

There is no program. You just need a HELOC and do all the payments yourself.

This is not like the bi-weekly payment plan that most banks offer to setup for you for a fee. And if there is a program designed to automate this for you, you don't need to use it, you can do it all yourself. There are real advantages to this system that are not gotten with a simple extra payment on an existing mortgage. There may be some HELOC risks as well but to say it's crap is to not understand what's really going on here.

And there does not have to be any fees with a HELOC either. I have two HELOCs from Pentagon Federal Credit Union. I also have multiple other mortgages on my primary and investment properties. The HELOCs are by far the cheapest loans I have ever taken out. No fees at all, zero: no closing, no origination, no nothing, as long as I don't close them within the first 24 months (don't even have to use them, just can't close them).

Pentagon Federal has the best HELOC rates that I can find in the country for anyone interested (and I have no association with this credit union at all, just very happy with what I have gotten from them):

@ Apex,

In the UA, nearly all HELOCs are callable or scalable by the lender. Of course, if you don't like their new terms, you can opt-out of those changes, which of course cancels the agreement and makes the balance due immediately. You'll also likely be paying some hefty charges for closing the account. Even if the bank can't call the loan, they can freeze the credit, and they can do so retroactively most of the time. If you have 100k credit limit on your HELOC, and you currently have 90k out of it. The bank decides your house value can only support a 75K HELOC (which is happening all over the place), you owe the bank 15k in cash immediately. HELOCs are great tools, especially in a booming market. When the housing markets slip, banks eat people up with those things.

Richard, Em,

Thanks for the feedback. Pretty cool.

It would seem that another benefit is that if you lose your job, you only need pay your minimum interest payment and not your fixed mortgage payment.

Thinking out loud here, would you take your emergency fund and put it in your HELOC as well? For me, it would lock in a 4.5% return on my emergency funds and get me that much closer to being debt free.


I question the claim in the original blog above "It's true that interest rates on HELOCs are variable, which means that this strategy operates in an open-ended, variable environment. That may sound scary, but in fact, the accelerator system is so powerful it even trumps rate increases."

This would seem to only be plausible only if you're carrying a substantial balance in your checking/savings accounts and starting w/ a HELOC rate significantly (2% or more) below your current mortgage rate...


What is the UA? I am not familiar with that abbreviation and thus can't speak to how HELOCs are setup there (unless you mean AU for Australia in which case I still can't speak to how they are setup there. :). If that was a typo and you meant US, then I dispute your claim and am still looking for proof, which the article you linked to does not provide.

The article you posted references HELOC freezes or credit limit reductions (both of which I already acknowledged) but does not state that any HELOC's are callable or that the balance currently owed can be reduced with an immediate payment due. One would think that in an article that lays out all the cons of a HELOC, that the number one risk would be that an immediate large payment due notice could be coming. Yet the article makes no reference to that at all.

I am still looking for proof that this type of action can be taken with most HELOCs. I still don't think it can and have yet to see any proof to the contrary.

... But you still need at least 50% equity in your house in order to qualify for a HELOC of sufficient size to pay off the 1st mortgage - right?? Isn't THAT the biggest block to this strategy for most people?

My friend did something like this with only a 10,000 heloc. He would pay 10,000 off and then make room on the heloc and pay another 10,000.

Seemed like a lot of work and trouble though. I got my mortgage in 2003 and will have it paid off in 2011 the old fashioned way! Woo Hoo!


You are partially right. I've read about some of these programs that are essentially MLM scams. But like Apex said, you don't need any of that... you can just do it yourself with a HELOC and Excel.

I wouldn't do it though ;)

I think I would just pay extra on the mortgage.

I am 100% right.

Regarding not understanding, I own a multimillion dollar mortgage company. Really.

And the MLM through U First Financial or the likes is junk. It has been dissected every way possible. It is a waste of money.

As for the position of replacing the ENTIRE fixed first mortgage (or ARM for that matter) with a HELOC first mortgage...that is debatable.

I would find it foolish to take on the additional risk of a HELOC when fixed rates are at historic lows. Sure there are situations where it may make sense but generally speaking replacing a fixed rate with an adjustable rate is backwards and a poor choice.

And exchanging the minimal benefit of arbitrage of carrying a smaller balance for a partial month in exchange for the future interest rate shock is also not a good move.

The juice isn't worth the squeeze. Not even close


What is the name of your mortgage company?

You beat me to it ;)

I enjoy the annonymity of not disclosing my direct personal information:)

That being said, I am telling you the truth.

Not that I assume I am being all reality it doesn't matter.

What does matter is this happens to be a subject I am well educated on.

There are various mortgage products for various individuals and needs do differ.

Even so..replacing a fixed first with a variable LOC would be an extremely rare positive move.

Aside from the MLM accellerator programs, looking at self directed accellerator programs reveals several fallacies.

While it is intriguing to calculate the benefit of arbitration on the LOC, reality shows it is minimal. The benefit does exist, but it is less than 1% of the total loan benefit.

The real benefit of any accelerator program is the encouraged additional principal reduction. That can happen with a fixed or adjustable first.

The fact it is a LOC means little. You could use a credit card in the same fashion. And in theory a CC would have zero interest during the grace period vs a LOC low but not zero rate. Interest accrues in arrears on both.

But I don't advocate either move because eventually you will get burned. Trading a 4.5 fixed for a 3.25 (or prime based) HELOC is a short term gain, albiet small, with a tremendous amount of risk in the future.

The longer the timeframe the more certain your prime based rate will increase, likely more than it's current fixed counterpart. And that longer timeframe is needed to justify the arbitrage in the first place.

If you are planning on paying off the loan in a couple years as justification for the HELOC, the rate makes little difference anyway. The rate benefit only compunds as the term is lengthend.

Because of that there is little reason to take the rate risk associated with a LOC. And risk matters. You could take your entire mortgage payment and bet it on black and pay it off in 24 hours. But are you willing to assume the risk.

Same with the HELOC.

Most people would be better served to simply round up their monthly payment (making sure that it is applied to the principal) and leave these elaborate methods alone.

Frankly this looks like a scam.

How much do you have to pay to get their special system to do this?

I'd like to see some math to justify the claim you can pay off a mortgage in 5-7 years doing this. I don't see how that is possible unless its combined with paying significantly extra towards the loan principal.

Take a $100k loan at 5% for 30 years and your monthly payment is $537. If you make the montly payment for 7 years and 100% of it goes towards principal then you'd still have paid only about $45k towards principal. It would take a minimum 14 years of $537 monthly payments going 100% towards principal to pay off the $100k.

I'm guessing the 5-7 year claim has some extremely unusual assumptions built into it.

Elaborating on my thoughts.. I'm sure you can make some money off arbitrage by shuffling money between a lower interest rate HELOC and your mortgage. That makes sense. BUT I think to say that using that trick can pay down a 30 year mortgage in a mere 5-7 years is basically impossible unless they are simply shoving more money into the mortgage or using fuzzy math.

It's pretty standard in Australia to have banks offer a mortgage offset account, which sounds a little simpler than the HELOC procedure, although it might be the same thing. Basically, it's just a savings account, but you don't earn interest on any money in there. Instead, the bank calculates interest on the amount of the homeloan less the amount in the offset account. You could have $400,000 left to pay on your loan, and $400,000 in your offset account and not pay any interest at all (I have some friends who are in this position, but for most people it's just theoretical). I think my bank charges about $300 to set up the account, but otherwise the offset is just like any other savings account.

I've fixed my interest rate for 5 years, but after that I'm definitely setting up an offset and keeping the money currently in my "bills" and "car" accounts in there (any interest I earn on them was just getting put into the mortgage anyway).


It is not a is just extremely disengenious. And your BS meter is going off as it should.

A typical 200K 5% 30yr fixed loan ($1073 per month) would require a payment of more than triple ($3333 per month) at 0% interest to pay off in 5 years. That assumes the entire $3333 goes to principal.

That is how the loan is paid off early. That is how ANY loan is paid off early. Not because of a magical HELOC, or rate spreads or arbitrage or anything else.

This is irresponsible advice.


I am not above admitting I was wrong and what you said about what is being proposed here as I look deeper (and follow the link posted to the author's website) is true. This is crap.

Now the whole concept is still sound and can be used to improve the paydown time window. And everything I previously said about how it would work is still true. However this is only going to work if significant extra principle is being paid each month. I have always known this as the bi-weekly programs that get touted only work because of the extra payment made each year. For example a semi-monthly payment system that pays twice a month thus getting some principle paid down earlier only knocks 1/2 month off your loan on a whole 30 year loan. The bi-weekly gets 7 years off your loan but that is because you make an extra principle payment each year. So the idea of paying a little bit early doesn't buy you very much.

However in this plan you have a cheaper interest rate and you are paying as much as 3 or 4 payments early and then extracting that back out as you pay your bills. So the effect is much more powerful. But if that was all it was with no extra principle pay down, and no cheaper interest it would only knock a few months off. With the cheaper interest it might knock a couple years off (assuming it stayed cheaper).

So the only way to get to something like 5-7 years is to pay extra principle like crazy. And my whole point was if you are going to do that anyway and know you are going to be paying this down way quicker than normal then doing this just makes it that much more powerful. But as I watched the pitch on the person's website who was writing this book he doesn't mention that at all. That makes him a sheister in my book.

So I presume that was most of what you were talking about when you called this crap and to that extent I agree with you after seeing how this person has approached this topic.

To let people believe this HELOC scheme alone can change a 30 year into a 5 year with simple early payments is simply creative lying and I am really disgusted by people who try to trick people into doing things that will never work even close to the way they have allowed people to think they will work.

My apologies, Troy. As this is presented by the original author, it is in fact, crap.

I actually did pay off my first mortgage with a HELOC when the balance became low, and the rates were less than my fixed rate, which was about to adjust anyway (5-1 ARM). I had about $25,000 left, but I took a $100,000 limit to get the lowest rate possible, as that was a "break point" and I had the equity. I had it paid off in under a year, with no fees, and have kept it open for flexibility and to possibly use as an relatively inexpensive "bridge loan" for the down payment in buying my next house. Didn't use it like a checking account though, as the HELOC that I had only allowed draws equalling $1,000 or more, and I don't think that is uncommon in my area, to discourage just such a practice, and a lot of admin work for the bank, in order to keep costs low. Has anyone else found or addressed this problem with the proposed system?

Now, I actually am on to the purchase of my next home, within a few months. The home will appraise about $275,000, and I expect to put about $150,000 down. My purchase price is about $250,000, since I am buying from my mother. Because of these favorable ratios, (I have great credit and our market is relatively stable) I looked into the option of getting a HELOC or a fixed HE loan, to save the closing cost/fees, hassle of a mortgage closing, and I like the payment flexibility, lack of escrow requirements, etc. However, I was told that one cannot take out a HE loan or line on a home YOU DO NOT ALREADY OWN, which means you must have a mortgage in the first place, and cannot use one for an initial purchase of a different home as the post suggests. Is this snafu addressed in the book? Anyone know how to get around this obstacle? I had a banker suggest that in my case, perhaps my mom could somehow sign the home over to me, so I would own it, with lifetime right of occupancy, to avoid gift tax, etc., and then obtain a HELOC or loan once I was the technical owner. This comes with risks, since my mom is older, with the "look back period" for Title 19, but my mom was not concerned with that. Then the banker said, we could have a lawyer rescind the agreement my mother and I made, and I would then pay her for the home. This would put us out some legal fees, but a lot less than a tradtional closing. Decided not to do this after all though, because I think this method would disqualify me from taking advantage of the new spring $6500 tax credit for repeat homebuyers, for which I meet all other qualifiers. I will look for some responses. Thanks!


You unfortunately do not qualify for the $6500 tax credit because you cannot use it to purchase a home from a family member. Imagine all the people who would suddenly be selling their houses to their brother and vice versa just to get $6500 dollars.

You could try to file for it and see if you can get away with it but they are putting much more scrutiny on those after all the fraud last time. And technically you would probably be considered to be committing tax fraud which can result in a felony depending on the kind of fraud, so I would advise against it.

Apex, can you direct me to where it states this?


I am considering an offshoot to this method.

In particular, take my $20K 'emergency fund' out of a short/intermediate term gov't fund and pay down my mortgage principal.

Then open a HELOC for $20K to use as my emergency fund.

In effect, moving the $20K into a no-fee 4.5% investment versus whatever I would otherwise earn from the government fund.

I found it- I am not eligible for the tax credit since I am purchasing from a family member. That is absurd, and not well-publicized. I am so disappointed and was telling everyone about it. Who would go through the effort and expense involved just to get a tax credit? I thought it was supposed to stimulate a higher end of the market. Perhaps this is the result of the real estate lobby? Family transactions often don't involve realtors..... Mine is not a "sham transaction", just happens that my dad died in the past year, my mom is looking to downsize, I am having my third baby any time now, and my mom lives six mile from my husband's work and I live currently 40 miles from his work and the gas/time/danger of the commute for the past 9 years has been killing my husband and our family life!
Well, maybe I will go back to my first plan. I have had a very bad experience shopping so far for a mortgage, even though I am going through the Dave Ramsey endorsed provider! I have an 800++ credit score and no debt. We have adequate income for what we want to borrow, and as I stated before, I am putting down like 2/3 of the purchase price, yet I feel like getting into heaven would be WAY easier! They want to see our retirement statements, etc. It's ridiculously invasive. They should be begging for my business! When I got my HELOC, I just went to my community bank 1 mile away, sat down with the assistant branch manager for about 10 minutes. She filled out the app online for me, and a week later my husband and I sat in the same seats for about 20 minutes with our toddler in tow, and the deal was done, easily, with no fees!


The money paragraph is the following:

It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.

As referenced above, the instructions for form 5405 makes the following statement under the heading of "Who cannot claim the credit" at the top of page 2.

9. You acquired your home from a related person. This

a. Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).

Once again, the abusers have ruined it for those who work hard and try to be honest!


"Who would go through the effort and expense involved just to get a tax credit?"

Sorry you think people would not but people will go through amazing efforts to get free money. It would not be hard at all to get an attorney, file a document with the county, pay $500 bucks and get $6500 from the government. You don't think a lot of people would do that. There are 150 million home owners in this country. What if 1% did it. Thats 1.5 million cases of sham transactions that would equal 10 billion dollars of free money. It would most certainly happen and as stupid as congress is and as much fraud as they didn't prevent before, they weren't stupid enough to overlook this one.

While yours may not be a sham, most family sales would be a sham just to get the credit.

"Once again, the abusers have ruined it for those who work hard and try to be honest!"

Unfortunately, this is true in almost all areas of life.

Why do you have to go through amazing scrutiny now at airports. Because of 1 in 1 million nut balls who want to kill you.

Why do you have to put crazy software on your computer that slows everything down and causes some things not to work to scan for viruses. Because of 1 in a million geeks/hackers who think its cool to create software that creates havoc.

Why can't you buy a kids sweatshirt with a draw string on the hood anymore? Because some kid choked to death somewhere on one and the parents sued the sweatshirt maker and now it's not worth the risk to make them with a draw string anymore.

why do all bottles have tops that show if they have been tampered with. Because of a few events like the nuts who put cyanide in tylenol 30 years ago.

It's always the few nuts that ruin it for everyone else. And actually in this case, I would bet that there would be more than just a few who would try to scam the govt out of $6500 bucks.

Has anybody found a calculator on the web that can show when your mortgage is paid off with a HELOC, given the interest rate, start balance, actual payments, and balance you decide to put in the HELOC (like your emergency fund)? I found this calculator which is not bad:

but there's no way to give it the average daily balance amount to see what effect that will have on the loan.

Apex, you are so right.

I read an article on Yahoo that was mentioning several funny but real warning labels. The second warning spot on an Ipod Shuffle read "Do not eat the Ipod Shuffle". Really?! Why tried eating an Ipod to get that added?

Another picture was of a warning sticker on the bottom of a cereal bowl that read "WARNING: Use only with adult supervision." It was a basic cereal bowl.

"It is not a is just extremely disengenious."

I'm sticking with 'scam' in this case because the originators of this idea are actually selling something. This is a pitch used to sell you their 'system' which can cost thousands of dollars.

"Do not eat the Ipod Shuffle".


That is the best one I have ever heard. Thank goodness for government and lawyers to prevent us from eating our Ipod Shuffle.

I still can't stop laughing about that one. Good stuff!

Well, I am sure that anyone who tried to scam the govt out of the tax credit before will get their just desserts. I mean, so many things can go wrong with disputes in those kinds of property transfers. No matter how close or solid your deal, things can go awry, especially since under the current terms, the new property must be kept for 3 years, or else the tax credit repaid. I am sure it causes more trouble than it is worth if it is done in a non-genuine manner, even if the measurement of "trouble it is worth" is non-monetary. So, I must be naive, but I find it hard to believe that many people would take that kind of risk, and also meet the other qualifiers, such as owning and paying property taxes for the preceding 5 years, and then owning and personally paying taxes on the new place for three years. And, I am fuzzy on the details of the primary residency requirements of the properties, but I am pretty sure that there are some, on at least one end, so there is effort involved on that as well. And, I know that the gov't has to draw a line in the sand somewhere, but there are friends and associates who can often be closer than family, though harder to delineate, and there is nothing to stop them from doing the same...

Just sounds like a mess, I am treading very carefully to be above-board with my transaction with my mom to make it a win-win. I agree with Dave Ramsey that transactions with family members are usually not a good idea!

That iPod shuffle warning was meant as a joke. Apple is like that.

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