How to Pay Off Your Mortgage Using A HELOC

If you have ever watched late-night TV or stayed home sick from work and found yourself watching reruns of Judge Judy, you will relate 100% to what I am about to say.

On those days we play hooky, we have all seen those commercials that say things like, “Payoff all your debt in 5 months, just call this number,” or “You can be a millionaire with this cassette tape and three payments of $45.oo!”

And while nobody in the right mind ever calls those numbers, what am I about to say almost sometimes reminds me of those awful commercials. But it works.

Believe it or not, you can pay off your mortgage in 5-7 years using a home equity line of credit.

Also referred to as a HELOC, a home equity line of credit is essentially a credit line backed by your home's equity. Pretty straightforward.

However, if you keep reading, you might learn how to pay off your mortgage in 5-7 years leveraging a HELOC (No, not like those commercials who say you can in 5-7 days).

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” -Henry Ford.


Paying Off a Mortgage with a HELOC

payoff mortgage with heloc

We don't do it often, but when we occasionally tell people how we paid off $150,000 worth of student loans in  18 months in person, they are either shocked or are so confused it doesn’t even make sense.

The interested ones ask how, and we say with additional income streams and some discipline, we have figured out how to throw almost 60% of our income towards our debt.

Most of the time, when we say this involved some lifestyle changes, it is not what they want to hear. However, adjusting to the 60/40 percent with a goal of 70/30 (Pay now, play later is our mantra, not play now, pay forever) does require some changes.

I say all this because, in reality, it depends on the person, but we don't divulge all of our secrets. Not because we are dishonest, all the above is true.

But because we are leaving one thing out – we leverage the equity in our home to pay off debt. In other words, we use a HELOC to pay off student loans, our mortgage and invest. 


How do mortgage acceleration and equity optimization work?

In short, mortgage acceleration is a concept that involves rapidly paying down a home's principal to avoid hefty interest charges over the long haul of most traditional mortgages.

Equity (which is the value of your home minus the balance owed) is the portion of the house you own. What most fail to recognize is that building equity is a great tool and asset – but equity is dormant.

Think about it, if you live in a home for ten years building equity, that equity is growing, but it is a dormant asset until the home is sold.

With a 30 year fixed rate mortgage (FRM) the first few years of the loan, 80% of the payment goes towards interest (Simple amortization charts later in the article show this).

Mortgage rates at 4% are great, but it is not the rate that counts so much. It is the principal mortgage balance that the rate is based on that matters.

The lower the principal balance of a mortgage, the more each monthly payment is applied to the principal instead of interest. 

Sure, making extra mortgage payments can be done manually and you might pay off your home in 28 years instead of 30. However, why not use the equity in your home to pay off the mortgage debt in your home in 5-7 years?

The idea behind the HELOC is you take large sums (upwards 25-50K) and make large principal payments on your mortgage.

By doing this and regularly maintaining your regular payment, you attack the principal faster, therefore saving huge on the interest. But before breaking down hit all works, here is why you probably have never heard of a HELOC mortgage payoff.

Why are people reluctant to use a HELOC to pay off their mortgage?

I will admit, whenever we first mention accelerating our student loan debt and paying off our mortgage using a home equity line of credit people tense up and become uneasy.

Most have been taught to be averse to debt, myself included. However, paying off debt with debt is not taking out more debt – it is merely washing debt.

Throw in these three misunderstandings about HELOC's and most people will never capitalize on the benefits of leveraging one:

  1. We don't trust what we don't understand, so we are less reluctant to learn/try.
  2. The realist in most of us tells us something like this is too good to be true, and we immediately knock the notion that it works.
  3. Guru Dave Ramsey says “No to proceed with the idea”, keep budgeting.

The whole idea of robbing Peter to pay Paul to pay off your mortgage quicker is not something most really understand. There isn't a ton of literature on the concept, which makes it hard to find information on the subject.

Note: A simple google search only yielded 42,000 search results. Not a lot when compared to a google search of “Debt consolidation,” which produced 103 million results.


Is using a HELOC to pay off a mortgage safe?

At this point, you, like myself, might be asking, “Well if this concept is so great, why haven't I heard of it?”

Trust me, I said the same thing. But my wife and I were in such a pickle with the student loans we were willing to try anything. We are glad we did. But here is a few reasons why you haven't even heard of the idea of leveraging a HELOC to pay off your mortgage:

  • Banks do not want people to accelerate mortgages.
  • It is not something that is commercialized or recommended.
  • Most experts in this own small companies, sometimes that can scare people away; thus the concept is not very popular.
  • Banks would rather have you re-fi or consolidate; they don't deal in the financial advice world, which is what using a HELOC is.
  • Most don't understand amortization and how much they are paying in interest.
  • Many still have a traditional 30 FRM idea of owning
  • Requires a positive cash flow each month
  • The process upfront is very hands-on and can seem to complicate

Steps to use HELOC for your mortgage:

In order for you to make the HELOC concept work for you there are three essential ingredients required.

  1. Positive monthly cash flow that would make enough of an impact on the HELOC
  2. Equity in our home significant enough to produce the results we needed to make it all worth it
  3. Simple financial discipline

Once we decided to use the HELOC concept to pay off our student loans first (Our mortgage later) the process was pretty simple, and I describe in detail at the end of this article.

How we did it: We took a line of credit out at 3% (Nearly 5% lower than the student loan rates) and paid down 40K in loans. When we did this, we immediately freed up about $800 in cash flow and funneled that in with all of our extra money into the HELOC, paying it down in 6 months only to repeat in June 2017, March 2018 and December 2018. 

What it would look like applying a HELOC mortgage payment:

Here is where it gets fun.

Using an amortization schedule calculator and the ability to apply one time extra payments, here is how it would look to pay off a $300,000 home with a 4.5% interest rate applying an annual $40,000 HELOC payment.

Here are results of applying the annual $40,000 HELOC payment:

Amortization Schedule sample
2018 Amortization HELOC Mortgage

 2018 total:

  • Principal $46,362  
  • Interest: $11,637    
Amortization acceleration

2019 total:

  • Principal $48,491    
  • Interest : $9,508      

 2020 total:

  • Principal $50,719    
  • Interest $7,280

2021 total:

  • Principal $53,049    
  • Interest $4,950      

2022 total:

  • Principal $55,486  
  • Interest $2,513      
  • Interest total for loan: $41,680  

In this scenario, a $300,000 home using a HELOC to payoff the mortgage can be fully paid off by 2023.

With the mortgage paid in full,  over the life of the loan the owner has paid a grand total of $41,680 in interest towards their mortgage, roughly $700 per month.

YES, the HELOC has interest, but over the course of five years you can estimate paying an average of about 75$ a month in interest (5% on $40,000 is $166 a month. But remember the HELOC balance is dropping monthly so the interest charges are dropping $15-$25 per month too!)

In all, the interest on the HELOC is close $4,500 over 5 years so factored in with the mortgage interest for a grand total of: $46,180.

(Remember $46,180 as we look at a traditional 30 year fixed mortgage at 4.5%).

HELOC Mortgage Compared to Traditional 30 Year FRM

2018 Totals:

  • Principal: $4,931
  • Interest:   $13,310

 

2019 Totals:

  • Principal: $5,158
  • Interest:   $13,083 

2020 Totals:

  • Principal: $5,395
  • Interest:   $12,846 (Running total interest: $44,849)

2021 Totals:

  • Principal: $5,642
  • Interest:   $12,598 

2022 Totals:

  • Principal: $5,902
  • Interest:   $12,339 

First 5 Year totals 2018-2023:

Total Principal Paid: $35,190

Total Interest Paid: $81,850 or $1,350 per month for 5 years. Only 24 years to go! 

Final Amortization Year

By 2047 (Above) Paid in Full 

traditional mortgage

The total amount paid  traditionally in interest: $247,220

The total amount paid with the HELOC in interest: $46,180

Difference: $201,040

What would you do with an extra $201,040?

Or how about being 6 years away from not having a mortgage and having an additional $2,218 a month (combined mortgage payment and interest amount saved) to put towards retirement or savings?

The entire concept revolves around equity optimization, essentially the same way the banks earn their income. Using your deposits, banks leverage your income into an interest-bearing accounts that earn for them.
 
It’s the same reason why some banks can give 1% on savings and others give .01%. Using the same approach, instead of spraying your money, you can leverage 100% of your income against your debt with the use of a HELOC, saving thousands among thousands in interest.
 
At first glance, it seems risky and by all means, it is absolutely unconventional. But, when you have $295,000 in student loans just on your soon to be wife’s side of the ledger, anything is better then what we were doing.
 
For now, we are focused on paying off student loans with a HELOC, then our home.
 
Obviously, home ownership and equity is where it all starts… but don’t stop reading just yet if you don’t own.
 
One day when you do decide to buy, reading this article could save you thousands in interest.
 

Step by Step Application of a HELOC Payment:

applying heloc to mortgage

Between my car loan, my wife’s ESCI & Naviant Loans, and then her Great Lakes Student Loans (which consisted of 15 individual loans) we needed to be strategic. So using a HELOC we were able to tackle some of the smaller loans (freeing up cash flow), followed by the bigger loans.
 
*Disclaimer, I am not a certified financial planner so with anything, I do not recommend doing anything until you consult a professional. This is just what we did and how which we learned using Truth in Equity*
 

Step 1:

Create an emergency fund with Ally Savings. Goal: 4-6 months worth of expenses ( At the time or writing this Ally is currently at 2.2%).
 
 
use ally for emergency savings
 

Step 2:

Figure out the best HELOC for your needs. In our case, Pen Fed was our best bet, and to make life easier we ran our checking through them as well. Streamlining accounts is vital since your manually moving money, and Penfed is no-nonsense with transfers.

Our HELOC rate was 3.5%, and that is variable, but can only raise a quarter-point every 6 months (AKA it would take 4 years to get to where our student loans were at in terms of %)

Penfed Bank
 

Step 3:

Take a line out that meets your goals and budget. Ours happened to be $40,000 increments, so we took out a $50,000 line to always make sure we had a buffer (This I will expand on – the correct HELOC is vital).
 

Step 4:

Attack loans that can be paid off and create cash flow first. By paying off the remaining balance on my car, the ESCI loan, the Naviant loan, and $16,000 in undergrad Great Lake loans, we had over $500 to put towards the line.
 

Step 5:

Pay the line down and run everything through it. Essentially treat it like a checking account. We set up bill pay dates of the 1st and 15th. We have solid financial discipline so we put everything, except our student loan and mortgage payment on our credit card, and pay it off on the 15th.
 
We keep as much income in the line at all times. That is the magic – keeping the line as low as possible at all times since that is what the interest is based on.
 

 Step 6:

Wash rinse and repeat.
 
Once you get the HELOC down (it does not need to be at 0), then transfer an amount back to your checking account and make a huge principal payment again. Repeat as necessary to eliminate consumer debt, student loans, then the big bad mortgage.
 

Step 7:

Use the same concept to pay your mortgage, and you can save $200,000 in interest over the life of your mortgage in interest. Here is why it is important to consider paying off your mortgage. 
 

Step 8:

Create wealth using the same concept by investing ( insurance, stocks, real estate, bonds).
 
Update: After reading Financial Freedom by Grant Sabatier, he talks about using cash-out refinancing to invest in real estate. These concepts are not out of the norm, they are just privy to a select few who know how money works. 
 

My takeaway with using a HELOC to Pay off a Mortgage:

If you are new to this whole personal finance thing, this all might seem a bit out of the norm… that is because it is.
 
 
I wouldn’t recommend using this sort of process unless you have consulted with a professional and you have been operating with a budget for a year. Additionally, you will want to have a positive monthly cash flow to really pay down the HELOC as fast as possible.
 
Keep in mind, what works for one person might not work for another. Depending on your long term financial goals may be paying off your home isn't a goal. You would rather invest.
 
However, if you have your home and you are certain you are staying there – or you plan on renting it out – paying it off as fast as possible with a HELOC isn't a bad idea!

Q: Would you consider using this concept?

Why we use a HELOC to payoff student loan debt