Should You Use a HELOC to Payoff Your Mortgage?

Hey there, real quick, before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Ah, heck. It's another episode of the Affluent Entrepreneur show. Welcome, welcome, welcome. This one, we're going to answer a question that came in from you, from the community. And I hope that if you have questions, do me a favor, reach out, send me your questions. Go to askmailnow.com we'll bring them on the show. We'll try to make sure that we guide you on this journey. And so this question came in about HELOCs Home equity lines of credit. You know, should I be using an 8 HELOC to pay off my mortgage faster or to pay my bills? All right, the answer might surprise you, and we're going to break it down in this episode because there are nuances and pitfalls that you need to make sure you're aware of before you get caught up in the HELOC game. All right, welcome to this episode. I look forward to seeing you on the journey. This is the Affluent Entrepreneur show for entrepreneurs that want to operate as a a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money and scale your life while creating a deeper impact and living with complete freedom because that's what it really means to be an athlete. Entrepreneur.

All right, welcome to this episode of the Affluent Entrepreneur show. This one, we're going to answer a question that came in from you, and it is this question about should I use a heloc, a home equity line of credit, to pay off my mortgage? There are these promotions out there, if you will, let's call it that, where these lenders or these mortgage brokers or these advisors, if you will, are advising people to use a home equity line of credit as a way to pay your mortgage off sooner, five years sooner, seven years sooner, and everything. Now, mathematically, it can work okay, because what is a, what is a heloc? HELOC is a home equity line of credit. You're using the equity in your home to create a line of credit. In other words, they're going to give you a checkbook where you can write checks against the equity of your home. You know, and the reason that this can just mathematically work is simply the way that the loan interest is calculated, depending on interest rates. But the bottom line is, what you need to know is that a mortgage.

On the home, the typical mortgage you have on the home is, is what they call amortized. If it's a 30 year mortgage, they're going to figure out a payment, assuming it's fixed rate, they're going to figure out a payment.

For 30 years that's going to stay the same every single month. And it will cover not only the interest, but it will also cover paying down the loan. So by the time you get to the end of the 30 years, there's no more interest and there's no more loan. So that's a mortgage.

With a heloc, you only pay interest on what you borrow. So you could put a HELOC on your home, get, get a home equity line of credit. It's a line of credit, meaning that you could get a home equity line of credit, say for $100,000. And if you never borrow anything from that line of credit, you, you never pay interest on it. And the interest is calculated on the number of days you have outstanding. So if I borrow.

From the 100,000, $10,000 and it's only for a day, I pay interest for a day. The mortgage, you're paying interest regularly. So there's a mathematical calculation that allows you to potentially get a benefit. So I'm not arguing that, that there is the potential benefit with it, but let's just look at what a mortgage and heloc, how the difference is with respect to if we're going to use it as a way to pay bills. And so I'm going to, I'm going to jump to some slides to break that down so you understand it. Because here's what we know. When you talk about traditional financing, you will make money. And when you make money, you will put it in the bank. And so you'll put it in your checking account, you'll put it in your savings account. And once you put it in that, that account, now you'll turn around and take money out of it and you'll use it to pay for stuff and you'll use it to pay for the house and you'll use it to pay for utilities and you'll use it to pay for groceries and outings and all of that stuff. Well, and this works. What happens is this, is that we start to look at it from this perspective is that.

A traditional type of financing has a set term. I have a 15 year loan, I have a 30 year loan, I have a 10 year loan. It can be a variable or fixed rate loan. Okay? Now what's happening is historically when rates were low, when rates were low, we would just get fixed rate loans because it made no sense. But now as interest rates have come back up higher and at the 8% level, there's things called ARMs, adjustable rate mortgages. So they're variable. That means that they'll get you in, get you in for a teaser rate. They get you in for something that's low and they say this is good. And it's going to be that way for a year, two years, three years, whatever it is. But then it starts to adjust. All right, A lot of people got themselves hurt in 2008, 2009, because they were on adjustable rate mortgages. When the interest rates start to get away from them, they can't sustain it. They can't stay in the mortgage because they can't afford it. It was affordable at the time they got in because they gave them a low teaser rate. This is why it's really important to look at how do you buy a home and do it in a way that doesn't put you in jeopardy? Because the reason they're giving you a teaser rate is to get you to afford something you couldn't otherwise afford. That's the bottom line. And so you need to be really careful. And, and so a mortgage can be a variable rate where the interest rate will go up and down. But by and large, what we try to do is if we can get into a fixed rate situation so you don't have that variability and you don't have that risk. The other thing is that the interest, like I said, is amortized over the life of the loan. So they calculate the interest on a monthly basis. And if the loan is 10 years, 30 years, 15 years, whatever the term is, they'll do it. And you pay the same payment every month until the loan's paid off. That's a mortgage. That's what we're used to. That's what traditional financing is. But what happens if we put a HELOC in here? So what happens when we do a HELOC is that instead of putting money In a bank, what they're doing is they're saying, take all your income and put it in the heloc. In other words, you're going to use the HELOC to pay bills and pay the mortgage. And then when you make money, you put it in the heloc. So they put money in the heloc, and then in order to pay your mortgage, you are writing a check from the heloc, the home equity line. So in effect what you're doing is borrowing real time for your groceries, you're borrowing retail real time to pay your payment, you're buying real time to go clothes shopping, and you're just writing checks against the line of credit, which is really against your house. Okay? And when you do that, then the line of credit goes up and you have to start paying interest because remember, it calculates interest on a daily basis. So the moment you borrow, it starts calculating interest on that loan from that day until you pay it off. So now you come in, you make money, you get your income, you get your paycheck, whatever it is, and you put all that money into the home equity line of credit. So you pay it down, you pay it down and now the interest stops. And that's the game that they're playing. And yes, it can save you interest if done correctly because you're not on an amortized loan. You're, you're going to only pay for the amount that's borrowed for the time it's borrowed. So how is this different, you know, from the, the traditional financing? Well, it's open ended. Remember the traditional financing had a term, it was a 10 year loan, it was a 15 year old, it was a 30 year old. It's open ended and the line of credit is just there until it's not. Because they can always take it away from you, they can always shut it down. In fact, they do. They do that when they feel that they're at risk. When they feel that there's a concern, they'll just send you a letter and say, you know, we decided we're not going to allow you to have this anymore. Okay? Now if you owe money on the line of credit, you're going to have to pay it, but over a period of time. But if you don't owe any money on the line of credit, they can close it out from under you. And now you don't have access to a line of credit anymore. The other thing is that most of them are variable rate. So the interest you're going interest rate, you're going to pay is going to change, and it could change quarterly, monthly, and, you know, whatever the terms are. But that means that you could have a lower interest rate for a period of time, but it could be very high down the road.

It's not amortized. It's simple interest. It's calculated based on the number of days.

And like I said, you use it typically as a cash account. So this is what they're promoting. This is what they say that you should do to reduce it. Now, mathematically, it can make sense. Let's really look at the pros and cons of this. Really look at the pros and cons. All right? And the first is this. The pros is that sometimes you can get lower interest rates and you'll pay lower interest in some cases because you only pay on the amount that you borrow and for the number of days that it's borrowed. Okay. The other pro is this, is that it's flexible. It's this open line that I can use, not use. I can use when I need it and not. And, and, and do what I need with it.

The other pro is that if done right now, there's limitations here. And you got to talk to your tax advisor. The interest you pay on the line of credit could potentially be tax deductible, but so could the mortgage.

And then the, the fourth pro is this, is that it could possibly improve your cash flow because you're, you're paying back and forth and you have that liquidity in the line of credit. Now, those are the pros. Let's look at the cons. What are the things that, that could get you in trouble? Well, the first is this. You're. You're putting your home at risk. I mean, it's a loan against you. It's secured by your home. You could lose your home if you cannot pay it. They can foreclose on the home. So you're putting your home at risk, not unlike a mortgage. I mean, mortgage the same thing. The home is at risk.

Number two, though, it's got variable rates. So how you start the game may not be how you finish the game at the beginning. It may look great from a math standpoint. Hey, I'm going to save all this interest, save all this interest, but all of a sudden the rate starts ratcheting up, and now you're actually paying at a much higher rate than you would have if you, you were in a mortgage. The third thing is that actually temps overspending because this, it's this thing that you say, I got a lot of credit. I just put on a line of credit. I remember as a kid, y' all remember as a kid that, that you would sit back and, and you wanted something at the store and you would, you would look at your parent, your mom, your dad, and you.

Want it. They go, no, we can't afford it. And what do you do? You tell, because you didn't know any better, you tell them it just put on a credit card.

Not thinking that you got, we didn't know about, oh, you got to pay the credit card off. It's the same mentality that can come up with it with, with a HELOC if you're not careful. Is that, that, oh, I'll just, I'll just put on the heloc. And all of a sudden you max out the heloc, which means that you've eroded the equity, which means that you're also paying interest for the days that it's outstanding. It could tempt overspending if you're not careful with doing that. Number four is that there's actually some costs and fees and so associated with it. And number five, from a con standpoint is that there may be a balloon payment. It isn't amortized out like a regular mortgage is, you know, so if you borrow $50,000 and you're just paying the interest, paying the interest, paying the interest. At some point you have to write a check for that 50. Where's that coming from? You may be subject to a balloon payment at some, at some level. Okay, then there's the idea of home values.

So it's a home equity line. And just like anything secured by an asset, they try to make sure. Why are they, why are they securing it with an, with a home? Because they don't want to take in the risk. The bank doesn't. They say, look, if this person decides not to pay, at least we have a home that we can take back and we can sell and get our money back. And the way they do this is called loan to value, is that they're going to take a percentage. They're not going to. If your home is worth 300,000, you're not getting a home equity line for 300,000. They let. They may give you a $200,000 line against a $300,000 home if you have no other debt on it. But see, so they know that they have a hundred thousand dollars equity. If you took $200,000 on the loan against a $300,000 home, they, and you didn't pay. They just take back the Home, they sell it for 300, they get their 200.

So there is, there's a situation. Well, what happens if you, you have that loan completely outstanding and now the home values drop for whatever reason, interest rates are up, real estate has a bad year like an 0809, and now all of a sudden, instead of having $100,000 in equity, you have zero or you have negative, and the bank turns around and says, oh, wait a second.

We'Re not going to let you do this anymore. Okay, now we have an issue because, because what they can do with this, one of the problems with this is they can actually freeze it or call it, they can turn around. Now if I have a mortgage, if I have a regular traditional mortgage that's termed out for 15 years, 30 years, 10 years, whatever it is, then I may, and as long as I make the payments, they can't tell me to pay it early, I can continue to make the payments. They can't take the house away, they can't do any of that. But with a home equity line of credit, they can't. Let's say that you, you put a hundred thousand dollars, again, you draw $100,000 out of the line of credit and you're using it, you're using it, and then you put $50,000 back to the line of credit, you pay it down. They could literally come to you and say, we're reducing your ability to take the line of credit down to the 50 you can't take anymore. And in fact, we want you to pay the other 50 back. They can take it away from you. So imagine this. You're using the HELOC strategy to pay your bills to live by. And so you are paying your bills from the heloc. You get checks and you just pay the bills. And then when you get your income.

You replenish the heloc. It stops the interest and you go from there.

But then in between, you pay off the heloc. In between paying bills, they then freeze it or call it. And now you have no liquidity, you have your income, you have no ability to pay bills other than through the income. It's a problem. Okay, I understand that the strategy seems really appealing. It creates complexity, it creates exposure to variable interest rates, to freezes, to calls, to fluctuating real estate values. It creates an element that maybe doesn't make sense when you start to put it all together, especially when you see teaser rates and all that stuff. So I hope that this kind of gave you the lay of the land as far as you know, a home equity line of credit.

Does it make sense? Should it make sense? Just know that there's risks involved. It isn't all tulips and daisies, as they might tell you when they say, oh, just do this. And you're going to do that because they're not telling you about the downsides or the things that could happen. And as long as you go in eyes open, okay, as long as you go in eyes open and you understand the downsides, you want to take the risk, then you go for it.

But I won't be there with you because I'm not going to take the risk. Okay? Bottom line is I want to know that I have a set payment, I have a low rate, fixed rate loan that we're not going to change, you know, and I'm just going to do it from there. I don't even have a home. Okay, so that's just me. But you get to do you. I'm just here to inform you, I'm trying to give you perspective. I'm trying to give you what, what I would do and what I've seen people do. And I'm trying to give you the truth because I'm not selling a heloc. I'm not selling you anything. Just want you to do the right things to build your money machine so you can have the financial freedom deserve after all, I believe financial freedom. I hope that this helps. I hope that this answers this question for you. If you have other questions for me, hit me up, let me know. You can go to askmelnow.com and submit your question there just like this one was, or get it answered. We'll get you helping. We'll get you help. We'll get you moving. We'll keep you growing, all right? And, and if you know of anyone else that needs financial guidance, unbiased, objective financial guidance from someone who's lived it, someone who's done it, someone who's advised for many, many years, not someone that's just on TikTok doing it. All right? Send more away. All right? Till I see you on the road, till I see you out there speaking, till I hear from you on social media or something, please say hi. All right? Always, always strive to live a life that outlives. I'll see you soon. Cheers. Thank you for listening to the affluent entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com for and I'll see you there.

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