What is a HELOC?
A HELOC (Home Equity Line of Credit) is another tool to finance real
estate. A HELOC is a simple interest line that recasts every single day for free. One of the
major benefits of a HELOC is ability to have 100% liquidity. This feature gives clients the
confidence to deposit 100% of their monthly cash flow knowing they have access to line
anytime they may need it for emergencies or opportunities just like a checking account.
Since the HELOC computes interest differently based on the new balance daily, a client
can achieve extremely fast principal reduction.
Can I achieve this with a mortgage?
You can certainly pay down principal on a mortgage
anytime you want. However, you will lose access to the principal pay down unless you do
a costly refinance to access the equity or sell your home. Neither option is ideal. A
mortgage is NOT liquid, and the interest does NOT recast daily based on the new
principal balance. Hence, you would NOT deposit 100% of your cash flow into a
mortgage because your funds immediately become trapped. Therefore 99% of
Americans don’t pay extra on their mortgage. It’s a scary proposition. But a HELOC does
have all of these features which allows you to capitalize on your cash flow with comfort
driving down the principal balance on every deposit.
Aren’t HELOCs variable rate?
Most HELOC programs are variable. However, there are
some that are fixed or hybrid. Believe it or not, some banks offer a very low fixed rate for
a short period of time (5-10 years). A hybrid HELOC allows you to lock a portion of your
balance at a fixed rate while leaving the rest on variable. There are times and strategies
we may recommend a fixed or a variable rate HELOC depending on external market
conditions or your personal cash flow.
What if interest rates increase?
If you choose a variable rate HELOC, rates can rise or
fall depending on the monetary policy implemented by the Federal Reserve. Of course,
we love the low interest rate market we have grown accustomed to over the last several
decades, but our strategy can teach you how to eliminate or reduce the effects of rising
rates due to focusing on the two factors most important with paying lower
interest…TIME and BALANCE. Because the balance of a HELOC drastically drops over the
years, you can offset the rise of rates by having a lower balance thus paying it off faster
than rates can rise. Some of our clients are “interest rate immune” which means due to
their cash flow positivity and debt owed they pay down principal much faster than rates
can rise thus rates have no impact on their debt free date.
Can I get a HELOC on a purchase?
Absolutely! We know several banks or credit unions
that will allow you to purchase a home and close on a 1 st lien position HELOC eliminating
the need for a mortgage. Typically, those banks or credit unions will require a 10% down
payment.
Can I get a HELOC on an investment property?
Yes! Again, we have many relationships
with banks or credit unions across the country. Some of them do offer HELOCs on an
investment property up to 80% Loan-to-value.
Do HELOCs have mortgage insurance?
NO! Out of the thousands of banks and credit
unions we have researched, only one bank has mortgage insurance even on loan-to-
values well above 80%. This is additional/unnecessary expenses saved by utilizing a
HELOC.
Do HELOCs have closing costs like a mortgage?
NO! Although there are some banks
with HELOC programs that have costs like a mortgage, most have closing costs from $0
to $750. Not only is a HELOC more efficient to use than a mortgage, it also much
cheaper.
What are the interest rates on HELOCs?
Remember the mortgage market prior to 2010
when lenders’ interest rates and programs were wildly different from one another? Well,
that’s how the HELOC market is. HELOCs are bank owned assets and stay on the bank’s
balance sheet. Where 99% of all mortgages today are government backed/insured. IN
short, each bank and credit union dictate their own risk level when lending on HELOCs.
So, rates vary from 0.99% to 5% in today’s market.
Why haven’t I heard of this before?
The reason could depend on who you talk to about
this strategy. It’s nothing new. In fact, this strategy has been practiced for centuries. It is
very popular in other countries that cannot afford to be extorted via the archaic
mortgage process that we see here in America. Mortgages in America are primarily only
used by the middle class. The poor can’t afford them, and the rich don’t use them.
Mortgage Loan Officers don’t offer HELOCs and most Bankers have never been taught
offer them the way we teach it. Additionally, HELOCs don’t pay well. Most
bankers/lenders are not compensated to offer and close on HELOCs. Why? Because they
are not profitable like a mortgage. Want to take any guesses where that profit comes
from? Consumers overpaying!