From the Financial Hotline
By: Financial Hotline
Summer 2019 (Vol. 37, No. 2)
Q: I am impressed with all the ads about the HELOC Strategy for paying off my mortgage early. Are there any downsides I should know about?
A: The HELOC Strategy requires you to replace part or all of your mortgage and your checking account with a Home Equity Line Of Credit (HELOC). All your monthly expenses will be paid from the HELOC account.
For example, let’s say you are making payments on a $400,000, 4%, 30-year fixed mortgage. You take out a HELOC for $100,000 and use that to pay down your mortgage. You still have a mortgage with a payment of $1,910 but by making that $100,000 principal payment, your mortgage will be paid off in 20 years. You save 10 years of interest payments!
In the best-case scenario, if you earn more than you spend, you will use any extra money to pay down your mortgage and HELOC each month. The simple interest HELOC will save you a little extra too. You could accomplish similar results by simply paying more in principal each month. Or, you could just keep paying that mortgage payment and invest your extra money to earn a higher return, then use those proceeds to pay down your mortgage.
Some complications with the HELOC strategy include: You just earn enough to make the minimum payments; you pay off your mortgage early but now you owe a $100,000 HELOC. As a rule, even though its simple interest, these usually come with variable or higher interest rates. Most have closing costs and other fees added in. In many cases, consumers just trade a low fixed rate tax deductible mortgage for a variable (ultimately higher) rate HELOC. If it’s an interest only HELOC - you still owe all $100,000!
Also, a lot can happen along the way. If you hit a low financial point, instead of working on alternatives, you may be tempted to use the HELOC to make ends meet. If that happens, you will end up with higher debt for a longer period.
Another risk is that you could be passing up better investments in order to pay off your mortgage early. For example, it doesn’t make good financial sense to miss out on employer matched or tax protected retirement accounts earning higher returns to pay off a tax-deductible low interest mortgage. Also, keep in mind, in most states, your retirement accounts are considered protected assets while your home equity may not be.
In summary, we recommend using extra money first to fund an emergency account, any employer matched and or tax deferred retirement accounts and to maximize higher return investment accounts. Once you are set with these, use any extra funds to pay down debt, starting with the highest interest debt first.
Q: Do I need to participate in UltraFico and Experian Boost?
A: UltraFICO is a new credit score first announced in a joint press release from Fair Isaac Corporation (FICO), Experian, and Finicity late in 2018. Ultra FICO is a credit scoring model that incorporates your checking, savings and money market accounts to calculate your overall risk. In general, if you make regular deposits, keep a reasonable balance ($400 minimum) and don’t bounce checks you could see a increase in your credit score.
Experian Boost also uses your online banking information, but it focuses on how you pay for utilities. If you make your utility bills and telecommunications payments by bank draft, that information can be added to your Experian credit report — making it fair game for both FICO and VantageScore credit scores to consider during their scoring process.
On a positive note, both programs are free, and they could boost your score or add more data for those who have little or no credit. The downside is you do have to allow access to your bank account info including usernames and passwords.
Here are some other points to note:
- Both programs Influence Experian-based credit scores only.
- Consumer opt-in is required.
- Ultra Fico does not add information to your Experian credit report.
- Experian Boost adds information directly to your Experian credit report.
- Ultra Fico works if your creditor uses FICO 8 and FICO 9 credit scores at Experian.
- Experian Boost works with any Experian-based credit score that considers utility style data, including those built by FICO and VantageScore.