Using a HELOC to pay off a mortgage is an interesting debate.
What’s a HELOC?
A HELOC is a home equity line of credit. If you have equity in your home, you can take out a loan from your bank using that equity as collateral.
Paying off a mortgage with a HELOC is paying off a loan with another loan.
While I’m not so sure paying off a mortgage is the smartest financial move anymore (I used to believe it was), doing it using another loan certainly an idea worth exploring.
I’m going to summarize the issues in a fair and balanced slightly biased way.
So Should I?
My final answer on this is that you should not use a HELOC to pay off a mortgage. HELOCs are variable rate loans instead of fixed rate like a (good) mortgage. HELOC interest is not tax-deductible in most cases. The line of credit can be frozen or reduced by the bank at any time. Also, even if you are making lower, interest only payments on your HELOC, it eventually will revert to a principal plus interest payment that you may not be ready for.
You will often see articles on how to payoff your mortgage early. People seem to make up their minds it’s the best course of action.
What about the question: Should I pay off my mortgage early? Here is my take on both sides of the argument.
Reasons NOT to payoff a mortgage are: It’s an inflation hedge, you can write off the interest, maintaining liquidity is important, and the money would be better off invested in higher yielding opportunities. Good reasons to pay off a mortgage include peace of mind and primary residence equity having special protection from creditors and bankruptcy in many states. Poor, but often cited reasons to pay off the mortgage are decreasing expenses and gain a risk-free return equal to the interest rate.
I rushed through listing these answers. I go into more detail below.
Before You Payoff a Mortgage Early
We will assume you have an emergency fund, your high
interest debt like credit cards is paid off, and you are fully maxing out all
retirement savings account opportunities.
This means you are contributing the max to your IRA, your
spouse’s IRA if you have one, and your 401K, TSP, or equivalent vehicle. You should not bother paying off a mortgage
if you have not done these basic things first.
In the end, I’m partial to keeping the mortgage. I feel like the evidence is strongly stacked
against keeping it.
It’s a little ironic, because I paid off my primary residence in 6 ½ years. I also have 20 paid-off single family homes.
Yeah, that’s a little psycho.
This certainly qualifies me, however, to make a fair
judgement on the subject.
Since I’m partial to keeping the mortgage, I’ll explore the pros of keeping the mortgage first.
As a military member, the largest difficulty I had was finding the best places to invest in real estate. I moved every 1 to 3 years, so I didn’t have an obvious choice. Through a lot of trial and error, I figured out a system that has worked well for me. It goes against the conventional wisdom on picking the best markets for real estate investing. That’s why it works!
How to Find the Best Markets
The secret to finding the best places to invest, especially
in this advanced real estate cycle, is two things. First, you must gain a strong knowledge of
the market you are going to invest in.
This means you or somebody you trust needs to be your boots on the ground in that
location. This will allow you to buy the
right house in the right neighborhood in any city you end up choosing. Second, prioritize cash flow over
appreciation. Make sure the property you
buy will cash flow well, and never sacrifice that for a hope that you will get
a large amount of appreciation.
Finding the Best Cities to Invest – Common Advice
To understand the significance of the advice I’m giving, I
want to share the advice every other website would give you if you googled
“How to choose the best city for real estate investing.”
O yeah. I’ll also
tell you why those websites are all wrong.
All the other websites will tell you the most important
things to consider in choosing a real estate market to invest in are items such
1. Population Growth
2. Job Growth
4. Low Unemployment
5. Low Rental
These blogs will sometimes teach you how to lookup these statistics showing you which websites to use so you can pick the best markets to invest in real estate.
What do I know about long distance real estate investing?
As a military member:
I’ve moved every 1 to 3 years while investing in
I currently have 20 paid-off single family homes
I’ve self-managed and used management companies
I bought 16 properties while living overseas
I read a blog post this morning that said investing long
distance requires a slightly
different approach than normal real estate investing.
It’s a different ball game altogether.
The secret to mastering long distance real estate investing is getting these 5 things right:
The Importance of Boots on the Ground
The Best Real Estate Agent for Long Distance
Choosing a Property Manager from Long Distance
Choosing the Right Property from Long Distance
Managing Contractors from Long Distance
The Importance of Boots on the Ground
This is where I feel a lot of new investors make their first mistake.
They are neglecting the importance of having boots on the ground.
There have been good books written about long distance real estate investing and how easy it can be done using video, pictures, docusign, and aligning yourself with a great “team.”
This all sounds great, and might work for an experienced investor.
I can tell you from a practical standpoint, however, that
nothing replaces the importance of having boots
on the ground that you can trust in the location you are investing.
Whether it is a contractor trying to rip you off, tenant trashing a house, or just a need to respond quickly to an emergent situation at your property, there is nothing like having someone you trust that can tell you what is actually going on with your property.
With the TSP Modernization Act going into effect on
September 15, 2019, there are new withdrawal rules. These expanded options greatly enhance your
ability to access your money both before and after you are eligible for tax and
The major changes are:
Choose if your withdrawals come from traditional, Roth, or both balances
Up to four in-service withdrawals per year
Multiple post-separation partial withdrawals
No longer must make a full withdrawal at 70 ½.
Can take monthly, quarterly, or annual payments
and make changes to it anytime
These are a summary of the big changes, but there is plenty more to know about each one of these and how to fully take advantage of them. We will do a deeper dive into each topic and add some more info on new withdrawal options from the TSP Modernization Act.
Before these changes, whenever you made a withdrawal from
your TSP, it came out of both your Roth and your traditional balances proportionally.
What that means is, if 25% of your total balance was in your
traditional TSP, when you took a $1000 withdrawal, 25% of that, or $250, would
be from your traditional TSP balance, and the other $750 from Roth TSP.
These both are treated different for tax reasons. If you withdrew this after separating from
federal service and after 59 ½ years old, the $250 from traditional would be
taxable income. The $750 from your Roth
TSP would not be taxable income.
Investing in rental property with VA Loan is a tricky subject. There are many rules that dictate how a VA loan should be used.
Bottom Line Up Front (BLUF): VA loans are not authorized for investment properties, but there is no rule stopping you from moving out after initially living in the property and making it an investment.
There is also a way to buy a 2, 3 or 4-plex property, live in one unit, and legally rent the rest out.
The VA doesn’t say you can use the VA loan for investing, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.
You can’t just buy a home and make it a rental property without living in it first. There is an occupancy rule I’ll be discussing.
You can, however, buy a house at your current assignment using your VA benefit, live in it, turn it into a rental property when you move away, and buy a house at your next location with a VA loan repeating the entire process.
Another possibility for real estate investing with a VA loan is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units while renting the other units out. When you move on to your next assignment, you’ll be able to turn the entire property into a rental property legally.
Let’s start digging into the details!
The first thing we need to understand is the occupancy rule.
The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government.
HOW IT WORKS
When you borrow the money, it comes out of your actual TSP
account. It can be any amount between
$1,000 and $50,000, not to exceed your contributions and earnings from those
contributions. It does not include any
agency contributions (blended retirement system or BRS) or earnings from agency
As you are repaying this loan, it is repaid with interest
through payroll deductions back into your own TSP account. This means that this large amount of money
will not be growing tax advantaged in your TSP account during the time period
you have borrowed it. You lose the
opportunity for that growth. More on
Keep in mind, even though you are paying interest, it’s a
low, low rate and you pay it back to yourself, so it’s not really a cost to
you. The interest, however, is not
To be eligible for a TSP loan, the following must apply:
Employed by uniformed services or federal government
In pay status
Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
Have at least $1,000 in your TSP account not counting agency contributions and earnings
Have not repaid a TSP loan of the same type within the past 60 days
Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service