HELOC Payments Explained - Don't Use Long-Term!

what's up guys your agent tyler waverung here and today we're going to talk more about creative finance more specifically the heloc and how heloc payments work there's been a lot of questions around this lately in the comments on some of my other heloc videos so i want to dive deeper and help explain to you this is a big reason why i'm a big proponent in using the heloc as the tool that it is to buy property but this is not a long-term financing play here you want to have a plan to get in and get back out for me that's a 12-month plan i don't like to go beyond 12 months for a lot of different reasons but the big one is really how these payments work so let's dive right in and compare how heloc payments are different from your traditional fully amortizing loans that you're used to all right so you'll see on the left here let's start talking about something i think we're all familiar with this is a fully amortizing fixed interest rate mortgage that most people have all right let's just say this is over a 30-year period that's the most common fully amortizing is a term that really just means when you get to the end you don't know anything left we've amortized it all the way down to zero and at the end you know you get the title you take over that first position lien and there's no one else that you have to make payments to aside from the tax person but there's no other lien holder on the property right and so what this is showing this is kind of the principal balance throughout the duration of the loan it starts at the very high end and it makes its way all the way down to zero here and so at the bottom here this is just an example of what an amortization schedule kind of looks like you can google this if you want a more detailed uh view of this but this is basically if you sent your whole a thousand dollar payment in this is how it's broken up in terms of principal and interest rate be an interest black being principal and throughout the loan cycle you you start out paying a higher proportion of your monthly payment goes to interest and towards the end the higher proportion goes to principal this is because the banks want to get their money back right away and they let you pay that uh your bigger half on the back end so this is example what it looks like kind of over the life of the loan again this is exactly just to give you an idea but the key point here is each time you make one of these payments you do have a piece of that going to your principal amount it's paying that principal down so that as you go through here you are paying that down all the way to zero so why that's so important to know is the heloc payment is an interest only payment you know a lot of people go out and buy a property with a heloc and just think they're on a normal payment they go ahead and pay their minimum balance every month but the thing is most helocs have a balloon at the end which basically means your principal balance doesn't go down at all while you're making those payments and then there's gonna become a point in time for most cases is a 10 year balloon at that 10 year you owe the full amount back and if you don't have that in liquid funds or you don't you're not able to come up with that or refinance you're going to be in hot water and potentially they can foreclose on you or go after your other assets in terms of bankruptcy foreclosure things like that so the big difference is here you'll notice that this is your principal balance throughout the life of a heloc it doesn't go down unless you make deliberate principal payments but the minimum payment that they give you is interest only so this is what an amortization schedule looks like when you're making interest-only heloc payments all of it goes to interest and no principal paydown so this is the end of the term of your heloc and this is when you would be required to pay this whole amount back in full at once so if you're not prepared for this if you don't you know if it catches you off guard uh you could be in big trouble so really wanted to just call that out the big differences there and when you're anytime you're paying interest only you're really just throwing money out the door now again this is an awesome tool to use if you have a plan to get back out of it throwing this money away in lieu of a bigger goal or getting a property under contract and getting back out of it it's kind of water under the bridge but you don't want to do this long term because it can get you into a bad situation so my favorite ways to get back out of a property that i bought with the heloc is either through a bur model where you're doing a rehab to increase the value so that you can refinance and use those funds to pay this back off or by buying a great deal so far under market value that once you purchase it you can then just refinance it and pay this money back again but i've just gotten too many questions around buying a property and tying it up with the heloc and leaving those payments on it long term so i wanted to show you guys this make sure that everyone understands that it is different from a normal mortgage payment that you make on something like your house or at the end of a 30 year or whatever cycle you get on it you are free and clear versus a heloc where you really want to pay attention to what that is and also monitoring the interest rates throughout this cycle as those payments could fluctuate so guys i hope this was helpful if you got anything out of it drop a comment below and let me know what you like you like these drawings you like me up in front of a whiteboard or just chatting with you so as always guys a like or subscribe would be greatly appreciated but we'll catch you next time [Music]

Channel: Your Agent - Tyler Wehrung

Views: 4,394

Keywords: heloc, heloc explained, home equity line of credit, heloc strategy, real estate investing, heloc to buy rental, real estate investing for beginners, real estate investing strategies, real estate investing with no money, how to use equity to buy property, how to use equity to invest in property, home equity, how to use equity, hamilton ohio, hamilton, ohio real estate investing, ohio real estate, your agent tyler, tyler wehrung, buying a house, HELOC PAYMENTS, ammortization

Id: W7yQH7TmFBc

Length: 4min 56sec (296 seconds)

Published: Mon Jan 24 2022