HELOC Refinancing to Fixed Rate and Vanguard Index Strategy

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
007Investor
Posts: 13
Joined: Mon Mar 08, 2021 12:34 am

HELOC Refinancing to Fixed Rate and Vanguard Index Strategy

Post by 007Investor »

HELOC Refinancing to Fixed Rate and Vanguard Index Strategy

I’m helping out a relative who took out a $53k HELOC to pay off credit card debt, that was several years ago and the first part of the plan was successful, cards fully paid off, years later, card debt never again went over $1k, but they only paid interest on the HELOC and took advantage of the low prime rates, so the principal basically remains the same.

The current rate is 3.25 interest, the credit union is just prime, no margin, relative is in the top credit rating tier, but now they want the security of a fixed rate.

In addition this relative wants to utilize an experiment, they want to pay the minimum fixed monthly rate and then place another monthly fixed amount into a VTI or VTSAX, the amount that would garner the same amount that would be remaining from the principal of the $53k after ten years, this would be with a hypothetical return of 7 percent per year.

The relative understands that there could be a ten year period that does not return 7 percent annually, they are willing to take that risk and wait fifteen or twenty years before taking the money out of the Vanguard index fund, they also understand the risk that even after twenty years it might not produce enough to make this experiment successful.

They are willing to take that risk for the reward of a possible ten or thirteen percent annualized return over ten or twelve or fifteen years, in that instance, with the numbers I will show you, there is a chance to have the loan paid off after ten years and have anywhere from $3k to $15k in extra funds.

Beyond the risks and uncertainties of this plan, I’m presenting this to the board to see if we are missing something, either a better refinancing plan out there or a better index fund, or any problems you see with this plan.

We’ve shopped around at a few credit unions, basically we have two options, a home equity loan with a fixed interest rate, or a mortgage with a fixed interest rate, the type of mortgage that is not for a home purchase but for the purpose of what we are doing, paying off a HELOC.

For a Home Equity Loan:
(No Closing Costs)

10 years: 4 percent interest - $536 per month

20 years: 4.25 percent interest - $328 per month.

(Now this experiment needs a higher rate per month for the Vanguard Index and a lower rate per month for the loan to maximize the potential reward in a higher than 7 percent return rate situation)

And they really want to keep the total monthly amount to $500 per month for both the Loan and Vanguard Index, the idea is to exploit a loan timetable of 15 years and above, so that effectively takes the 10 year off the table.

In the above example (20 year loan) after ten years there would be $32k in principal left.

In the Vanguard Index Fund I am starting with an initial deposit of $100 for each run of the numbers and I am not including any dividend reinvestment numbers so that will add to the bottom line but leaving that out for now.

Vanguard Index Fund:

10 years: 7 percent - $172 per month = $28.7k (Close enough to break even to satisfy the relative)

10 years: 10 percent - $172 per month = $33k

10 years: 13 percent - $172 per month = $38.3k

So in a great ten year market, a $6k reward.


The other option and the one that both the relative and I think is the best option and the one that maximizes the reward potential is a straight Mortgage.

The house is fully paid off, the relative is debt free except for this HELOC, still working but nearing retirement and wants the security of a fixed rate, a very disciplined person and totally changed the use of credit cards over the last seven years but I understand the common reticence on this board, however at this point the HELOC accomplished the first goal, it is just that God forbid the prime rate goes back over 5 or 7, the relative does not want the monthly payments to balloon higher.

Mortgage Rates:

(With this option must add $4k in closing costs, numbers run on $57k loan.)

10 years: 2.25 percent interest - $530 per month

15 years: 2.5 percent interest - $400 per month

30 years: 3.25 percent interest - $250 per month

The 30 year option is what we are considering, here are the Vanguard numbers, that would give us $250 per month for that option, total $500 a month.

Vanguard Index:

10 years: 7 percent interest - $250 per month = $41.6k

10 years: 10 percent interest - $250 per month = $48k

10 years: 13 percent interest - $250 per month = $55.5k


With the 30 year mortgage option, there will be 43.4k left in principal after ten years. So a potential reward of $4.5k or $12k in a really great market. And of course the dividend reinvestments will push it even higher.

Again in a 7 percent market, just shy of paying it off, still be $2k in the hole which is acceptable.

Obviously the plan that carries the lowest risk is to take the ten year Mortgage option, $530 a month and it will paid off in ten years, no chance of anything extra but no chance of a sideways or perhaps negative ten year market. In a total sideways market, zero percent returns over ten years, you would still have $30k, about $13k in the hole, not great but the relative is fine with that risk.

Also I feel this plan gives one the flexibility to stop the Vanguard deposits at any point and just double up on the loan payments, for example if you paid $500 per month on the loan, in ten years your principal remaining would only be $8k.

So the question is, if you don’t mind this risk, are there other refinancing options we are missing or other index fund options besides the VTI VTSAX that in this situation you think presents a better risk vs. reward possibility.

Also this would be done in a Roth IRA, the relative envisions a small part time job in retirement to continue to utilize the ROTH but we can’t predict the future, if no job is possible, then they would have to switch off to a taxable account, that is another possible negative but I’m hoping the fact I did not include the dividend reinvestments in my calculations, I hope that balances off the tax impact.

Update: After speaking further with my relative, they really don’t want to add the $4k closing costs to the principal, I don’t know how I can input it into the mortgage calculator to determine if going down one interest point is worth more than $4k extra to the principal. One credit union estimated it could be as high as $6k of closing costs.

Thank you and apologies for this novel of a post.
Post Reply