Why Should You Stay Away From a HELOC That Uses a Sweep Account?

Most HELOCs use a sweep account to transfer money into the HELOC. Why don’t you want that? Doesn’t that sound like a good thing? Not having to transfer the money yourself would cut down on a lot of mistakes … right?

We’ll get into that. But first, here’s the definition of a sweep account, so we’re operating from a position of knowledge.

heloc sweep account

A bank account set up to automatically transfer all funds over a certain dollar amount into another account at the close of business each day

The answer sounds complex, but it’s surprisingly simple. We can summarize it like this: you lose money if you use a sweep account. Put another way, you gain interest savings if you choose a HELOC that offers direct deposit straight into the HELOC.

Here’s Why Sweep Accounts Cost You Money:

Every time your paycheck is deposited, it hits the sweep account and has to post (1 business day).

It’s transferred into the HELOC at close of the next business day (1 more business day).

You lose about 2 business days of lower interest as a result, because of the time it takes the transfer to hit the HELOC.

But, that’s no big deal, right? It’s just a short delay – just a business day or two. At most, your income may have to wait over the weekend before hitting the HELOC. That sounds like it won’t make much difference. And, you’re still paying down the HELOC.

That rationale is why most banks (okay, the OVERWHELMING majority of banks) still employ sweep accounts to move their borrowers’ income into their HELOC accounts.

Because it doesn’t make much difference.

But it does. It does make a difference – to the individual borrower. To you.

Consider This Scenario:

If you are perfect at moving money into a sweep account, you still pay higher interest than you should for 24 days every year.

If you aren’t perfect at moving money, and miss a day every so often, or forget to before the weekend a couple of times, you pay higher interest than you should at least 45 days every year.

While your money is in transit from the sweep account to the HELOC, you do not have access to it. That could lead to a painful situation.

That’s why Direct Deposit is such a huge benefit. It gets your money into your HELOC much faster – and every time you pay down the balance, you pay less interest immediately, starting on that day.

There aren’t many banks that offer direct deposit to HELOC. That feature keeps you in control of your own money, rather than alienating you from it.

We can put you in touch with our preferred lender that does offer direct deposit.

We highly recommend making direct deposit a priority.