Heloc to pay off mortgage faster

[Drew Cameron]

I recently came across a new strategy that I don't quite understand and it sounds too good to be true. The principal is simple. Use your heloc to pay your mortgage and funnel all your funds in and out of it like a checking account. The interest updates daily so you can pay down principal balance much faster than on a traditional mortgage. With a decreasing principal balance the payments go down each month as you pay it off. Plus you can get rid of other payments by funneling them into your account as well. Has anyone else heard of this? Or has anyone used this successfully?

[Joshua S.]

I'm sure everyone is over this thread now, but I just wanted to say I think it's unfortunate that so few people understand it. They get stuck on interest rates and trying to work out the math, which most people suck at, and then think they are debunking it when they are misunderstanding it.

When you pay extra principal on your mortgage, you skip ahead on the amortization schedule and save on interest. Everyone knows this, it's not controversial. I took some of my own savings and paid it toward my principal to "test" the idea at first and even on my mortgage website it states that I skipped X number of payments and moved my payoff date up by a couple years. Then I checked the amortization schedule and confirmed how many payments I skipped over. When I added up the interest portion of all those skipped payments it came out to $21,000 in savings. Again, nothing controversial here and it was about 100% ROI.

Ok, so to understand this, just compare the two scenarios. You could simply pay extra money toward your principal. The upside to doing it this way - there are no costs involved. Cool. Downsides - you are using your own funds, more than likely eating into your emergency / investing money, and taking time to save the money. That doesn't sound too bad. If you can do it this way, great, but most people barely have any savings / emergency funds, so asking them to save AND pay extra toward their mortgage is not realistic. Next downside - doing it this way means you can't get your money back (without selling or refinancing). The consequences are obvious. You want the benefits of paying your mortgage early, but have to put up with the risk of not having access to your funds when you need them.

Now look at the HELOC scenario. Upsides - you don't have to wait to save up the money. You take money out of the HELOC and put it on the mortgage. Done. Savings. Next upside - even though you put the money against your mortgage, you essentially still have access to it since it's a revolving credit line. If you need emergency funds they are there for you. Again, there is nothing controversial here, you're essentially doing when you did in the other scenario, you just borrowed against a credit line to do it. Now the one downside - cost. The monthly cost of the HELOC using worst case scenario numbers (your HELOC is 8% interest and you took out $10,000 and then had a brain fart and forgot to do the rest of the strategy) is $66.00/month. If you get a better interest rate and keep your average daily balance lower as the strategy suggests, it's actually more like $20.00-35.00/month. Either way, most people spend at least that much dining out each month, it's a nominal fee.

So, the question is, if someone told you the fee for an investment was $35/month and you could put in $10,000 and get $21,000 back, would you do it? Yes, obviously you would do it. The best part about this strategy is that you just change the way you are banking and don't even have to change the way you spend as long as you have more coming in than going out. You pay off the $10,000 over the course of the year and then you do it again, saving thousands and years on your mortgage. And on top of all this, the next regular mortgage payment (after you skip the 20 payments) is typically $35 lower, anyway, so the strategy literally pays for itself. The strategy works, I'm telling you from personal experience. There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not. The true cost (at least on my loan) is 67% over 30 years. It says the true cost on your mortgage, check it yourself. Or think about it this way. The interest portion of the first 15 years of your mortgage is twice as much as your principal. How on earth is that cheap money? No way I'm sticking to their schedule or using all my emergency funds to pay it off early, so the HELOC strategy is obviously the best way to go. The only possible way you wouldn't want to do this is if you misunderstand it. Thanks.

[Chris May]

Originally posted by @Joshua S.:

I'm sure everyone is over this thread now, but I just wanted to say I think it's unfortunate that so few people understand it. They get stuck on interest rates and trying to work out the math, which most people suck at, and then think they are debunking it when they are misunderstanding it.

When you pay extra principal on your mortgage, you skip ahead on the amortization schedule and save on interest. Everyone knows this, it's not controversial. I took some of my own savings and paid it toward my principal to "test" the idea at first and even on my mortgage website it states that I skipped X number of payments and moved my payoff date up by a couple years. Then I checked the amortization schedule and confirmed how many payments I skipped over. When I added up the interest portion of all those skipped payments it came out to $21,000 in savings. Again, nothing controversial here and it was about 100% ROI.

Ok, so to understand this, just compare the two scenarios. You could simply pay extra money toward your principal. The upside to doing it this way - there are no costs involved. Cool. Downsides - you are using your own funds, more than likely eating into your emergency / investing money, and taking time to save the money. That doesn't sound too bad. If you can do it this way, great, but most people barely have any savings / emergency funds, so asking them to save AND pay extra toward their mortgage is not realistic. Next downside - doing it this way means you can't get your money back (without selling or refinancing). The consequences are obvious. You want the benefits of paying your mortgage early, but have to put up with the risk of not having access to your funds when you need them.

Now look at the HELOC scenario. Upsides - you don't have to wait to save up the money. You take money out of the HELOC and put it on the mortgage. Done. Savings. Next upside - even though you put the money against your mortgage, you essentially still have access to it since it's a revolving credit line. If you need emergency funds they are there for you. Again, there is nothing controversial here, you're essentially doing when you did in the other scenario, you just borrowed against a credit line to do it. Now the one downside - cost. The monthly cost of the HELOC using worst case scenario numbers (your HELOC is 8% interest and you took out $10,000 and then had a brain fart and forgot to do the rest of the strategy) is $66.00/month. If you get a better interest rate and keep your average daily balance lower as the strategy suggests, it's actually more like $20.00-35.00/month. Either way, most people spend at least that much dining out each month, it's a nominal fee.

So, the question is, if someone told you the fee for an investment was $35/month and you could put in $10,000 and get $21,000 back, would you do it? Yes, obviously you would do it. The best part about this strategy is that you just change the way you are banking and don't even have to change the way you spend as long as you have more coming in than going out. You pay off the $10,000 over the course of the year and then you do it again, saving thousands and years on your mortgage. And on top of all this, the next regular mortgage payment (after you skip the 20 payments) is typically $35 lower, anyway, so the strategy literally pays for itself. The strategy works, I'm telling you from personal experience. There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not. The true cost (at least on my loan) is 67% over 30 years. It says the true cost on your mortgage, check it yourself. Or think about it this way. The interest portion of the first 15 years of your mortgage is twice as much as your principal. How on earth is that cheap money? No way I'm sticking to their schedule or using all my emergency funds to pay it off early, so the HELOC strategy is obviously the best way to go. The only possible way you wouldn't want to do this is if you misunderstand it. Thanks.

I have PTSD from this thread. 

Josh - I'm sure you're a great person, but you picked a hell of a thread to jump in on for your first post ever on BP. Side note--I find it curious how many new BP accounts chime in on this thread. 

Unfortunately, your argument is hogwash, poppycock, nonsense, and tomfoolery. It's simply not true. What you're calling HELOC "fees", the rest of us call interest. Trading interest on one debt vehicle (mortgage) for another (HELOC) saves you nothing (also known as zilch, nada, zero, goose-egg) if the interest rates are the same. In your example, you moved interest from 4% loan to an 8% credit line. If you're doing things like that, I think you need to evaluate if you're in the right business.

Please stop perpetuating this myth.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

I'm sure everyone is over this thread now, but I just wanted to say I think it's unfortunate that so few people understand it. They get stuck on interest rates and trying to work out the math, which most people suck at, and then think they are debunking it when they are misunderstanding it.

When you pay extra principal on your mortgage, you skip ahead on the amortization schedule and save on interest. Everyone knows this, it's not controversial. I took some of my own savings and paid it toward my principal to "test" the idea at first and even on my mortgage website it states that I skipped X number of payments and moved my payoff date up by a couple years. Then I checked the amortization schedule and confirmed how many payments I skipped over. When I added up the interest portion of all those skipped payments it came out to $21,000 in savings. Again, nothing controversial here and it was about 100% ROI.

Ok, so to understand this, just compare the two scenarios. You could simply pay extra money toward your principal. The upside to doing it this way - there are no costs involved. Cool. Downsides - you are using your own funds, more than likely eating into your emergency / investing money, and taking time to save the money. That doesn't sound too bad. If you can do it this way, great, but most people barely have any savings / emergency funds, so asking them to save AND pay extra toward their mortgage is not realistic. Next downside - doing it this way means you can't get your money back (without selling or refinancing). The consequences are obvious. You want the benefits of paying your mortgage early, but have to put up with the risk of not having access to your funds when you need them.

Now look at the HELOC scenario. Upsides - you don't have to wait to save up the money. You take money out of the HELOC and put it on the mortgage. Done. Savings. Next upside - even though you put the money against your mortgage, you essentially still have access to it since it's a revolving credit line. If you need emergency funds they are there for you. Again, there is nothing controversial here, you're essentially doing when you did in the other scenario, you just borrowed against a credit line to do it. Now the one downside - cost. The monthly cost of the HELOC using worst case scenario numbers (your HELOC is 8% interest and you took out $10,000 and then had a brain fart and forgot to do the rest of the strategy) is $66.00/month. If you get a better interest rate and keep your average daily balance lower as the strategy suggests, it's actually more like $20.00-35.00/month. Either way, most people spend at least that much dining out each month, it's a nominal fee.

So, the question is, if someone told you the fee for an investment was $35/month and you could put in $10,000 and get $21,000 back, would you do it? Yes, obviously you would do it. The best part about this strategy is that you just change the way you are banking and don't even have to change the way you spend as long as you have more coming in than going out. You pay off the $10,000 over the course of the year and then you do it again, saving thousands and years on your mortgage. And on top of all this, the next regular mortgage payment (after you skip the 20 payments) is typically $35 lower, anyway, so the strategy literally pays for itself. The strategy works, I'm telling you from personal experience. There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not. The true cost (at least on my loan) is 67% over 30 years. It says the true cost on your mortgage, check it yourself. Or think about it this way. The interest portion of the first 15 years of your mortgage is twice as much as your principal. How on earth is that cheap money? No way I'm sticking to their schedule or using all my emergency funds to pay it off early, so the HELOC strategy is obviously the best way to go. The only possible way you wouldn't want to do this is if you misunderstand it. Thanks.

I have PTSD from this thread. 

Josh - I'm sure you're a great person, but you picked a hell of a thread to jump in on for your first post ever on BP. Side note--I find it curious how many new BP accounts chime in on this thread. 

Unfortunately, your argument is hogwash, poppycock, nonsense, and tomfoolery. It's simply not true. What you're calling HELOC "fees", the rest of us call interest. Trading interest on one debt vehicle (mortgage) for another (HELOC) saves you nothing (also known as zilch, nada, zero, goose-egg) if the interest rates are the same. In your example, you moved interest from 4% loan to an 8% credit line. If you're doing things like that, I think you need to evaluate if you're in the right business.

Please stop perpetuating this myth.

Chris, sorry, but the rate is less significant than the total cost of the borrowed money. The ten grand sitting in my mortgage balance costs me $21,000 at this particular time on my loan. I know that for a fact because I can look at my amortization schedule and add up all the payments between my balances before and after my lump sum payment. It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413. Again, there's nothing controversial about this - anyone will tell you that paying extra principal will save you interest. You already know that. I eliminated those payments so the interest will never accrue on my mortgage.

All I'm telling you is that I'm doing it without dipping into my savings / emergency funds and at a cost of about $35/month to carry a balance on my HELOC. If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't, but you might want to reevaluate some things yourself. I do find it interesting, though, that you're so dead sure the strategy is "poppycock" when you clearly haven't tried it. The fact of the matter is it works like a charm and you're missing out because you don't know any better. But that's cool, too. Only trying to help! :)

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

I'm sure everyone is over this thread now, but I just wanted to say I think it's unfortunate that so few people understand it. They get stuck on interest rates and trying to work out the math, which most people suck at, and then think they are debunking it when they are misunderstanding it.

When you pay extra principal on your mortgage, you skip ahead on the amortization schedule and save on interest. Everyone knows this, it's not controversial. I took some of my own savings and paid it toward my principal to "test" the idea at first and even on my mortgage website it states that I skipped X number of payments and moved my payoff date up by a couple years. Then I checked the amortization schedule and confirmed how many payments I skipped over. When I added up the interest portion of all those skipped payments it came out to $21,000 in savings. Again, nothing controversial here and it was about 100% ROI.

Ok, so to understand this, just compare the two scenarios. You could simply pay extra money toward your principal. The upside to doing it this way - there are no costs involved. Cool. Downsides - you are using your own funds, more than likely eating into your emergency / investing money, and taking time to save the money. That doesn't sound too bad. If you can do it this way, great, but most people barely have any savings / emergency funds, so asking them to save AND pay extra toward their mortgage is not realistic. Next downside - doing it this way means you can't get your money back (without selling or refinancing). The consequences are obvious. You want the benefits of paying your mortgage early, but have to put up with the risk of not having access to your funds when you need them.

Now look at the HELOC scenario. Upsides - you don't have to wait to save up the money. You take money out of the HELOC and put it on the mortgage. Done. Savings. Next upside - even though you put the money against your mortgage, you essentially still have access to it since it's a revolving credit line. If you need emergency funds they are there for you. Again, there is nothing controversial here, you're essentially doing when you did in the other scenario, you just borrowed against a credit line to do it. Now the one downside - cost. The monthly cost of the HELOC using worst case scenario numbers (your HELOC is 8% interest and you took out $10,000 and then had a brain fart and forgot to do the rest of the strategy) is $66.00/month. If you get a better interest rate and keep your average daily balance lower as the strategy suggests, it's actually more like $20.00-35.00/month. Either way, most people spend at least that much dining out each month, it's a nominal fee.

So, the question is, if someone told you the fee for an investment was $35/month and you could put in $10,000 and get $21,000 back, would you do it? Yes, obviously you would do it. The best part about this strategy is that you just change the way you are banking and don't even have to change the way you spend as long as you have more coming in than going out. You pay off the $10,000 over the course of the year and then you do it again, saving thousands and years on your mortgage. And on top of all this, the next regular mortgage payment (after you skip the 20 payments) is typically $35 lower, anyway, so the strategy literally pays for itself. The strategy works, I'm telling you from personal experience. There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not. The true cost (at least on my loan) is 67% over 30 years. It says the true cost on your mortgage, check it yourself. Or think about it this way. The interest portion of the first 15 years of your mortgage is twice as much as your principal. How on earth is that cheap money? No way I'm sticking to their schedule or using all my emergency funds to pay it off early, so the HELOC strategy is obviously the best way to go. The only possible way you wouldn't want to do this is if you misunderstand it. Thanks.

I have PTSD from this thread. 

Josh - I'm sure you're a great person, but you picked a hell of a thread to jump in on for your first post ever on BP. Side note--I find it curious how many new BP accounts chime in on this thread. 

Unfortunately, your argument is hogwash, poppycock, nonsense, and tomfoolery. It's simply not true. What you're calling HELOC "fees", the rest of us call interest. Trading interest on one debt vehicle (mortgage) for another (HELOC) saves you nothing (also known as zilch, nada, zero, goose-egg) if the interest rates are the same. In your example, you moved interest from 4% loan to an 8% credit line. If you're doing things like that, I think you need to evaluate if you're in the right business.

Please stop perpetuating this myth.

Chris, sorry, but the rate is less significant than the total cost of the borrowed money. The ten grand sitting in my mortgage balance costs me $21,000 at this particular time on my loan. I know that for a fact because I can look at my amortization schedule and add up all the payments between my balances before and after my lump sum payment. It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413. Again, there's nothing controversial about this - anyone will tell you that paying extra principal will save you interest. You already know that. I eliminated those payments so the interest will never accrue on my mortgage.

All I'm telling you is that I'm doing it without dipping into my savings / emergency funds and at a cost of about $35/month to carry a balance on my HELOC. If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't, but you might want to reevaluate some things yourself. I do find it interesting, though, that you're so dead sure the strategy is "poppycock" when you clearly haven't tried it. The fact of the matter is it works like a charm and you're missing out because you don't know any better. But that's cool, too. Only trying to help! :)

What you're suggesting violates the distributive property of multiplication. You're completely neglecting to factor in the principal and interest you're now paying on the HELOC.

I worked as an accounting policy manager for years at a company with hundreds of billions in amortizations. I've audited thousands of amortization accounts and I've also disproven every variant of this theory on Google sheets posted earlier in this thread. Trust me, I know better.

Re-read this thread in its entirety.

[Nick Moriwaki]

@Joshua S. - That is a great explanation you put together.  

One major point of clarification, for those who fixate on certain details and immediately disregard the rest of the strategy. The dollar amount you put down the monthly cost for borrowing the $10,000 assumes you pay it off. This is a major detail that I believe is the core misunderstanding of how the strategy works. You are still paying your mortgage and any additional money should be going towards paying down the balance of the line of credit. Many people have blinders towards the fact that you are "paying" off your HELOC, when a better way to look at it is simply re-allocating your money. Instead of your excess income sitting in a checking/savings account earning you 0.00X%, you are letting it sit in your HELOC until it is needed, reducing the amount you are charged in interest in the process. If you don't do this, and instead would rather see your checking account increase rather than your HELOC decrease, then you are going to be paying the interest on HELOC ($66 in your example) forever, rendering the strategy ineffective.

Not trying to knock your explanation, but just wanted to clarify since you jumped from from borrowing the money to paying it off and only quoted the $35-ish/month fee for the borrowed money.  

[Chris May]

Originally posted by @Nick Moriwaki:

@Joshua S. - That is a great explanation you put together.  

One major point of clarification, for those who fixate on certain details and immediately disregard the rest of the strategy. The dollar amount you put down the monthly cost for borrowing the $10,000 assumes you pay it off. This is a major detail that I believe is the core misunderstanding of how the strategy works. You are still paying your mortgage and any additional money should be going towards paying down the balance of the line of credit. Many people have blinders towards the fact that you are "paying" off your HELOC, when a better way to look at it is simply re-allocating your money. Instead of your excess income sitting in a checking/savings account earning you 0.00X%, you are letting it sit in your HELOC until it is needed, reducing the amount you are charged in interest in the process. If you don't do this, and instead would rather see your checking account increase rather than your HELOC decrease, then you are going to be paying the interest on HELOC ($66 in your example) forever, rendering the strategy ineffective.

Not trying to knock your explanation, but just wanted to clarify since you jumped from from borrowing the money to paying it off and only quoted the $35-ish/month fee for the borrowed money.  

Nick, with all due respect, you're complicating this thread. You keep jumping in with great things you can do with a HELOC and risk-weighted strategies. Those converations are not what this thread is about. This thread is about a mathemarically impossible notion that transferring mortgage debt to a HELOC magically saves interest over the life of the loan.

I still disagree with many of the points you're making, but for reasons other than what the thread is about. Others, such as risk strategies, are interesting and worth discussing but, again, not what this thread is about.

[Joshua S.]

Originally posted by @Nick Moriwaki:

@Joshua S. - That is a great explanation you put together.  

One major point of clarification, for those who fixate on certain details and immediately disregard the rest of the strategy. The dollar amount you put down the monthly cost for borrowing the $10,000 assumes you pay it off. This is a major detail that I believe is the core misunderstanding of how the strategy works. You are still paying your mortgage and any additional money should be going towards paying down the balance of the line of credit. Many people have blinders towards the fact that you are "paying" off your HELOC, when a better way to look at it is simply re-allocating your money. Instead of your excess income sitting in a checking/savings account earning you 0.00X%, you are letting it sit in your HELOC until it is needed, reducing the amount you are charged in interest in the process. If you don't do this, and instead would rather see your checking account increase rather than your HELOC decrease, then you are going to be paying the interest on HELOC ($66 in your example) forever, rendering the strategy ineffective.

Not trying to knock your explanation, but just wanted to clarify since you jumped from from borrowing the money to paying it off and only quoted the $35-ish/month fee for the borrowed money.  

No, that's exactly right. I guess I neglected that because I was A) trying to keep it simple since people don't seem to understand and B) using worst case scenario type numbers to explain that even at the high end you are still saving a ton on mortgage interest. When you let your money sit in a checking account, it's not working for you. When you put it against your HELOC balance, you bring your average daily balance down, which saves you on interest. So, the money that you don't use throughout the month, your surplus serves to bring the balance down, but the money you DO use also brings the balance down temporarily while you are waiting for bills to come in.

In other words, you can start the month at $10,000, have a paycheck come in which takes you down to $7000, then you get some bills and that brings you up to $8000, then you get another paycheck and another bill and so on until you end up at $9000 for the month (because you make $1000 more than you spend each month). Your total balance is still $9000 in terms of what you owe, but maybe your average daily balance was $6000 and that's what you pay interest on. On a 5% HELOC, that's $25.00.

I just can't get my mind around how few people understand this concept. It's so sad that we're trained to think, "If it sounds too good to be true....". Just look at your mortgage statement and it shows the breakdown of interest and principal. If you are paying twice as much to interest as you are to principal and not doing SOMETHING to pay principal down faster, you're stuck on a treadmill. Use your own funds, borrow money from Uncle Morty - whatever. Or do what I'm advocating and pay the cost of one dinner out per month to pay huge chunks toward your mortgage. Maybe part of the problem is I'm with Quicken Loans and they tell you flat out how much money and time you save each time you make an additional principal payment and other lenders don't have this? I don't know. But if you understand that additional principal payments will save you a ton and aren't finding some way to do it, then I don't know what to tell you. The HELOC thing is just a way you can do it without altering your spending or using your emergency funds or anything, just changing the way you're banking and making your money work harder for you.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

I'm sure everyone is over this thread now, but I just wanted to say I think it's unfortunate that so few people understand it. They get stuck on interest rates and trying to work out the math, which most people suck at, and then think they are debunking it when they are misunderstanding it.

When you pay extra principal on your mortgage, you skip ahead on the amortization schedule and save on interest. Everyone knows this, it's not controversial. I took some of my own savings and paid it toward my principal to "test" the idea at first and even on my mortgage website it states that I skipped X number of payments and moved my payoff date up by a couple years. Then I checked the amortization schedule and confirmed how many payments I skipped over. When I added up the interest portion of all those skipped payments it came out to $21,000 in savings. Again, nothing controversial here and it was about 100% ROI.

Ok, so to understand this, just compare the two scenarios. You could simply pay extra money toward your principal. The upside to doing it this way - there are no costs involved. Cool. Downsides - you are using your own funds, more than likely eating into your emergency / investing money, and taking time to save the money. That doesn't sound too bad. If you can do it this way, great, but most people barely have any savings / emergency funds, so asking them to save AND pay extra toward their mortgage is not realistic. Next downside - doing it this way means you can't get your money back (without selling or refinancing). The consequences are obvious. You want the benefits of paying your mortgage early, but have to put up with the risk of not having access to your funds when you need them.

Now look at the HELOC scenario. Upsides - you don't have to wait to save up the money. You take money out of the HELOC and put it on the mortgage. Done. Savings. Next upside - even though you put the money against your mortgage, you essentially still have access to it since it's a revolving credit line. If you need emergency funds they are there for you. Again, there is nothing controversial here, you're essentially doing when you did in the other scenario, you just borrowed against a credit line to do it. Now the one downside - cost. The monthly cost of the HELOC using worst case scenario numbers (your HELOC is 8% interest and you took out $10,000 and then had a brain fart and forgot to do the rest of the strategy) is $66.00/month. If you get a better interest rate and keep your average daily balance lower as the strategy suggests, it's actually more like $20.00-35.00/month. Either way, most people spend at least that much dining out each month, it's a nominal fee.

So, the question is, if someone told you the fee for an investment was $35/month and you could put in $10,000 and get $21,000 back, would you do it? Yes, obviously you would do it. The best part about this strategy is that you just change the way you are banking and don't even have to change the way you spend as long as you have more coming in than going out. You pay off the $10,000 over the course of the year and then you do it again, saving thousands and years on your mortgage. And on top of all this, the next regular mortgage payment (after you skip the 20 payments) is typically $35 lower, anyway, so the strategy literally pays for itself. The strategy works, I'm telling you from personal experience. There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not. The true cost (at least on my loan) is 67% over 30 years. It says the true cost on your mortgage, check it yourself. Or think about it this way. The interest portion of the first 15 years of your mortgage is twice as much as your principal. How on earth is that cheap money? No way I'm sticking to their schedule or using all my emergency funds to pay it off early, so the HELOC strategy is obviously the best way to go. The only possible way you wouldn't want to do this is if you misunderstand it. Thanks.

I have PTSD from this thread. 

Josh - I'm sure you're a great person, but you picked a hell of a thread to jump in on for your first post ever on BP. Side note--I find it curious how many new BP accounts chime in on this thread. 

Unfortunately, your argument is hogwash, poppycock, nonsense, and tomfoolery. It's simply not true. What you're calling HELOC "fees", the rest of us call interest. Trading interest on one debt vehicle (mortgage) for another (HELOC) saves you nothing (also known as zilch, nada, zero, goose-egg) if the interest rates are the same. In your example, you moved interest from 4% loan to an 8% credit line. If you're doing things like that, I think you need to evaluate if you're in the right business.

Please stop perpetuating this myth.

Chris, sorry, but the rate is less significant than the total cost of the borrowed money. The ten grand sitting in my mortgage balance costs me $21,000 at this particular time on my loan. I know that for a fact because I can look at my amortization schedule and add up all the payments between my balances before and after my lump sum payment. It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413. Again, there's nothing controversial about this - anyone will tell you that paying extra principal will save you interest. You already know that. I eliminated those payments so the interest will never accrue on my mortgage.

All I'm telling you is that I'm doing it without dipping into my savings / emergency funds and at a cost of about $35/month to carry a balance on my HELOC. If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't, but you might want to reevaluate some things yourself. I do find it interesting, though, that you're so dead sure the strategy is "poppycock" when you clearly haven't tried it. The fact of the matter is it works like a charm and you're missing out because you don't know any better. But that's cool, too. Only trying to help! :)

What you're suggesting violates the distributive property of multiplication. You're completely neglecting to factor in the principal and interest you're now paying on the HELOC.

I worked as an accounting policy manager for years at a company with hundreds of billions in amortizations. I've audited thousands of amortization accounts and I've also disproven every variant of this theory on Google sheets posted earlier in this thread. Trust me, I know better.

Re-read this thread in its entirety.

This is exactly why you're not getting it, because it's too simple. You remember when Dustin Hoffman didn't know how much a candy bar costs, but could count the toothpicks? That's what you're doing right now. So, let's keep it simple. Which part do you disagree with specifically? The part where paying large chunks toward your principal helps you save on mortgage interest or the part where it cost so little to do so using this strategy? Because so far you're saying it's impossible and poppycock, but haven't actually refuted anything I've said specifically so I'm having trouble grasping what you actually disagree with.

[Jeremy Z.]

@Joshua S.

"It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413."

 You didn't skip 23 payments, you reallocated your payments to a HELOC, or you reallocated some money in savings that you were then not able to use elsewhere. You didn't get to magically skip out on payments.

Then you went on to say... "If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't"

That is a gross misrepresentation of what your supposed strategy does. Just flat out wrong.

[Joshua S.]

Originally posted by @Jeremy Z.:

@Joshua S.

"It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413."

 You didn't skip 23 payments, you reallocated your payments to a HELOC, or you reallocated some money in savings that you were then not able to use elsewhere. You didn't get to magically skip out on payments.

Then you went on to say... "If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't"

That is a gross misrepresentation of what your supposed strategy does. Just flat out wrong.

Nope, you literally skip the interest payments. Look at your amortization table. It shows the break down of principal and interest for each payment on the schedule. The interest is calculated daily on your balance - in my case around $31/day or $931/month. When I pay principal ahead of time, I move up to that spot in the schedule where my new balance is, which literally - "MAGICALLY", if you like that word - lets you skip out on paying that interest. Where else would the interest savings come from when you pay additional principal? 

In other words, when pretty much anyone including my mom will tell you that if you pay additional principal it will save you on interest, how do you think that's taking place if you're not skipping over those interest payments? 

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

"It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413."

 You didn't skip 23 payments, you reallocated your payments to a HELOC, or you reallocated some money in savings that you were then not able to use elsewhere. You didn't get to magically skip out on payments.

Then you went on to say... "If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't"

That is a gross misrepresentation of what your supposed strategy does. Just flat out wrong.

Nope, you literally skip the interest payments. Look at your amortization table. It shows the break down of principal and interest for each payment on the schedule. The interest is calculated daily on your balance - in my case around $31/day or $931/month. When I pay principal ahead of time, I move up to that spot in the schedule where my new balance is, which literally - "MAGICALLY", if you like that word - lets you skip out on paying that interest. Where else would the interest savings come from when you pay additional principal? 

In other words, when pretty much anyone including my mom will tell you that if you pay additional principal it will save you on interest, how do you think that's taking place if you're not skipping over those interest payments? 

You need to do ALL the math, including interest payments on HELOC and opportunity cost of savings that was allocated toward principle paydown.

Why stop at $10,000 toward principle? Why not just pay the whole darn mortgage off and "skip" ALL of the interest payments?

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

I'm sure everyone is over this thread now, but I just wanted to say I think it's unfortunate that so few people understand it. They get stuck on interest rates and trying to work out the math, which most people suck at, and then think they are debunking it when they are misunderstanding it.

When you pay extra principal on your mortgage, you skip ahead on the amortization schedule and save on interest. Everyone knows this, it's not controversial. I took some of my own savings and paid it toward my principal to "test" the idea at first and even on my mortgage website it states that I skipped X number of payments and moved my payoff date up by a couple years. Then I checked the amortization schedule and confirmed how many payments I skipped over. When I added up the interest portion of all those skipped payments it came out to $21,000 in savings. Again, nothing controversial here and it was about 100% ROI.

Ok, so to understand this, just compare the two scenarios. You could simply pay extra money toward your principal. The upside to doing it this way - there are no costs involved. Cool. Downsides - you are using your own funds, more than likely eating into your emergency / investing money, and taking time to save the money. That doesn't sound too bad. If you can do it this way, great, but most people barely have any savings / emergency funds, so asking them to save AND pay extra toward their mortgage is not realistic. Next downside - doing it this way means you can't get your money back (without selling or refinancing). The consequences are obvious. You want the benefits of paying your mortgage early, but have to put up with the risk of not having access to your funds when you need them.

Now look at the HELOC scenario. Upsides - you don't have to wait to save up the money. You take money out of the HELOC and put it on the mortgage. Done. Savings. Next upside - even though you put the money against your mortgage, you essentially still have access to it since it's a revolving credit line. If you need emergency funds they are there for you. Again, there is nothing controversial here, you're essentially doing when you did in the other scenario, you just borrowed against a credit line to do it. Now the one downside - cost. The monthly cost of the HELOC using worst case scenario numbers (your HELOC is 8% interest and you took out $10,000 and then had a brain fart and forgot to do the rest of the strategy) is $66.00/month. If you get a better interest rate and keep your average daily balance lower as the strategy suggests, it's actually more like $20.00-35.00/month. Either way, most people spend at least that much dining out each month, it's a nominal fee.

So, the question is, if someone told you the fee for an investment was $35/month and you could put in $10,000 and get $21,000 back, would you do it? Yes, obviously you would do it. The best part about this strategy is that you just change the way you are banking and don't even have to change the way you spend as long as you have more coming in than going out. You pay off the $10,000 over the course of the year and then you do it again, saving thousands and years on your mortgage. And on top of all this, the next regular mortgage payment (after you skip the 20 payments) is typically $35 lower, anyway, so the strategy literally pays for itself. The strategy works, I'm telling you from personal experience. There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not. The true cost (at least on my loan) is 67% over 30 years. It says the true cost on your mortgage, check it yourself. Or think about it this way. The interest portion of the first 15 years of your mortgage is twice as much as your principal. How on earth is that cheap money? No way I'm sticking to their schedule or using all my emergency funds to pay it off early, so the HELOC strategy is obviously the best way to go. The only possible way you wouldn't want to do this is if you misunderstand it. Thanks.

I have PTSD from this thread. 

Josh - I'm sure you're a great person, but you picked a hell of a thread to jump in on for your first post ever on BP. Side note--I find it curious how many new BP accounts chime in on this thread. 

Unfortunately, your argument is hogwash, poppycock, nonsense, and tomfoolery. It's simply not true. What you're calling HELOC "fees", the rest of us call interest. Trading interest on one debt vehicle (mortgage) for another (HELOC) saves you nothing (also known as zilch, nada, zero, goose-egg) if the interest rates are the same. In your example, you moved interest from 4% loan to an 8% credit line. If you're doing things like that, I think you need to evaluate if you're in the right business.

Please stop perpetuating this myth.

Chris, sorry, but the rate is less significant than the total cost of the borrowed money. The ten grand sitting in my mortgage balance costs me $21,000 at this particular time on my loan. I know that for a fact because I can look at my amortization schedule and add up all the payments between my balances before and after my lump sum payment. It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413. Again, there's nothing controversial about this - anyone will tell you that paying extra principal will save you interest. You already know that. I eliminated those payments so the interest will never accrue on my mortgage.

All I'm telling you is that I'm doing it without dipping into my savings / emergency funds and at a cost of about $35/month to carry a balance on my HELOC. If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't, but you might want to reevaluate some things yourself. I do find it interesting, though, that you're so dead sure the strategy is "poppycock" when you clearly haven't tried it. The fact of the matter is it works like a charm and you're missing out because you don't know any better. But that's cool, too. Only trying to help! :)

What you're suggesting violates the distributive property of multiplication. You're completely neglecting to factor in the principal and interest you're now paying on the HELOC.

I worked as an accounting policy manager for years at a company with hundreds of billions in amortizations. I've audited thousands of amortization accounts and I've also disproven every variant of this theory on Google sheets posted earlier in this thread. Trust me, I know better.

Re-read this thread in its entirety.

This is exactly why you're not getting it, because it's too simple. You remember when Dustin Hoffman didn't know how much a candy bar costs, but could count the toothpicks? That's what you're doing right now. So, let's keep it simple. Which part do you disagree with specifically? The part where paying large chunks toward your principal helps you save on mortgage interest or the part where it cost so little to do so using this strategy? Because so far you're saying it's impossible and poppycock, but haven't actually refuted anything I've said specifically so I'm having trouble grasping what you actually disagree with.

I find it a little arrogant that you're jumping into this thread 3 years late assuming I don't "get it". We've also debunked the variant of this theory that you're talking about currently--which is that taking advantage of the daily average interest calculation will result in material savings. I modeled it out over the life of the loan, making regular large payments from a HELOC to a mortgage. I will concede one thing: this is the one variant of this scheme that doesn't violate principles of algebra. However, the savings are laughably small. In our example, the savings was $300 over several decades.

So let's do this again: 200k mortgage with 5% interest, and a HELOC with 5% interest.

Mortgage payment is 1,703.64.

Scenario 1:

Month 1: Last day of month I pay 10,000 from my HELOC to my mortgage--which doesn't impact my balance for month 1. I pay my regular mortgage payment: $240.31 principal, $833.33 interest.

Month 2:

HELOC starts accruing interest. 1st of month my $3000 paycheck goes to HELOC. I spend $1,500 on the 15th, of the month. Daily average balance is 7,750. Ending balance is $8,500. Interest: 35.42, Principal: 1,500 (10,000 - 8,500).

Mortgage payment (balance=189,759.69): 1,703.64. 282.98 principal, 790.67 interest.

Total for 2 months: Principal: $2,023, Interest: 1659.42

Scenario 2:

Month 1: Last day of month I pay 1,500 principal payment (the amount from the month 2 HELOC in scenario 1) from my savings account towards mortgage--which doesn't impact my balance for month 1. I pay my regular mortgage payment: $240.31 principal, $833.33 interest. Total principal paid for month is 1740.31.

Month 2:

Mortgage payment (balance=198,259.69): 1,703.64. 282.98 principal, 790.67 interest.

Total for 2 months: Principal: $1,987.87, Interest: 1,659.42

Notice that the interest payments are exactly the same in the two scenarios.

Now, you'll say "but what about the difference if principal payoff"? If you run this through the life cycle of the loan, this difference washes out because you're really just gaming paying off principal at the beginning vs end of period. Over the life of the loan, the savings is negligible. You accomplish basically nothing by using a HELOC to payoff a mortgage. If you don't do the "use your HELOC as a savings account" strategy, there is NO DIFFERENCE.

[Gary Floring]

Chris May, if you will bear with me as a newbie....

My understanding of what Joshua Smith is saying is this:

If he takes $10K from his heloc and applies it to his primary mortgage, he immediately skips past approx. 23 payments on his amortization schedule. You agree with this first point, correct?

Since the largest portion of those 23 payments are interest, Joshua says he skipped past  approx. $21K in interest that he would have paid had he not applied the $10K. You're OK with this second point, right?

Joshua says he can pay back the $10K borrowed from the HELOC by placing a monthly income of $3K into it (reducing its balance in the first cycle to $7K), and then taking out all monthly expenses of $2K (raising the balance to $9K) in the first cycle. As long as the income exceeds expenses by $1K, this leaves a "surplus" of $1K each cycle. In effect, this $1K each month represents the "principle" that pays back the HELOC in approx. ten months (10 mo. X $1K = $10K). If you have any problems with this HELOC pay-back arithmetic, please explain where the error is (from a calculation point of view). If not, then....

The last point Joshua makes is that the total cost in HELOC interest paid during these ten months of paydownaverages $35 per month, or $350 in ten months. Are you OK with that calculation?

Bottom line: Joshua says that he avoided over $21K in interests payments on his primary mortgage for the cost of $350 in interest paid on his HELOC over a period of ten months.

Chris, please show everyone where the above scenarios and/or simple arithmetic examples above are wrong. 

[Chris May]

Originally posted by @Gary Floring:

Chris May, if you will bear with me as a newbie....

My understanding of what Joshua Smith is saying is this:

If he takes $10K from his heloc and applies it to his primary mortgage, he immediately skips past approx. 23 payments on his amortization schedule. You agree with this first point, correct?

Since the largest portion of those 23 payments are interest, Joshua says he skipped past  approx. $21K in interest that he would have paid had he not applied the $10K. You're OK with this second point, right?

Joshua says he can pay back the $10K borrowed from the HELOC by placing a monthly income of $3K into it (reducing its balance in the first cycle to $7K), and then taking out all monthly expenses of $2K (raising the balance to $9K) in the first cycle. As long as the income exceeds expenses by $1K, this leaves a "surplus" of $1K each cycle. In effect, this $1K each month represents the "principle" that pays back the HELOC in approx. ten months (10 mo. X $1K = $10K). If you have any problems with this HELOC pay-back arithmetic, please explain where the error is (from a calculation point of view). If not, then....

The last point Joshua makes is that the total cost in HELOC interest paid during these ten months of paydownaverages $35 per month, or $350 in ten months. Are you OK with that calculation?

Bottom line: Joshua says that he avoided over $21K in interests payments on his primary mortgage for the cost of $350 in interest paid on his HELOC over a period of ten months.

Chris, please show everyone where the above scenarios and/or simple arithmetic examples above are wrong. 

 Did you look at my example immediately preceding your post? I don't disagree that many years will be shaved off the mortgage repayment. My disagreement is the WHY.

In my example above, you're effectively paying $1500 extra principal every month AND incurring ~$30 interest. So he's paying his normal mortgage payment of $1703 plus an additional $1580. Obviously the loan gets paid off faster doing it that way. The HELOC has nothing to do with it though.

Just pay an extra $1580 to the mortgage every month. Same thing.

That was the original question in this thread. 

[Mike V.]

I love seeing the passion in this but it’s mind blowing that this is still even being discussed. 

It is entertaining seeing both sides argue that the ‘math’ is on their side... 

But,  @Chris May is correct. 

[Nick Moriwaki]

@Chris May - What are you referring to when you say "risk weighted strategies"? I was merely adding onto the explanation that Josh provided. I felt that a key part of the strategy revolves around paying off the HELOC with all your funds. Which leads me to my next question - what do you mean "not what this thread is about"? I admit I haven't refreshed my memory with everything that was posted, but I went to the initial post which states:

"I recently came across a new strategy that I don't quite understand and it sounds too good to be true. The principal is simple. Use your heloc to pay your mortgage and funnel all your funds in and out of it like a checking account. The interest updates daily so you can pay down principal balance much faster than on a traditional mortgage. With a decreasing principal balance the payments go down each month as you pay it off. Plus you can get rid of other payments by funneling them into your account as well.

Has anyone else heard of this? Or has anyone used this successfully?"

The initial question references the part of the strategy that I was clarifying almost verbatim ("funnel all your funds in and out of it like a checking account").

As I said, this seems to be the part of the strategy that most people are missing. Yes, if you paid the same amount to a mortgage as you did with a HELOC this would not save you anything. The strategy revolves around putting large sums of money towards the principal of the mortgage and then paying that off with the excess funds monthly. That is, ALL of your excess funds. This is where the HELOC strategy strays from the conventional "pay extra monthly to your mortgage" strategy. The only way for the "pay extra to your mortgage" strategy to keep up is to put all your excess funds into the mortgage, which most people don't do. And, as Josh mentioned, the HELOC strategy provides the flexibility to immediately use the balance paid off in the HELOC, whereas paying extra to your mortgage does not.

A better way to visualize the strategy is to do exactly what @Jeremy Z. said. Swap the entire mortgage balance for a HELOC, dump your savings into it, then take every paycheck and dump that into the HELOC. Yes, you would see zeroes in your checking and savings, but you would ultimately pay a significant amount less money towards interest over the long run. And for those who didn't read my recent post - I know this is "paying" extra, but it's more like re-allocating your funds since it is readily available to be used without needing to refinance.

So to expand on your example - imagine you had a bank account of $50K along with your $200K mortgage and 5% interest rate. Now convert that to a 200K HELOC at 5% that you dump your 50K savings into, dropping it to 150K at 5%. Then run that balance to 0 while you pay the $3000 a month (minus interest) towards that balance. The difference in interest paid is not so insignificant. I'll dust off my old spreadsheet that I use for these comparisons and run the exact numbers tomorrow.

[Joe Splitrock]

@Gary Floring it is incorrect to say that @Joshua S. "skips past approx. 23 payments". Interest on a HELOC and interest on a mortgage is accrued the same way, so all he is doing is transferring debt from a mortgage to a HELOC. The "skipping payment" idea is a slight of hand that guru on Youtube use to trick people who don't understand how the math works.

You never skip payments. When you pay extra principal on a mortgage, the principal and interest is recalculated. So you don't avoid all the interest in those 23 payments, that is the slight of hand. Those payments gets recalculated so you still pay the majority of the interest on those 23 payments. You are just transferring the debt and interest to your HELOC. You typically pay similar or even more interest on your HELOC than you did on your primary mortgage (depends on interest rate).

The point is simple. The only way to accelerate (pay a loan off sooner) is to make extra principal payments. Whether those payments are directly to a mortgage or flow through a HELOC makes little difference. The interest is avoided because he is paying $1000 a month extra. The HELOC can be completely removed and paying $1000 extra per month has the same mathematical effect as using a HELOC.

Look closely at the math. Several people including @Chris May have modeled this on BiggerPockets and the results are always the same. 

[Joe Splitrock]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

"It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413."

 You didn't skip 23 payments, you reallocated your payments to a HELOC, or you reallocated some money in savings that you were then not able to use elsewhere. You didn't get to magically skip out on payments.

Then you went on to say... "If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't"

That is a gross misrepresentation of what your supposed strategy does. Just flat out wrong.

Nope, you literally skip the interest payments. Look at your amortization table. It shows the break down of principal and interest for each payment on the schedule. The interest is calculated daily on your balance - in my case around $31/day or $931/month. When I pay principal ahead of time, I move up to that spot in the schedule where my new balance is, which literally - "MAGICALLY", if you like that word - lets you skip out on paying that interest. Where else would the interest savings come from when you pay additional principal? 

In other words, when pretty much anyone including my mom will tell you that if you pay additional principal it will save you on interest, how do you think that's taking place if you're not skipping over those interest payments? 

The error in your statement is that you don't "move up to that spot in the schedule where my new balance is". When you make extra principal payments, the loan recalculates your principal/interest split. It is true to say that more money goes towards principal, but it is incorrect to say you skip payments. When pay off principal using a HELOC you are simply moving money from one loan to another. Assuming the interest rate on the mortgage and HELOC were the same, the amount of interest you avoid on the mortgage will equal the amount of interest you pay on the HELOC.

In your example you claim to avoid $931 per month of interest by paying $25 on your HELOC. The problem is you only avoid $25 or that $931 and still pay the other $906. Plus you still pay the $25 on your HELOC, so at the end of the month, you have paid the same amount.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Gary Floring:

Chris May, if you will bear with me as a newbie....

My understanding of what Joshua Smith is saying is this:

If he takes $10K from his heloc and applies it to his primary mortgage, he immediately skips past approx. 23 payments on his amortization schedule. You agree with this first point, correct?

Since the largest portion of those 23 payments are interest, Joshua says he skipped past  approx. $21K in interest that he would have paid had he not applied the $10K. You're OK with this second point, right?

Joshua says he can pay back the $10K borrowed from the HELOC by placing a monthly income of $3K into it (reducing its balance in the first cycle to $7K), and then taking out all monthly expenses of $2K (raising the balance to $9K) in the first cycle. As long as the income exceeds expenses by $1K, this leaves a "surplus" of $1K each cycle. In effect, this $1K each month represents the "principle" that pays back the HELOC in approx. ten months (10 mo. X $1K = $10K). If you have any problems with this HELOC pay-back arithmetic, please explain where the error is (from a calculation point of view). If not, then....

The last point Joshua makes is that the total cost in HELOC interest paid during these ten months of paydownaverages $35 per month, or $350 in ten months. Are you OK with that calculation?

Bottom line: Joshua says that he avoided over $21K in interests payments on his primary mortgage for the cost of $350 in interest paid on his HELOC over a period of ten months.

Chris, please show everyone where the above scenarios and/or simple arithmetic examples above are wrong. 

 Did you look at my example immediately preceding your post? I don't disagree that many years will be shaved off the mortgage repayment. My disagreement is the WHY.

In my example above, you're effectively paying $1500 extra principal every month AND incurring ~$30 interest. So he's paying his normal mortgage payment of $1703 plus an additional $1580. Obviously the loan gets paid off faster doing it that way. The HELOC has nothing to do with it though.

Just pay an extra $1580 to the mortgage every month. Same thing.

That was the original question in this thread. 

Listen, I think I figured out a way to make this Forrest Gump simple to understand. You seem to think that all loan products have interest that is calculated in the same way and all the money is equal, but they don't and it's not. If I just continue making regular payments on my mortgage, it will take me two years to pay off the $10,000 in question. When you make your mortgage payment, a very small amount goes to principal and the bulk of it goes to interest early on in a loan. We all know this. So, when you look at my amortization schedule, that $10,000 IF PAID ON THEIR SCHEDULE costs me two years and $21,000. I would make a payment of $1500 and $948 was going to interest and the rest to principal (an avg of $931/month over that period). The following month it was $947 to interest and so forth until about 15 years or so into the loan when you're paying roughly the same toward both P & I. Again, there's nothing new to understand here, we all know and accept this. Homeowners every day go to sell their house and say, "THAT'S all I have in equity after paying for 10 years?!?" - because of all the interest front loaded on the loan.

Now look at the HELOC payment. When I make a $1500 payment, they don't take $950 of it and put it toward interest and put $550 toward principal. You pay a nominal amount of interest and 99.9% of your payment goes toward reducing your principal. So, the $10,000 on my HELOC IS NOT costing me two years and $21,000 anymore. It's costing me one year and give or take $600 during that time. Those two scenarios are not the same thing just because they both charge interest. It's because there is a massive different between a 30 year amortized, heavily-front-loaded-with-interest mortgage and a revolving line of credit that charges interest once a month based on your ADB. You're looking at a bear and a dog and saying it's the same animal because they both have four legs and fur. You pay interest on both and there's a lien on your house for both, but the similarities end there. One is an evil, high balance, front loaded beast that will eat you alive and when you put your money in, it's gone until you sell or refi. The other one is a tool, a revolving line of credit that you can leverage to pay other debts down quicker and get money out when you need it.

I would tell you to get a HELOC and try it to understand, but you don't even have to look that far to find an example of what I'm talking about. Credit cards charge much higher interest, obviously, but when you make a $1500 payment your balance doesn't drop by $500 and send $1000 to the bank, right? There is interest in your balance if you are carrying it, but it's maybe $40/month, not $900. You make a $1500 payment and your balance drops by $1500. In this strategy, all you're doing is paying down your most aggressive, highest balance account with your least aggressive, lower balance account and then paying the least aggressive account down gradually. You can't just say this is 4% and that is 5-8% so this is good and that is bad. They work out to a different total cost. Look at your mortgage closing docs for your total / true cost. Mine was 67% interest over the 30 years ($213,000 total interest, I believe) and I have a 3.75% fixed! Mortgages are designed to fool you into basically paying for two houses and only getting one. I hope you get it now, because I don't think I can simplify it any more than this.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Gary Floring:

Chris May, if you will bear with me as a newbie....

My understanding of what Joshua Smith is saying is this:

If he takes $10K from his heloc and applies it to his primary mortgage, he immediately skips past approx. 23 payments on his amortization schedule. You agree with this first point, correct?

Since the largest portion of those 23 payments are interest, Joshua says he skipped past  approx. $21K in interest that he would have paid had he not applied the $10K. You're OK with this second point, right?

Joshua says he can pay back the $10K borrowed from the HELOC by placing a monthly income of $3K into it (reducing its balance in the first cycle to $7K), and then taking out all monthly expenses of $2K (raising the balance to $9K) in the first cycle. As long as the income exceeds expenses by $1K, this leaves a "surplus" of $1K each cycle. In effect, this $1K each month represents the "principle" that pays back the HELOC in approx. ten months (10 mo. X $1K = $10K). If you have any problems with this HELOC pay-back arithmetic, please explain where the error is (from a calculation point of view). If not, then....

The last point Joshua makes is that the total cost in HELOC interest paid during these ten months of paydownaverages $35 per month, or $350 in ten months. Are you OK with that calculation?

Bottom line: Joshua says that he avoided over $21K in interests payments on his primary mortgage for the cost of $350 in interest paid on his HELOC over a period of ten months.

Chris, please show everyone where the above scenarios and/or simple arithmetic examples above are wrong. 

 Did you look at my example immediately preceding your post? I don't disagree that many years will be shaved off the mortgage repayment. My disagreement is the WHY.

In my example above, you're effectively paying $1500 extra principal every month AND incurring ~$30 interest. So he's paying his normal mortgage payment of $1703 plus an additional $1580. Obviously the loan gets paid off faster doing it that way. The HELOC has nothing to do with it though.

Just pay an extra $1580 to the mortgage every month. Same thing.

That was the original question in this thread. 

Listen, I think I figured out a way to make this Forrest Gump simple to understand. You seem to think that all loan products have interest that is calculated in the same way and all the money is equal, but they don't and it's not. If I just continue making regular payments on my mortgage, it will take me two years to pay off the $10,000 in question. When you make your mortgage payment, a very small amount goes to principal and the bulk of it goes to interest early on in a loan. We all know this. So, when you look at my amortization schedule, that $10,000 IF PAID ON THEIR SCHEDULE costs me two years and $21,000. I would make a payment of $1500 and $948 was going to interest and the rest to principal (an avg of $931/month over that period). The following month it was $947 to interest and so forth until about 15 years or so into the loan when you're paying roughly the same toward both P & I. Again, there's nothing new to understand here, we all know and accept this. Homeowners every day go to sell their house and say, "THAT'S all I have in equity after paying for 10 years?!?" - because of all the interest front loaded on the loan.

Now look at the HELOC payment. When I make a $1500 payment, they don't take $950 of it and put it toward interest and put $550 toward principal. You pay a nominal amount of interest and 99.9% of your payment goes toward reducing your principal. So, the $10,000 on my HELOC IS NOT costing me two years and $21,000 anymore. It's costing me one year and give or take $600 during that time. Those two scenarios are not the same thing just because they both charge interest. It's because there is a massive different between a 30 year amortized, heavily-front-loaded-with-interest mortgage and a revolving line of credit that charges interest once a month based on your ADB. You're looking at a bear and a dog and saying it's the same animal because they both have four legs and fur. You pay interest on both and there's a lien on your house for both, but the similarities end there. One is an evil, high balance, front loaded beast that will eat you alive and when you put your money in, it's gone until you sell or refi. The other one is a tool, a revolving line of credit that you can leverage to pay other debts down quicker and get money out when you need it.

I would tell you to get a HELOC and try it to understand, but you don't even have to look that far to find an example of what I'm talking about. Credit cards charge much higher interest, obviously, but when you make a $1500 payment your balance doesn't drop by $500 and send $1000 to the bank, right? There is interest in your balance if you are carrying it, but it's maybe $40/month, not $900. You make a $1500 payment and your balance drops by $1500. In this strategy, all you're doing is paying down your most aggressive, highest balance account with your least aggressive, lower balance account and then paying the least aggressive account down gradually. You can't just say this is 4% and that is 5-8% so this is good and that is bad. They work out to a different total cost. Look at your mortgage closing docs for your total / true cost. Mine was 67% interest over the 30 years ($213,000 total interest, I believe) and I have a 3.75% fixed! Mortgages are designed to fool you into basically paying for two houses and only getting one. I hope you get it now, because I don't think I can simplify it any more than this.

[Joshua S.]

Originally posted by @Joe Splitrock:

@Gary Floring it is incorrect to say that @Joshua S. "skips past approx. 23 payments". Interest on a HELOC and interest on a mortgage is accrued the same way, so all he is doing is transferring debt from a mortgage to a HELOC. The "skipping payment" idea is a slight of hand that guru on Youtube use to trick people who don't understand how the math works.

You never skip payments. When you pay extra principal on a mortgage, the principal and interest is recalculated. So you don't avoid all the interest in those 23 payments, that is the slight of hand. Those payments gets recalculated so you still pay the majority of the interest on those 23 payments. You are just transferring the debt and interest to your HELOC. You typically pay similar or even more interest on your HELOC than you did on your primary mortgage (depends on interest rate).

The point is simple. The only way to accelerate (pay a loan off sooner) is to make extra principal payments. Whether those payments are directly to a mortgage or flow through a HELOC makes little difference. The interest is avoided because he is paying $1000 a month extra. The HELOC can be completely removed and paying $1000 extra per month has the same mathematical effect as using a HELOC.

Look closely at the math. Several people including @Chris May have modeled this on BiggerPockets and the results are always the same. 

Sorry, Joe, but this is wrong. You do skip payments, I've done it and I know for a fact that you completely skip them and don't allow them to accrue on your mortgage. Where else do you think the savings would come from if you weren't eliminating interest when you pay principal early? Yes, your interest is recalculated, but you seem to be saying that it goes up to compensate and charge you the interest you were trying to save. That's false, the interest portion of your payment goes down. Make an additional principal payment and then look at your statement the following month to see how your payment changes - the interest portion will go down and principal portion will go up. 

[Joe Splitrock]

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

@Gary Floring it is incorrect to say that @Joshua S. "skips past approx. 23 payments". Interest on a HELOC and interest on a mortgage is accrued the same way, so all he is doing is transferring debt from a mortgage to a HELOC. The "skipping payment" idea is a slight of hand that guru on Youtube use to trick people who don't understand how the math works.

You never skip payments. When you pay extra principal on a mortgage, the principal and interest is recalculated. So you don't avoid all the interest in those 23 payments, that is the slight of hand. Those payments gets recalculated so you still pay the majority of the interest on those 23 payments. You are just transferring the debt and interest to your HELOC. You typically pay similar or even more interest on your HELOC than you did on your primary mortgage (depends on interest rate).

The point is simple. The only way to accelerate (pay a loan off sooner) is to make extra principal payments. Whether those payments are directly to a mortgage or flow through a HELOC makes little difference. The interest is avoided because he is paying $1000 a month extra. The HELOC can be completely removed and paying $1000 extra per month has the same mathematical effect as using a HELOC.

Look closely at the math. Several people including @Chris May have modeled this on BiggerPockets and the results are always the same. 

Sorry, Joe, but this is wrong. You do skip payments, I've done it and I know for a fact that you completely skip them and don't allow them to accrue on your mortgage. Where else do you think the savings would come from if you weren't eliminating interest when you pay principal early? Yes, your interest is recalculated, but you seem to be saying that it goes up to compensate and charge you the interest you were trying to save. That's false, the interest portion of your payment goes down. Make an additional principal payment and then look at your statement the following month to see how your payment changes - the interest portion will go down and principal portion will go up. 

I know for a fact you didn't read this entire thread, which is a shame because it explains all this in detail. As I tried to explain to you, when you pay extra principal on a mortgage, your payment split between principal and interest is recalculated. If you paid off $10,000 of a $100,000 loan, you would reduce your interest only on the $10,000 portion of principal. You would still pay interest on the $90,000 portion. So my point to you is that you don't "skip" interest payments. Your payment is recalculated and the portion that goes to principal increases and portion that goes to interest decreases. But you don't skip the entire interest payment as you claim. The loan is paid off sooner because more money is going to principal and the payment stays the same. 

If you transfer the balance to a HELOC, you will just be paying interest on the HELOC that is equal to the interest you are saving on the mortgage. That is why it essentially becomes a wash.

The reason it gets paid off sooner is you are making much larger monthly payments. 

There is no magical way to avoid interest and the math does matter. If you don't understand the math, you will never understand this.

[Chris May]

Originally posted by @Nick Moriwaki:

@Chris May - What are you referring to when you say "risk weighted strategies"? I was merely adding onto the explanation that Josh provided. I felt that a key part of the strategy revolves around paying off the HELOC with all your funds. Which leads me to my next question - what do you mean "not what this thread is about"? I admit I haven't refreshed my memory with everything that was posted, but I went to the initial post which states:

"I recently came across a new strategy that I don't quite understand and it sounds too good to be true. The principal is simple. Use your heloc to pay your mortgage and funnel all your funds in and out of it like a checking account. The interest updates daily so you can pay down principal balance much faster than on a traditional mortgage. With a decreasing principal balance the payments go down each month as you pay it off. Plus you can get rid of other payments by funneling them into your account as well.

Has anyone else heard of this? Or has anyone used this successfully?"

The initial question references the part of the strategy that I was clarifying almost verbatim ("funnel all your funds in and out of it like a checking account").

As I said, this seems to be the part of the strategy that most people are missing. Yes, if you paid the same amount to a mortgage as you did with a HELOC this would not save you anything. The strategy revolves around putting large sums of money towards the principal of the mortgage and then paying that off with the excess funds monthly. That is, ALL of your excess funds. This is where the HELOC strategy strays from the conventional "pay extra monthly to your mortgage" strategy. The only way for the "pay extra to your mortgage" strategy to keep up is to put all your excess funds into the mortgage, which most people don't do. And, as Josh mentioned, the HELOC strategy provides the flexibility to immediately use the balance paid off in the HELOC, whereas paying extra to your mortgage does not.

A better way to visualize the strategy is to do exactly what @Jeremy Z. said. Swap the entire mortgage balance for a HELOC, dump your savings into it, then take every paycheck and dump that into the HELOC. Yes, you would see zeroes in your checking and savings, but you would ultimately pay a significant amount less money towards interest over the long run. And for those who didn't read my recent post - I know this is "paying" extra, but it's more like re-allocating your funds since it is readily available to be used without needing to refinance.

So to expand on your example - imagine you had a bank account of $50K along with your $200K mortgage and 5% interest rate. Now convert that to a 200K HELOC at 5% that you dump your 50K savings into, dropping it to 150K at 5%. Then run that balance to 0 while you pay the $3000 a month (minus interest) towards that balance. The difference in interest paid is not so insignificant. I'll dust off my old spreadsheet that I use for these comparisons and run the exact numbers tomorrow.

 First.. I posted a revision to my math in the example I gave earlier... lesson learned not to do math while putting a baby to bed. 

That said, I don't know how you can say I don't understand. We've done the math on exactly the scenario you're discussing. The savings comes from gaming the daily average balance calculation. If you start with a $10,000 balance, pay $3,000 on day one, and then spend $1,500 evenly throughout the course of the month, your ending balance is $8,500 and your daily average balance is $7,775.

Assuming the interest rates are the same on your mortgage and HELOC, the amount you save every month is: r * (DAB - EB) [interest rate times (daily average balance minus ending balance)].

.05/12 * (7775 - 8500) = $3.02 each month, $36.25 per year.

Prove it out with a formula like I did or run it through the full life cycle of the loan. It is simply not worth the effort. If your HELOC rate is higher than your mortgage, the numbers are even worse and you can LOSE money.

[Joe Splitrock]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Gary Floring:

Chris May, if you will bear with me as a newbie....

My understanding of what Joshua Smith is saying is this:

If he takes $10K from his heloc and applies it to his primary mortgage, he immediately skips past approx. 23 payments on his amortization schedule. You agree with this first point, correct?

Since the largest portion of those 23 payments are interest, Joshua says he skipped past  approx. $21K in interest that he would have paid had he not applied the $10K. You're OK with this second point, right?

Joshua says he can pay back the $10K borrowed from the HELOC by placing a monthly income of $3K into it (reducing its balance in the first cycle to $7K), and then taking out all monthly expenses of $2K (raising the balance to $9K) in the first cycle. As long as the income exceeds expenses by $1K, this leaves a "surplus" of $1K each cycle. In effect, this $1K each month represents the "principle" that pays back the HELOC in approx. ten months (10 mo. X $1K = $10K). If you have any problems with this HELOC pay-back arithmetic, please explain where the error is (from a calculation point of view). If not, then....

The last point Joshua makes is that the total cost in HELOC interest paid during these ten months of paydownaverages $35 per month, or $350 in ten months. Are you OK with that calculation?

Bottom line: Joshua says that he avoided over $21K in interests payments on his primary mortgage for the cost of $350 in interest paid on his HELOC over a period of ten months.

Chris, please show everyone where the above scenarios and/or simple arithmetic examples above are wrong. 

 Did you look at my example immediately preceding your post? I don't disagree that many years will be shaved off the mortgage repayment. My disagreement is the WHY.

In my example above, you're effectively paying $1500 extra principal every month AND incurring ~$30 interest. So he's paying his normal mortgage payment of $1703 plus an additional $1580. Obviously the loan gets paid off faster doing it that way. The HELOC has nothing to do with it though.

Just pay an extra $1580 to the mortgage every month. Same thing.

That was the original question in this thread. 

Listen, I think I figured out a way to make this Forrest Gump simple to understand. You seem to think that all loan products have interest that is calculated in the same way and all the money is equal, but they don't and it's not. If I just continue making regular payments on my mortgage, it will take me two years to pay off the $10,000 in question. When you make your mortgage payment, a very small amount goes to principal and the bulk of it goes to interest early on in a loan. We all know this. So, when you look at my amortization schedule, that $10,000 IF PAID ON THEIR SCHEDULE costs me two years and $21,000. I would make a payment of $1500 and $948 was going to interest and the rest to principal (an avg of $931/month over that period). The following month it was $947 to interest and so forth until about 15 years or so into the loan when you're paying roughly the same toward both P & I. Again, there's nothing new to understand here, we all know and accept this. Homeowners every day go to sell their house and say, "THAT'S all I have in equity after paying for 10 years?!?" - because of all the interest front loaded on the loan.

Now look at the HELOC payment. When I make a $1500 payment, they don't take $950 of it and put it toward interest and put $550 toward principal. You pay a nominal amount of interest and 99.9% of your payment goes toward reducing your principal. So, the $10,000 on my HELOC IS NOT costing me two years and $21,000 anymore. It's costing me one year and give or take $600 during that time. Those two scenarios are not the same thing just because they both charge interest. It's because there is a massive different between a 30 year amortized, heavily-front-loaded-with-interest mortgage and a revolving line of credit that charges interest once a month based on your ADB. You're looking at a bear and a dog and saying it's the same animal because they both have four legs and fur. You pay interest on both and there's a lien on your house for both, but the similarities end there. One is an evil, high balance, front loaded beast that will eat you alive and when you put your money in, it's gone until you sell or refi. The other one is a tool, a revolving line of credit that you can leverage to pay other debts down quicker and get money out when you need it.

I would tell you to get a HELOC and try it to understand, but you don't even have to look that far to find an example of what I'm talking about. Credit cards charge much higher interest, obviously, but when you make a $1500 payment your balance doesn't drop by $500 and send $1000 to the bank, right? There is interest in your balance if you are carrying it, but it's maybe $40/month, not $900. You make a $1500 payment and your balance drops by $1500. In this strategy, all you're doing is paying down your most aggressive, highest balance account with your least aggressive, lower balance account and then paying the least aggressive account down gradually. You can't just say this is 4% and that is 5-8% so this is good and that is bad. They work out to a different total cost. Look at your mortgage closing docs for your total / true cost. Mine was 67% interest over the 30 years ($213,000 total interest, I believe) and I have a 3.75% fixed! Mortgages are designed to fool you into basically paying for two houses and only getting one. I hope you get it now, because I don't think I can simplify it any more than this.

Mortgages are not front end loaded with interest. The interest is larger on the front end of a loan because the principal balance owed is larger. Mortgages have amortization schedules so the payments are spread across an even term like 30 years. If you pay down principal, the payment doesn't change, so it instead reduces the term (number of months). When you pay down principal, more money goes towards principal each month and less towards interest, because less principal is owed. By comparison most HELOC don't require any principal payment. Usually they just require interest only, so if you paid the minimum HELOC balance, you would never pay off the loan. On a HELOC anything above the interest payment goes towards principal, so the more you pay, the faster it gets paid off, same as a mortgage. Interest is calculated the same on a HELOC, it is just the payment flexibility that is different.

Your example would change drastically if you stretched your $10,000 HELOC out over 30 years of payments. You would pay massive amounts of interest over 30 years but much smaller payments.

Maybe an easier way for you to understand is imagine if you put your entire house balance on a HELOC. Compare that to a 30 year mortgage of the same amount. Then apply the same monthly payment to the HELOC as you would a 30 year fixed mortgage. This is where the math comes in. Both loans would take 30 years to pay off. That is because HELOC interest is calculated the same as mortgage interest. The only difference is "fixed payment" versus "variable payment".

Your credit card example is different because it is compounded interest. That means if you make the minimum payment, you are paying interest on interest. You DO NOT pay interest on interest in a fixed rate mortgage. 

[Joshua S.]

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

"It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413."

 You didn't skip 23 payments, you reallocated your payments to a HELOC, or you reallocated some money in savings that you were then not able to use elsewhere. You didn't get to magically skip out on payments.

Then you went on to say... "If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't"

That is a gross misrepresentation of what your supposed strategy does. Just flat out wrong.

Nope, you literally skip the interest payments. Look at your amortization table. It shows the break down of principal and interest for each payment on the schedule. The interest is calculated daily on your balance - in my case around $31/day or $931/month. When I pay principal ahead of time, I move up to that spot in the schedule where my new balance is, which literally - "MAGICALLY", if you like that word - lets you skip out on paying that interest. Where else would the interest savings come from when you pay additional principal? 

In other words, when pretty much anyone including my mom will tell you that if you pay additional principal it will save you on interest, how do you think that's taking place if you're not skipping over those interest payments? 

The error in your statement is that you don't "move up to that spot in the schedule where my new balance is". When you make extra principal payments, the loan recalculates your principal/interest split. It is true to say that more money goes towards principal, but it is incorrect to say you skip payments. When pay off principal using a HELOC you are simply moving money from one loan to another. Assuming the interest rate on the mortgage and HELOC were the same, the amount of interest you avoid on the mortgage will equal the amount of interest you pay on the HELOC.

In your example you claim to avoid $931 per month of interest by paying $25 on your HELOC. The problem is you only avoid $25 or that $931 and still pay the other $906. Plus you still pay the $25 on your HELOC, so at the end of the month, you have paid the same amount.

This is becoming a waste of time, so I'm just going to summarize and leave you guys to figure it out.

1. Your mortgage is designed to keep you in debt indefinitely and charge you as much as it can up front, so your scheduled payments are loaded with interest and do very little to bring your principal down early on. Again, nothing controversial here.

2. To combat the above, pretty much anyone will tell you to make additional principal payments to bring it down faster and save yourself on interest. Great, another slam dunk we can all agree on.

3. Maybe you have the money lying around and don't mind it being tied up in your mortgage. Throw it in there and save on interest and hope you don't have a family emergency or a job loss or something. Good job and good luck.

4. Maybe you have a rich uncle you can borrow from who wouldn't mind giving you a break if you run into an emergency. You borrow $10,000 from him and throw it on your mortgage. Remember, we all agreed this will save a bunch of interest and time off of your mortgage. Now you pay back $500 at a time and he doesn't even charge you interest. Again, great job and thank God for Uncle Morty.

5. Maybe you don't have a rich uncle or any savings. Or maybe you do have some savings but don't want it all tied up in your mortgage because you want to maintain liquidity. One thing you can do is get a HELOC and take $10,000 and dump it on your mortgage and AGAIN, we've all agreed this will save you a ton of time, interest, and keep your savings intact. But oops, the HELOC isn't Uncle Morty and charges interest. Well, 5% divided by 12 months is .0014666, so even if I carry that whole $10,000 and just pay against it, that's about $41.66/month in interest. Gosh darn it, I'll never get the whole thing paid off with interest charges THAT BIG. That's like $900 in mortgage money or it's like 17 in dog years. Or something.

6. Maybe what you can do is create a plan where you put all of your income and bills against the HELOC to keep your average daily balance lower and save on interest. If you can keep your ADB down around $6000, that 5% comes out to around $25/month. So, depending on which strategy you choose, $42/month on the high end will cost you $504 for the year or $25/month will be $300/year.

Now, look, you PAID to do this strategy vs using your savings or your uncle's money, but you paid a nominal amount of interest in order to keep your savings intact and stay liquid instead of just putting all your discretionary income into the mortgage and praying that you don't have an emergency. Call it liquidity insurance. You paid money to both pay down your mortgage quicker *AND* keep your savings intact in case you need it. You paid money to do both at the same time instead of one or the other. But at $3-$500/year to keep you liquid while you pay your mortgage down and save thousands and years off of your mortgage, holy cow, I'll take that deal every time. Have you ever paid in order to save or make money elsewhere? Do you belong to Costco? Do you own a rental property or a business? Do you own stocks? Ever taken a potential client out to dinner? Have you ever bought a more fuel efficient car? Have you ever made any investment at all, ever? Great, then you understand that you pay money and then have the chance to save or make money. Except this is guaranteed because your mortgage interest is definitely coming if you don't do something about it. <3