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?

[Jeremy Z.]

I was actually in the process of looking up your first post anyway. You argued that a $10,000 HELOC at 8% was cheap money, while a ~$200,000 mortgage at 4% was NOT cheap money, presumably because the monthly interest payment of the larger loan was larger. Here is the part I am referring to:

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.

If something happens and you can't pay off the HELOC quickly you will be paying MORE money over the life of your loans. You were advocating a strategy without being fully clear on the potential downsides (you suddenly can't pay HELOC down quickly, the adjustable rate keeps rising, etc.).

Let's be very clear here... you didn't use $10,000 of cheap money to pay down $10,000 of expensive money. Exactly the opposite. You paid down $10,000 at 4% with a different loan at 8% (or 5%, whatever).

[Chris May]

Unrelated: I suggested to @Mindy Jensen that they do a podcast on the new Money Podcast to cover mortgage payoff strategies and pointed her to this thread. Her exact response was that it's "robbing Peter to pay Paul."

Given how many people have fallen for this scam, I think a primer on various financial products would be beneficial to the BP community. 

[Jeremy Z.]

Originally posted by @Chris May:

Unrelated: I suggested to @Mindy Jensen that they do a podcast on the new Money Podcast to cover mortgage payoff strategies and pointed her to this thread. Her exact response was that it's "robbing Peter to pay Paul."

Given how many people have fallen for this scam, I think a primer on various financial products would be beneficial to the BP community. 

I'm pretty much with you 100% here, but I am sort of curious why you believe it goes to the level of being a scam? Seems like the fees on a HELOC are fairly nominal and I could see how someone might like the flexibility of having access to the money. Is it just that it is pitched as this "money saving" scheme to sell more HELOCs? Is that false sales pitch actually lucrative for them, or is this just a case of the people pitching the idea also being confused/mistaken?

[Chris May]

Originally posted by @Jeremy Z.:

Originally posted by @Chris May:

Unrelated: I suggested to @Mindy Jensen that they do a podcast on the new Money Podcast to cover mortgage payoff strategies and pointed her to this thread. Her exact response was that it's "robbing Peter to pay Paul."

Given how many people have fallen for this scam, I think a primer on various financial products would be beneficial to the BP community. 

I'm pretty much with you 100% here, but I am sort of curious why you believe it goes to the level of being a scam? Seems like the fees on a HELOC are fairly nominal and I could see how someone might like the flexibility of having access to the money. Is it just that it is pitched as this "money saving" scheme to sell more HELOCs? Do that false sales pitch actually lucrative for them, or is this just a case of the people pitching the idea even being confused?

Search Google and Youtube for mortgage acceleration. There are a ton of shady businesses out there selling this as a "system". You pay for their financial literacy seminar, and/or they get you to open new accounts with them so they get origination fees and HELOC maintenance fees.

[Jeremy Z.]

Originally posted by @Chris May:

Originally posted by @Jeremy Z.:

Originally posted by @Chris May:

Unrelated: I suggested to @Mindy Jensen that they do a podcast on the new Money Podcast to cover mortgage payoff strategies and pointed her to this thread. Her exact response was that it's "robbing Peter to pay Paul."

Given how many people have fallen for this scam, I think a primer on various financial products would be beneficial to the BP community. 

I'm pretty much with you 100% here, but I am sort of curious why you believe it goes to the level of being a scam? Seems like the fees on a HELOC are fairly nominal and I could see how someone might like the flexibility of having access to the money. Is it just that it is pitched as this "money saving" scheme to sell more HELOCs? Do that false sales pitch actually lucrative for them, or is this just a case of the people pitching the idea even being confused?

Search Google and Youtube for mortgage acceleration. There are a ton of shady businesses out there selling this as a "system". You pay for their financial literacy seminar, and/or they get you to open new accounts with them so they get origination fees and HELOC maintenance fees.

 Oh yeah, I forgot reading about those "services" that have been mentioned throughout this thread. Paying a fee for advice that boils down to "Pay off your loan really fast!".

Great idea to use this as a Podcast topic.

[Nick Moriwaki]

For those that requested, I have put together a spreadsheet outlining the strategy in the most aggressive form. As some have questioned (I believe sarcastically) - why not just swap out the mortgage for a HELOC? This is actually the most effective way to use the strategy since it allows you to apply all of your money towards the balance.

I've watched the thread unfold and, as I mentioned before, the biggest misunderstanding is that the HELOC strategy is simply saying to use another vehicle (HELOC) to spread out the debt and that you magically pay less. This is not the case. As mentioned multiple times in this thread (including the original post), the system revolves around applying ALL of your money (liquid money included) towards the debt. This is simply not possible with a mortgage, as the amount you pay is not available to use until you decide to refinance. While the available balance in your HELOC may not technically be liquid, it functions as such. I can take whatever money I throw in today and then take that money out tomorrow in the event of an emergency. That is where the strategy diverges from the conventional mortgage payment.

Using some numbers recently thrown around in examples ($200K mortgage, 5% interest, $1703.64 monthly mortgage payment) and filling in some additional information ($50K bank account, $5000 net income, $2000 personal expenses), the numbers run out to a savings of $40K comparing standard mortgage payments to the HELOC strategy I previously mentioned. If you pay an additional $500 to principal, the difference drops to a little over $30K. And if you put your entire cash flow towards the mortgage then you can narrow the gap to $16K. I don't think anyone would argue this is insignificant.

I know everyone is going to fixate on the fact that you are paying more, which is technically true, but it is nowhere near the same as paying more to the mortgage. As mentioned before, what I pay to the HELOC today is completely accessible tomorrow. How long would it take to get your additional payments back from a mortgage? A better way to put it would be that you are re-allocating your money rather than paying it. It is no different than putting all of your monthly cash flow into an investment earning 5%, but instead your cash flow is saving you 5% .

Now that the numbers are out there, is everyone still convinced that the strategy should be discounted?

[Chris May]

Originally posted by @Nick Moriwaki:

For those that requested, I have put together a spreadsheet outlining the strategy in the most aggressive form. As some have questioned (I believe sarcastically) - why not just swap out the mortgage for a HELOC? This is actually the most effective way to use the strategy since it allows you to apply all of your money towards the balance.

I've watched the thread unfold and, as I mentioned before, the biggest misunderstanding is that the HELOC strategy is simply saying to use another vehicle (HELOC) to spread out the debt and that you magically pay less. This is not the case. As mentioned multiple times in this thread (including the original post), the system revolves around applying ALL of your money (liquid money included) towards the debt. This is simply not possible with a mortgage, as the amount you pay is not available to use until you decide to refinance. While the available balance in your HELOC may not technically be liquid, it functions as such. I can take whatever money I throw in today and then take that money out tomorrow in the event of an emergency. That is where the strategy diverges from the conventional mortgage payment.

Using some numbers recently thrown around in examples ($200K mortgage, 5% interest, $1703.64 monthly mortgage payment) and filling in some additional information ($50K bank account, $5000 net income, $2000 personal expenses), the numbers run out to a savings of $40K comparing standard mortgage payments to the HELOC strategy I previously mentioned. If you pay an additional $500 to principal, the difference drops to a little over $30K. And if you put your entire cash flow towards the mortgage then you can narrow the gap to $16K. I don't think anyone would argue this is insignificant.

I know everyone is going to fixate on the fact that you are paying more, which is technically true, but it is nowhere near the same as paying more to the mortgage. As mentioned before, what I pay to the HELOC today is completely accessible tomorrow. How long would it take to get your additional payments back from a mortgage? A better way to put it would be that you are re-allocating your money rather than paying it. It is no different than putting all of your monthly cash flow into an investment earning 5%, but instead your cash flow is saving you 5% .

Now that the numbers are out there, is everyone still convinced that the strategy should be discounted?

 Nick, can you please clarify which situations we're comparing in your spreadsheet? Scenario 1, 2, 3. I'm not understanding what the bank account is doing.

Could you grant permission for us to see the underlying formulas?

Are columns B:F supposed to be a standard mortgage with no additional payment? That's kinda what it looks like, but it's not amortizing correctly. The payment (P+I) is too high for a 30 year loan.

PS Thank you for giving us actual numbers to look at. Let's dig into this.

[Chris May]

Originally posted by @Chris May:

Originally posted by @Nick Moriwaki:

For those that requested, I have put together a spreadsheet outlining the strategy in the most aggressive form. As some have questioned (I believe sarcastically) - why not just swap out the mortgage for a HELOC? This is actually the most effective way to use the strategy since it allows you to apply all of your money towards the balance.

I've watched the thread unfold and, as I mentioned before, the biggest misunderstanding is that the HELOC strategy is simply saying to use another vehicle (HELOC) to spread out the debt and that you magically pay less. This is not the case. As mentioned multiple times in this thread (including the original post), the system revolves around applying ALL of your money (liquid money included) towards the debt. This is simply not possible with a mortgage, as the amount you pay is not available to use until you decide to refinance. While the available balance in your HELOC may not technically be liquid, it functions as such. I can take whatever money I throw in today and then take that money out tomorrow in the event of an emergency. That is where the strategy diverges from the conventional mortgage payment.

Using some numbers recently thrown around in examples ($200K mortgage, 5% interest, $1703.64 monthly mortgage payment) and filling in some additional information ($50K bank account, $5000 net income, $2000 personal expenses), the numbers run out to a savings of $40K comparing standard mortgage payments to the HELOC strategy I previously mentioned. If you pay an additional $500 to principal, the difference drops to a little over $30K. And if you put your entire cash flow towards the mortgage then you can narrow the gap to $16K. I don't think anyone would argue this is insignificant.

I know everyone is going to fixate on the fact that you are paying more, which is technically true, but it is nowhere near the same as paying more to the mortgage. As mentioned before, what I pay to the HELOC today is completely accessible tomorrow. How long would it take to get your additional payments back from a mortgage? A better way to put it would be that you are re-allocating your money rather than paying it. It is no different than putting all of your monthly cash flow into an investment earning 5%, but instead your cash flow is saving you 5% .

Now that the numbers are out there, is everyone still convinced that the strategy should be discounted?

 Nick, can you please clarify which situations we're comparing in your spreadsheet? Scenario 1, 2, 3. I'm not understanding what the bank account is doing.

Could you grant permission for us to see the underlying formulas?

Are columns B:F supposed to be a standard mortgage with no additional payment? That's kinda what it looks like, but it's not amortizing correctly. The payment (P+I) is too high for a 30 year loan.

PS Thank you for giving us actual numbers to look at. Let's dig into this.

 Nevermind. I just realized I can download it.

On first inspection, you're comparing 1) an incorrectly amortizing 200k 30 year mortgage 2) the same incorrectly amortizing 200k 30 year mortgage with an additional $500 per month principal payment 3) 150k HELOC with a combined monthly payment of $3000, which is higher than either 1) or 2).

Looks like you're comparing a 150k loan with $3000 payments to 200k loans with ~$1700 and ~$2300 payments. These appear to be completely unrelated scenarios. Obviously a lower loan balance with almost double the monthly payments incurs significantly less interest.

I'm not understanding what this proves.

[Jeremy Z.]

@Chris May

I believe the difference in the $3,000 paid each month in Nick's example is added to the principal and bank account columns in each scenario. I'm not sure why one scenario is called "Mortgage" and one "Mortgage+additional" when they both appear to have additional going toward principal, just different amounts. The rest is then put in the bank account column. I believe it stems from him using a monthly mortgage payment of $1,703.64 which was used in a previous example. The numbers do appear to check out that way - when you total up all three columns (well, you have to move down a row in the bank account column to see how much was deposited there).

[Ryan Jones]

I've been reading this funny novel for entertainment value. The irony of this is that the guy opposed to paying interest on mortgage debt as if it's a bank scam is the sucker paying more interest by exchanging the low interest mortgage debt with higher interest HELOC debt. If you want to "skip" payments, simply pay off as much mortgage debt as possible which will leave the balance lower. With a lower balance, there is less interest to pay. Doing it the HELOC way is simply paying more interest in exchange for potential flexibility. However, you'd be better off always paying as much as possible directly to the mortgage loan balance. You can still have a HELOC and withdraw in an emergency which seems to be the benefit you want, but paying off much of the mortgage debt via a HELOC all of the time is pointless other than to fill the pockets of the bank, which you seem to be against.

[Jeremy Z.]

@Nick Moriwaki

Your example has a HELOC with a fixed rate equal to the mortgage rate. In your experience, have you found those terms to be typical?

[Jeremy Z.]

@Nick Moriwaki

Your example should include a scenario where you put your $50,000 savings down and start with a mortgage of $150,000, then put the difference of the $3,000 monthly payment entirely toward the mortgage each month. That would be the proper comparison, and the savings is negligible.

I guess you could argue that it's safer to take a HELOC out now, but what are the real odds of not being able to get a HELOC down the road? Also, bear in mind that this conversation was re-initiated by someone claiming that taking out a $10,000 HELOC was saving him $21,000 (even though he didn't have specifics about how quickly he was paying off that HELOC).

[Gary Floring]

Ryan Jones, you said:

"The irony of this is that the guy opposed to paying interest on mortgage debt as if it's a bank scam is the sucker paying more interest by exchanging the low interest mortgage debt with higher interest HELOC debt."

Actually, he seems to be proposing just the opposite. Although his primary mortgage APR is in the single digits, his TOTAL Interest Rate over the life of the loan is 67%. If that is the case, then the interest rate during the first few years of the primary mortgage must actually be well above 67%, since the P&I monthly payment is overwhelmingly interest, not principle.

Therefore, he is using a lump sum from a HELOC that costs approx. $400 per year in interest to pay down a primary mortgage by several years, effectively skipping (never paying) several tens of thousands in interest. The point being is he is paying a service fee (HELOC interest) of a few hundred dollars per year to eliminate tens of thousands in interest on the mortgage that will never have to be paid, due to accelerating the amortization schedule.

How does that equate to "paying more interest by exchanging the low interest mortgage debt with higher interest HELOC debt." ???

[Brent Coombs]

@Joshua S., you wrote: ..."notice you're paying 82% interest on this loan. Ouch."

Sorry, but if the total interest I'm paying over 30 years is 82% of the original amount I borrowed, it's not an "ouch"! I'll take that deal - every time!

Why? Because the properties I've bought have gone up in value between 300% to 1000%+ over the same period of time. And or, if they were pure investment buys rather than primaries, they would have returned similar percentages as net cash flow during the same 30 years!

Low interest debt need not be an enemy! Look again at your link. The interest rate is 4.5% per year (fixed)! Whatever amount you borrow upfront, you only pay 4.5% interest each year (for 30 years in that example). The principal is also paid back over the same period.

Where's the "ouch"? The responsible use of a HELOC will not necessarily lead to paying off your home sooner, or save you anything in interest payments! [Let that sink in]. The question is: What is your opportunity cost if you were to pay off your 30 year loan in 7 years, vs investing those same excess HELOC dollars throughout the same 7 years in other investment properties (or other wise investments), while not accelerating paying off your own home? 

Background: Alan Greenspan's "tap into your home's equity" idea, which many (eg. Michael Moore) largely blame for the last Global Financial Crisis, is still espoused, by you, and me, and generally by BP. Trouble was, leading up to 2007-8, not every Lender or their clients did so responsibly! Key word for 2018 onwards: Do so - responsibly! Cheers...

[Nick Moriwaki]

The spreadsheet represents 2 very common scenarios and compares them with the HELOC strategy

Scenario 1 - Minimum mortgage payment.  All excess cash flow goes into the bank account.

Scenario 2 - Minimum mortgage payment + $X additional payment.  All excess cash flow goes into the bank account.

Scenario 3 - 100% liquid cash and cash flow allocated towards a HELOC with the same balance as the mortgage

Note - I did not provide the mortgage payment.  It was initially provided by Chris in the very beginning.  It was a very specific number so as not to completely change things up I just used it.  It doesn't mean it's wrong - it just represents someone who is partway through paying their mortgage.  I didn't intend it, but this is probably a more realistic scenario given that most people reading this do not have 360 payments remaining on their mortgage.  Either way, it doesn't change the math.

For those wondering about the bank account, it is provided to show that I am not losing track of the money. Money saved in scenarios 1 and 2 go to the bank account, whereas the HELOC strategy allocates the money to paying down the balance of the line of credit. Therefore the bank account doesn't go up. By paying more money than any feasible mortgage paydown strategy (sorry Jeremy, your scenario of copying the HELOC strategy and living with no money just won't work), you pay less interest over the time you are paying it off. This is the same concept as comparing paying the minimum vs paying additional principal. One pays more than the other and the net interest savings is substantial in the long run. We can all agree the latter is true, so why wouldn't the former be as well?

The argument isn't that by paying the same to the HELOC as you did to the mortgage you save money, it's that the HELOC allows you to use all your money without having to calculate just how much you want to allocate to mortgage and how much to put in the bank. Most of us here have bigger aspirations for putting our money towards other investments, which aligns perfectly with the strategy because the money you put in can come right back out when the opportunity knocks. If you evaluate a scenario where you can make more than the percentage you are paying to the HELOC, by all means reallocate that money there. For example, for those that downloaded the spreadsheet, look at month 40. If at that time, an investor you trusted came to you seeking $100K and was offering 8% monthly returns, which scenario could take advantage of this? If you saved your money and only paid the minimum to your mortgage, you would have just enough to lend out, but you would leave yourself with a whopping $558 in your bank account. If you paid extra to your mortgage, well you just flat out don't have enough money. But if you used the HELOC strategy, you could easily write a $100K check that instant and still have a $50K buffer. To me this is a no brainer.

Also, to answer your question about the rate, Hawaii actually has many promotional rates on HELOCs which make the strategy that much more enticing. But the idea was to show that all things being equal, the HELOC strategy does work out. This is obviously oversimplified, but it needs to be to display the concept.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Chris May:

Originally posted by @Gary Floring:

Joshua Smith wrote:

"I paid $10,000 (from his HELOC) and was able to save $21,000 on interest (on his primary mortgage in which he accelerated the amortization schedule by approx. 23 months). The fact that I pay $50/month to my HELOC (interest paid per month = $50 x 10 months = $500).

Does everyone accept the scenario above as arithmetically correct (or feasible)????

 I'm not responding to Josh anymore, but I'll entertain your question. The premise of the argument is flawed.

Mortgage payment stays the same. Now there's an additional $50 per month being paid. Whether he pays that $50 to the HELOC, or adds it to his mortgage payment every month, the result is the same. The combined loans will be paid off on the same day whether he splits the balance between HELOC + mortgage or keeps the full balance on the mortgage. The interest savings and early payoff is the result of paying $50 more every month, regardless of whether it's to a HELOC or directly to a mortgage.

 Another example to drive home the point:

Scenario 1:

200k fixed rate loan. 30 years. 5% interest. Monthly payment is 1,073.64.

Day 1, use a HELOC to pay $99,185 on the mortgage. Now I have a 100,815 mortgage and a 99,185 HELOC. Mortgage will now be paid off in exactly 120 months.

But, I have a 100k HELOC that I have to make payments on. To pay off the HELOC in 120 months I have make a monthly payment of $1,052.01.

My combined payment between the HELOC and mortgage is $2,125.65. HELOC and morgage are both paid off after 120 months (yay early payoff!)

Scenario 2

Same mortgage. No HELOC. Pay $2,125.65 every month. Mortgage is also paid off in 120 months! The HELOC has nothing to do with it. You pay the exact same amount in both scenarios, and pay off the loan in the exact amount of time.

Thank you for proving my point in another way, Chris. You could pay extra principal every month, which would leave most people without any savings or you could do the same thing with the bank's money and maintain liquidity. Glad we could eventually get on the same page, no hard feelings from this end. Have a good one.

You are paying the exact same amount every month whether you use a HELOC or not. You're never using the bank's money. In both scenarios you use 2,125.65 of your own money every month.

Well, we're not really getting anywhere, obviously, but I had a question for those of you that are in the nay column. According to you, using most of your discretionary income to pay down your mortgage faster is the better solution, so is that your personal strategy?

In other words, assuming that you don't want to be on the mortgage treadmill and waste a hundred thousand dollars and 15-20 years (depending on your mortgage terms and level of discretionary income, of course), do you actually employ the strategy of paying extra principal using your own discretionary income? If not, why not?

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

"Proponents of the strategy suggest that you should try to pay it off within a year and then repeat the process."

Ding ding ding! And there is where you save money on interest. Aggressively paying down the loan with CASH, HELOC or no HELOC.

Listen, you guys, this is getting legit stupid now. Please do this for me. Go to the link below. There are already assumptions in the calculator. Please note the total interest with their assumptions is $135,971.07. They have a very standard $165,000 loan at 4.5% fixed 30 year - average mom and pop loan. And btw, also notice you're paying 82% interest on this loan. Ouch.

Now click on where it says "Add Extra Payments" and put 10000 in the middle one where it says "as an extra yearly mortgage payment occurring every" and click "Apply Extra Payments". 

Now scroll up and you'll see the new "Total Interest Paid" is $38,876.13. You can see that you've paid about $100,000 less in interest, correct?

Now click on where it says, "Show Amortization Schedule" and you can see that you've paid off this 30 year loan in 10 years. 

So, here's the grand finale question. If this looks attractive to you - Do you want to put all of your discretionary income into your primary mortgage to save the $100,000 and 20 years? I mean, assuming that you have a surplus of funds at the end of the month, do you want to lock them away in your mortgage to make this happen? Or would you rather use the bank's money to do it and pay about $50/month to maintain access to your liquidity? That's the only question about this scenario. If you want to save time and money on your mortgage (and it's fine if you don't, that's cool) then would you like to tie up your funds to do it or pay a nominal amount of interest on a HELOC to maintain some liquidity? It's that simple.

https://www.bankrate.com/calculators/mortgages/amo...

 I'm well aware of how amortization works. I use an amortization calculator on a regular basis. I have 30-year mortgages and a 15-year mortgage. I run different prepayment scenarios frequently.

We have finally fleshed out that the main benefit you are really arguing for here is flexibility. Be aware that flexibility can be problematic if the HELOC gets frozen due to a job loss, etc. or if the adjustable rate goes up thereby canceling out the savings.

Right, "finally fleshed out" what I've said a dozen times while everyone was busy saying no no no math math math, just swapping debt, etc. I can go back and get my first post for you if you want, but that was the whole point - the difference between putting all of your discretionary income against your mortgage vs using cheap money to do the same thing. Benefits - don't have to save up / can do it right away, still have access to funds since it's revolving, etc.

But, you know.... math math math. Can't be any benefit to something if you don't have a formula that proves it. LOL Glad this is settled. Have a good one.

"Putting all of your discretionary income against your mortgage vs using cheap money to do the same thing."

What does this word salad mean?

Um, clearly I meant, "Chumble spuzz avocado table tennis mortgage interest". You have a PhD in rocket science math, but can't determine words no good? That's toobad.  

[Chris May]

@Nick Moriwaki 

If I ever wrote 1,703, that was an accidental transposition, the payment on a 200k loan is 1,073. Sorry about that. But, it doesn't really change the principle, so we can work with it.

Unfortunately, you didn't do the comparison the that all of us have been discussing. You need to compare a mortgage and a HELOC with the exact same payments made to them. 50k at the beginning, 3k payment every month thereafter.

There's no reason to use a HELOC as a pass through. (I know you say there are other benefits to a HELOC, but let's get to that next). If you end every month with 3k that you can devote to your house, our argument is that paying it to a HELOC or a mortgage is mathematically the same interest calculation.

Are you with me so far? 

[Chris May]

The thing that makes it impossible to intelligently discuss this is that every proponent of this theory has a different concept of why it works. Ironically, very few argue the ONE variant of this theory that actually does save interest (and is what the bankers behind these products are actually selling). It's gaming the daily average balance calculation of your HELOC. But... as we've shown, you save like $3 per month.

[Mike Dymski]

@Joshua S. "...do you actually employ the strategy of paying extra principal using your own discretionary income? If not, why not?"

Option 1 - Pay down debt and get a 5% return on your capital (i.e. the rate on the debt)

Option 2 - Invest your capital and earn 10-20+% return

Many investors prefer Option 1 because they don't like debt.  Many investors prefer Option 2 to maximize the return on their capital.  We all have different goals.

[Mike Dymski]

Originally posted by @Chris May:

The thing that makes it impossible to intelligently discuss this is that every proponent of this theory has a different concept of why it works. Ironically, very few argue the ONE variant of this theory that actually does save interest (and is what the bankers behind these products are actually selling). It's gaming the daily average balance calculation of your HELOC. But... as we've shown, you save like $3 per month.

The membership should debunk the following myths:

1. HELOC interest and amortizing loan interest are calculated differently
2. The HELOC facilitates the acceleration of the mortgage (rather than saving money)
3. If you implement the program for free, it works and you are not getting scammed
4. Admitting that something has worked for reasons other that what you thought is a bad thing to admit
5. Criticizing other members' intellect is an effective form of communication (me included)

[Joshua S.]

Originally posted by @Mike Dymski:

@Joshua S. "...do you actually employ the strategy of paying extra principal using your own discretionary income? If not, why not?"

Option 1 - Pay down debt and get a 5% return on your capital (i.e. the rate on the debt)

Option 2 - Invest your capital and earn 10-20+% return

Many investors prefer Option 1 because they don't like debt.  Many investors prefer Option 2 to maximize the return on their capital.  We all have different goals.

So you're trying to avoid opportunity costs, got it. Work this out with me, then. I made a post about an amortization calculator where I talked about making extra $10,000 principal payments each year and on the loan in their assumptions ($165,000 / 4.5% / 30y Fixed) doing so would save you roughly $100,000 and 20 years off of your mortgage, ie. you are paid off after 10 years. Go and check out the post and step by step instructions if you want to work it out yourself, but this is an accurate summary.

So, you make 10 x $10,000 ($100,000, obviously) payments over ten years and your return is $100,000 that you no longer have to pay to the bank. Obviously, a penny saved is a penny earned, so that's 100% return. How does a 10-20% ROI investment beat that? You're saying that paying down your debt only earns you 5% because that's the rate they stamp on your loan, but that's obviously not the case. It's a bankrate amortization calculator, so I'm sure it's accurate, but check it against another one. If you pay $100,000 of extra principal over ten years your return is $100,000 in interest saved, which is 100%. There's no investment that can compete with that, actually.

PS - I changed the assumptions to $225,000 / 3.75% and some other rates and making an extra $10,000 principal payment each year still results in $100,000 savings - 100% ROI. How could this possibly be confused for 5% ROI?

PPS - I moved up to $315,000 and it took 15 years at $10,000 extra per year, so $150,000 to get the $100,000 savings - 67% ROI. Moved down to $125,000 and it takes 8 years at $10,000 extra per year, $80,000 to get $63,000 savings - 78% ROI. Clearly nothing as paltry as 10-20% and trying to say it's a 5% ROI is ridiculous (no offense, but that's the truth).

[Ryan Jones]

Originally posted by @Gary Floring:

his TOTAL Interest Rate over the life of the loan is 67%. If that is the case, then the interest rate during the first few years of the primary mortgage must actually be well above 67%, since the P&I monthly payment is overwhelmingly interest, not principle. 

The total interest rate over the life of the loan is 67% assuming you stick to the standard fixed monthly payment each month, correct. Meanwhile, each year's interest payment is only on the remaining loan balance remains. If you start a fixed 30-year $200,000 loan balance at 5% interest that you owe the bank, you will pay 5% worth of interest every year whatever the loan balance is that year, so the first year would be $10,000 of interest (about $833 per month in interest). If you immediately pay off your $200,000 mortgage right away, according to what otherwise would have been the typical 30-year payment schedule, you will have saved $186,512 in interest - great job! Unfortunately, you just paid the $200,000 mortgage off with a 5.5% HELOC which typically only require interest payments (meaning technically you never have to pay off the balance); instead, you can just pay monthly interest payments of $916 in perpetuity. Of course, you wouldn't do that and you would want to pay off the actual balance since the interest rate is based on whatever the balance is.

I understand your mindset of jumping up the mortgage pay scale to have the fixed monthly payment go more toward principal. When you immediately pay off $10,000 toward principal of a 5% interest rate mortgage, every year you continue that mortgage - say the full 30 years assuming you made an initial extra payment of $10,000 the first month of the mortgage), you save 5% on that $10,000 ($500) each and every year because you no longer have to pay what would have been $500 interest on that $10,000 loan portion amount x 30 years. So everyone agrees that whatever extra you pay off toward the mortgage loan will save you that interest rate each and every year that you have left and continue to pay that mortgage down, just like if you paid off the entire $200k balance from the get go compared to the traditional 30-year amortization schedule. If you pay it all off and (transfer) it all to the HELOC, you still have the HELOC balance and whatever that HELOC interest payment is. When you pay just $10,000 of the mortgage loan off and (transfer) that $10,000 portion to the HELOC, you still have that HELOC balance and whatever that interest payment is. Yes, assuming you stay in the property and finish that 30-year mortgage all the way, you will have saved the interest on that $10,000 portion each and every year. If you keep it in the HELOC for 30-years, you'll still pay the interest on that portion each and every year anyways. But what you're saying you want to do is more quickly pay down the HELOC in ten months let's say - ok great, you'll save money because you won't be paying interest on that balance. But you could've just paid all of your extra money to the mortgage loan balance in the first place which is the same thing. But you want the benefit of being able to withdraw when you want which increases back the loan balance - ok fine - that will cost you not too much via a higher HELOC interest rate.

[Mike Dymski]

Option 1:

$165,000 x 4.5% / 365 days = $20.34 interest accrues per day when the principal balance is $165,000

$165,000 - $10,000 x 4.5% / 365 days = $19.11 interest accrues per day when the principal balance is $155,000

$20.34 - $19.11 = $1.23 interest saving per day due to one extra $10,000 principal payment

@Joshua S. Do we have common ground so far?

[Joshua S.]

Originally posted by @Joshua S.:

Originally posted by @Mike Dymski:

@Joshua S. "...do you actually employ the strategy of paying extra principal using your own discretionary income? If not, why not?"

Option 1 - Pay down debt and get a 5% return on your capital (i.e. the rate on the debt)

Option 2 - Invest your capital and earn 10-20+% return

Many investors prefer Option 1 because they don't like debt.  Many investors prefer Option 2 to maximize the return on their capital.  We all have different goals.

So you're trying to avoid opportunity costs, got it. Work this out with me, then. I made a post about an amortization calculator where I talked about making extra $10,000 principal payments each year and on the loan in their assumptions ($165,000 / 4.5% / 30y Fixed) doing so would save you roughly $100,000 and 20 years off of your mortgage, ie. you are paid off after 10 years. Go and check out the post and step by step instructions if you want to work it out yourself, but this is an accurate summary.

So, you make 10 x $10,000 ($100,000, obviously) payments over ten years and your return is $100,000 that you no longer have to pay to the bank. Obviously, a penny saved is a penny earned, so that's 100% return. How does a 10-20% ROI investment beat that? You're saying that paying down your debt only earns you 5% because that's the rate they stamp on your loan, but that's obviously not the case. It's a bankrate amortization calculator, so I'm sure it's accurate, but check it against another one. If you pay $100,000 of extra principal over ten years your return is $100,000 in interest saved, which is 100%. There's no investment that can compete with that, actually.

PS - I changed the assumptions to $225,000 / 3.75% and some other rates and making an extra $10,000 principal payment each year still results in $100,000 savings - 100% ROI. How could this possibly be confused for 5% ROI?

PPS - I moved up to $315,000 and it took 15 years at $10,000 extra per year, so $150,000 to get the $100,000 savings - 67% ROI. Moved down to $125,000 and it takes 8 years at $10,000 extra per year, $80,000 to get $63,000 savings - 78% ROI. Clearly nothing as paltry as 10-20% and trying to say it's a 5% ROI is ridiculous (no offense, but that's the truth).

So, the point is - if anyone is man enough to admit they are wrong - the real opportunity cost is missing out on a 60-100% ROI by NOT paying down your mortgage early and piddling around with stocks or other investments. But you know, maybe you don't have an extra $10,000 per year to just plunk on the mortgage. As Nick said, maybe more succinctly than I put it, the benefit of the HELOC strategy is that you don't have to calculate how much you can afford to pay extra toward your principal. And as I've said a million times, you can pay the extra principal, but maintain liquidity instead of having it locked up in your primary mortgage.

Most people will say that they have stocks because they can earn money, but they are liquid. Great, in this strategy you pay your mortgage down early and remain liquid by using a HELOC and get a much higher ROI. That sounds a lot better to me.