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?

[Nick Moriwaki]

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I still think you should be comparing two scenarios where equal payments are being applied toward the debt(s) each month. In your HELOC scenario, $2,000/mo is going toward the debt. However, in your Mortgage+Additional you have $1700/mo going toward debt and $300/mo going into savings, which inflates the "average daily balance" savings from the HELOC.

But overall I won't argue against your scenario. If you have the means and access to financing options to maintain a $50,000 lower balance you will see some significant interest savings. I do think your method has some risks that may or may not be less risky than just putting an extra $50,000 on your mortgage. I really can't judge that since I don't have a full understanding of the HELOC products you have been referring to.

The situation you are describing is quite different than the examples that are being propagated on Youtube, etc. Using your scenario to argue in general terms that the "HELOC approach works" is bound to mislead a lot of folks. Heck, maybe that's how a lot of these sales pitches got started in the first place, from a misunderstanding of a much more specific strategy. You are definitely the exception here. Far too many others are spreading this idea with a fundamental misunderstanding of financial arithmetic. I appreciate that you don't fit into that camp.

Maybe you need a separate post titled "The HELOC Method is Unnecessary, Unless You Meet [These Criteria], Have Access to [These Financing Options] and Don't Mind [These Risks]".

The only problem is that the HELOC model I laid out cannot be replicated with a mortgage. As I mentioned before, the only way to match the balance is to zero your bank account every month - not reasonable. At some point you have to make a risk-based decision on how low your bank account can be while still being comfortable. The more you keep in the bank account, the bigger the gap in the savings between the HELOC and mortgage pay down strategies.

In addition, by keeping the mortgage, you lock away those extra payments. If an opportunity presents itself you need to refinance to get access to that money again. This costs time and money, something you don't give up when you use the HELOC.

The part where you say "If you have the means and access to financing options to maintain a $50,000 lower balance you will see some significant interest savings" makes me think you're missing how the strategy works. The financing option is just swapping the mortgage for a HELOC - the LTV should be equal or less than the mortgage (unless the property depreciated). And the $50K is just the bank account in this scenario. That's how you maintain the lower balance, by being able to dump that into the HELOC. There is no magic financing or criteria. Dumping the $50K into the mortgage in this scenario would leave you at risk of missing payments if your electricity bill is a few dollars higher than expected.

The reason I say the situation is in the same category as what others are saying is because the concept is the same. The math may not work out if you can match the HELOC chunks, but as the HELOC chunks increase past what your liquid cash can keep up with, the margin starts to rapidly increase. The scenario I provided was the most extreme case of the latter description where the HELOC chunk is the entire balance.

[Jeremy Z.]

@Nick Moriwaki

"In addition, by keeping the mortgage, you lock away those extra payments. If an opportunity presents itself you need to refinance to get access to that money again."

Or just get a HELOC. I know you have many arguments for why you might not be able to get one when needed or why that might not be ideal, but I'm not so sure that isn't offset by the adjustable rate of your original HELOC, etc.

Others came on here talking about getting a $20,000 HELOC but only using $10,000 for "chunks". Doing that is a recipe for worse financial management for many of the people who fall for this sales pitch, people's with finances that don't even afford for them to see the benefits being pitched anyway.

I can see we are in a stalemate now. I should have recognized that a long time ago.

[Nick Moriwaki]

Originally posted by @Jeremy Z.:

@Nick Moriwaki

"In addition, by keeping the mortgage, you lock away those extra payments. If an opportunity presents itself you need to refinance to get access to that money again."

Or just get a HELOC. I know you have many arguments for why you might not be able to get one when needed or why that might not be ideal, but I'm not so sure that isn't offset by the adjustable rate of your original HELOC, etc.

Others came on here talking about getting a $20,000 HELOC but only using $10,000 for "chunks". Doing that is a recipe for worse financial management for many of the people who fall for this sales pitch, people's with finances that don't even afford for them to see the benefits being pitched anyway.

I can see we are in a stalemate now. I should have recognized that a long time ago.

Exactly, getting a HELOC would be refinancing at that point. Probably at a cost of a few weeks and $1000 - $1500. That's not even getting into potential hurdles in DTI and reserves if you tried to keep up with the first position HELOC strategy by paying additional to your mortgage.

So you're suggesting a potential better option is to wait and get the HELOC later, forgoing the savings until that point, and dealing with the problems listed above?

That's what I'm trying to figure out. Everyone keeps rattling off "simple" counters to the strategy as if the financing just appears or that if you just throw the $50K into the mortgage it functions the same not acknowledging what the resulting scenario looks like. All the while, no one has been able to show that the HELOC strategy I presented isn't simple, or comes with opportunity costs, or anything really. Granted there is an upfront cost (potentially) and has variable interest, but it lowers the balance and keeps your money available. And if you play with the numbers, you'd see that in most scenarios the variable interest doesn't affect the total interest paid as much as you'd think.

I understand that there was a large debate going on regarding a slightly different spin on this strategy, and that the math may prove that strategy to be ineffective, but now that the dust has settled I'm trying to address a variation that I think is a home run and haven't been able to get much response other than that I'm not comparing apples to apples scenarios.   

[Joshua S.]

Originally posted by @Nick Moriwaki:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

"In addition, by keeping the mortgage, you lock away those extra payments. If an opportunity presents itself you need to refinance to get access to that money again."

Or just get a HELOC. I know you have many arguments for why you might not be able to get one when needed or why that might not be ideal, but I'm not so sure that isn't offset by the adjustable rate of your original HELOC, etc.

Others came on here talking about getting a $20,000 HELOC but only using $10,000 for "chunks". Doing that is a recipe for worse financial management for many of the people who fall for this sales pitch, people's with finances that don't even afford for them to see the benefits being pitched anyway.

I can see we are in a stalemate now. I should have recognized that a long time ago.

Exactly, getting a HELOC would be refinancing at that point. Probably at a cost of a few weeks and $1000 - $1500. That's not even getting into potential hurdles in DTI and reserves if you tried to keep up with the first position HELOC strategy by paying additional to your mortgage.

So you're suggesting a potential better option is to wait and get the HELOC later, forgoing the savings until that point, and dealing with the problems listed above?

That's what I'm trying to figure out. Everyone keeps rattling off "simple" counters to the strategy as if the financing just appears or that if you just throw the $50K into the mortgage it functions the same not acknowledging what the resulting scenario looks like. All the while, no one has been able to show that the HELOC strategy I presented isn't simple, or comes with opportunity costs, or anything really. Granted there is an upfront cost (potentially) and has variable interest, but it lowers the balance and keeps your money available. And if you play with the numbers, you'd see that in most scenarios the variable interest doesn't affect the total interest paid as much as you'd think.

I understand that there was a large debate going on regarding a slightly different spin on this strategy, and that the math may prove that strategy to be ineffective, but now that the dust has settled I'm trying to address a variation that I think is a home run and haven't been able to get much response other than that I'm not comparing apples to apples scenarios.   

Nick, there are some differences in our approaches, but only ones that change the risk, not the results in any distinct, tangible ways.

In other words, you replace your mortgage with a HELOC and expose yourself to a variable rate for a larger portion of your debt and a worse position if you are frozen. For those risks, and I guess because of your physical location your $50,000 is at a better teaser rate, you may have slightly better results, but as you said I can also bail at any time. To me, that's a wash, because I'm getting lower risk in exchange for my lower results.

That said, neither you or I can pay down $10,000 or $50,000 or $200,000 any quicker than our income will allow, but this is simply a more efficient way of going about it.

Most people won't accelerate their mortgage at all, which is goofy because it's the only investment where you can get a massive ROI and get out of debt. Those who do want to accelerate, many will save save save and then have an emergency or buy a big screen with it.

In either of our situations you pay a small amount of HELOC interest (which I have argued is more than paid for, but in the worse case scenario is the same as you would pay on the mortgage because all debt is exactly the same no matter what according to the detractors) in order to keep your money comfortably focused on your mortgage. The alternative works out mathematically, but is a mess, which is why no one seems to be doing it. Calculate what your discretionary income at the end of the month (nevermind that throughout the month the money didn't spend any time on your mortgage because you didn't know if you would need it or not), THEN dump the money on your mortgage. If the electric comes back high or the car goes in the shop or your wife needs new bedroom toys because you're spending so much time managing the strategy, now you borrow against the HELOC to pay. You and I get that that's "so much better" than our strategy, but we're really lazy and just want bills and income all coming and going from the same account because we can't be bothered to do it right. But we get that now and we're sorry. I would still rather do it wrong than not at all, so I'm all in. Hopefully this a good summation for everyone, you're just a lazy bastard who's doing it wrong, buddy. Nothing else to worry about. Everyone admits that the strategy works, they just think you should be doing it manually.

[Brent Coombs]

Originally posted by @Joshua S.:

Originally posted by @Nick Moriwaki:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

"In addition, by keeping the mortgage, you lock away those extra payments. If an opportunity presents itself you need to refinance to get access to that money again."

Or just get a HELOC. I know you have many arguments for why you might not be able to get one when needed or why that might not be ideal, but I'm not so sure that isn't offset by the adjustable rate of your original HELOC, etc.

Others came on here talking about getting a $20,000 HELOC but only using $10,000 for "chunks". Doing that is a recipe for worse financial management for many of the people who fall for this sales pitch, people's with finances that don't even afford for them to see the benefits being pitched anyway.

I can see we are in a stalemate now. I should have recognized that a long time ago.

Exactly, getting a HELOC would be refinancing at that point. Probably at a cost of a few weeks and $1000 - $1500. That's not even getting into potential hurdles in DTI and reserves if you tried to keep up with the first position HELOC strategy by paying additional to your mortgage.

So you're suggesting a potential better option is to wait and get the HELOC later, forgoing the savings until that point, and dealing with the problems listed above?

That's what I'm trying to figure out. Everyone keeps rattling off "simple" counters to the strategy as if the financing just appears or that if you just throw the $50K into the mortgage it functions the same not acknowledging what the resulting scenario looks like. All the while, no one has been able to show that the HELOC strategy I presented isn't simple, or comes with opportunity costs, or anything really. Granted there is an upfront cost (potentially) and has variable interest, but it lowers the balance and keeps your money available. And if you play with the numbers, you'd see that in most scenarios the variable interest doesn't affect the total interest paid as much as you'd think.

I understand that there was a large debate going on regarding a slightly different spin on this strategy, and that the math may prove that strategy to be ineffective, but now that the dust has settled I'm trying to address a variation that I think is a home run and haven't been able to get much response other than that I'm not comparing apples to apples scenarios.   

Nick, there are some differences in our approaches, but only ones that change the risk, not the results in any distinct, tangible ways.

In other words, you replace your mortgage with a HELOC and expose yourself to a variable rate for a larger portion of your debt and a worse position if you are frozen. For those risks, and I guess because of your physical location your $50,000 is at a better teaser rate, you may have slightly better results, but as you said I can also bail at any time. To me, that's a wash, because I'm getting lower risk in exchange for my lower results.

That said, neither you or I can pay down $10,000 or $50,000 or $200,000 any quicker than our income will allow, but this is simply a more efficient way of going about it.

Most people won't accelerate their mortgage at all, which is goofy because it's the only investment where you can get a massive ROI and get out of debt. Those who do want to accelerate, many will save save save and then have an emergency or buy a big screen with it.

In either of our situations you pay a small amount of HELOC interest (which I have argued is more than paid for, but in the worse case scenario is the same as you would pay on the mortgage because all debt is exactly the same no matter what according to the detractors) in order to keep your money comfortably focused on your mortgage. The alternative works out mathematically, but is a mess, which is why no one seems to be doing it. Calculate what your discretionary income at the end of the month (nevermind that throughout the month the money didn't spend any time on your mortgage because you didn't know if you would need it or not), THEN dump the money on your mortgage. If the electric comes back high or the car goes in the shop or your wife needs new bedroom toys because you're spending so much time managing the strategy, now you borrow against the HELOC to pay. You and I get that that's "so much better" than our strategy, but we're really lazy and just want bills and income all coming and going from the same account because we can't be bothered to do it right. But we get that now and we're sorry. I would still rather do it wrong than not at all, so I'm all in. Hopefully this a good summation for everyone, you're just a lazy bastard who's doing it wrong, buddy. Nothing else to worry about. Everyone admits that the strategy works, they just think you should be doing it manually.

Joshua, that was quite the unjustified rant. And Nick, you wrote "you save more than just pennies, and you don't forgo the ability to invest in future opportunities". But, I hope you both realize that the whole point of this thread was "pay off mortgage faster", so how does that work if/when you do "invest in future opportunities"? ie. You both want the flexibility of seizing any good investment opportunity, without having to ask your lender's permission. Kudos!

But you must see: then disappears the "faster" pay off! That argument flies out the window!

[Chris May]

@Nick Moriwaki Appreciate you acknowledging that your strategy is fundamentally different than the rest of "pro HELOC strategy" crowd. Their math is fundamentally broken.

The simplified gist of your argument seems to be: "I'm more comfortable throwing every cent I have at a HELOC than a mortgage because I can get it back in an emergency."

I get what you're advocating here. The conversation on this strategy is really a question of pricing risk. If I were to put all of these strategies on a "financial complexity" scale, I would put extra mortgage payments at a 2, the nonsensical HELOC strategy that Josh is promoting at a 6, and yours at a 10. Pricing risk is a very complicated, theoretical exercise with no clear "right" answer.

To really weigh the cost/benefit of your strategy, you'd need to price the risk (cost) of moving from a safe, predictable, low cost mortgage with known interest to an adjustable rate HELOC with unknown interest and a credit line that can be frozen in a downturn.

I'm a very risk averse investor, and the interest savings of your strategy, for me, is not even close to the cost of the risk. I want to be 100% sure, with all my investments, that I won't lose them after spending so much time and effort building my wealth. 

You're saving on interest, but "paying" on risk. There's a reason why stocks return more than bonds, why sub-prime mortgages charge more than prime ones, etc. Everyone in the financial world wants a premium on the risk they're taking, and that's what you're doing--exposing yourself to risk for a greater "return" in the form of reduced interest payments.

I personally don't think you're fully pricing in the risk of your strategy, but that's an individual decision. As others have said, you could still take out a 10-20% HELOC, not carry a balance, and pay down your fixed rate mortgage directly, and have access to cash in an emergency. That seems like a much more balanced risk strategy, but it's impossible to say which is "better."

[Nick Moriwaki]

Originally posted by @Brent Coombs:

Originally posted by @Joshua S.:

Originally posted by @Nick Moriwaki:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

"In addition, by keeping the mortgage, you lock away those extra payments. If an opportunity presents itself you need to refinance to get access to that money again."

Or just get a HELOC. I know you have many arguments for why you might not be able to get one when needed or why that might not be ideal, but I'm not so sure that isn't offset by the adjustable rate of your original HELOC, etc.

Others came on here talking about getting a $20,000 HELOC but only using $10,000 for "chunks". Doing that is a recipe for worse financial management for many of the people who fall for this sales pitch, people's with finances that don't even afford for them to see the benefits being pitched anyway.

I can see we are in a stalemate now. I should have recognized that a long time ago.

Exactly, getting a HELOC would be refinancing at that point. Probably at a cost of a few weeks and $1000 - $1500. That's not even getting into potential hurdles in DTI and reserves if you tried to keep up with the first position HELOC strategy by paying additional to your mortgage.

So you're suggesting a potential better option is to wait and get the HELOC later, forgoing the savings until that point, and dealing with the problems listed above?

That's what I'm trying to figure out. Everyone keeps rattling off "simple" counters to the strategy as if the financing just appears or that if you just throw the $50K into the mortgage it functions the same not acknowledging what the resulting scenario looks like. All the while, no one has been able to show that the HELOC strategy I presented isn't simple, or comes with opportunity costs, or anything really. Granted there is an upfront cost (potentially) and has variable interest, but it lowers the balance and keeps your money available. And if you play with the numbers, you'd see that in most scenarios the variable interest doesn't affect the total interest paid as much as you'd think.

I understand that there was a large debate going on regarding a slightly different spin on this strategy, and that the math may prove that strategy to be ineffective, but now that the dust has settled I'm trying to address a variation that I think is a home run and haven't been able to get much response other than that I'm not comparing apples to apples scenarios.   

Nick, there are some differences in our approaches, but only ones that change the risk, not the results in any distinct, tangible ways.

In other words, you replace your mortgage with a HELOC and expose yourself to a variable rate for a larger portion of your debt and a worse position if you are frozen. For those risks, and I guess because of your physical location your $50,000 is at a better teaser rate, you may have slightly better results, but as you said I can also bail at any time. To me, that's a wash, because I'm getting lower risk in exchange for my lower results.

That said, neither you or I can pay down $10,000 or $50,000 or $200,000 any quicker than our income will allow, but this is simply a more efficient way of going about it.

Most people won't accelerate their mortgage at all, which is goofy because it's the only investment where you can get a massive ROI and get out of debt. Those who do want to accelerate, many will save save save and then have an emergency or buy a big screen with it.

In either of our situations you pay a small amount of HELOC interest (which I have argued is more than paid for, but in the worse case scenario is the same as you would pay on the mortgage because all debt is exactly the same no matter what according to the detractors) in order to keep your money comfortably focused on your mortgage. The alternative works out mathematically, but is a mess, which is why no one seems to be doing it. Calculate what your discretionary income at the end of the month (nevermind that throughout the month the money didn't spend any time on your mortgage because you didn't know if you would need it or not), THEN dump the money on your mortgage. If the electric comes back high or the car goes in the shop or your wife needs new bedroom toys because you're spending so much time managing the strategy, now you borrow against the HELOC to pay. You and I get that that's "so much better" than our strategy, but we're really lazy and just want bills and income all coming and going from the same account because we can't be bothered to do it right. But we get that now and we're sorry. I would still rather do it wrong than not at all, so I'm all in. Hopefully this a good summation for everyone, you're just a lazy bastard who's doing it wrong, buddy. Nothing else to worry about. Everyone admits that the strategy works, they just think you should be doing it manually.

Joshua, that was quite the unjustified rant. And Nick, you wrote "you save more than just pennies, and you don't forgo the ability to invest in future opportunities". But, I hope you both realize that the whole point of this thread was "pay off mortgage faster", so how does that work if/when you do "invest in future opportunities"? ie. You both want the flexibility of seizing any good investment opportunity, without having to ask your lender's permission. Kudos!

But you must see: then disappears the "faster" pay off! That argument flies out the window!

For what I’m talking about faster payoff isn’t the ultimate goal. Paying less interest is.  

One thing to keep in mind regading future investments. Everyone points out that taking money out of the HELOC to fund an investment costs you money (5% interest in this case). But everyone seems to overlook that not putting your money into the mortgage costs you money as well (5% savings not realized). I'd much rather save 5% until the point I need the money than give up 5% waiting for that opportunity to present itself.

[Justin H.]

@Nick Moriwaki - Sorry for being slow on the uptake. There are two ways I can think of that a HELOC could 'replace' a mortgage...You meant one, and I kept thinking thought the other.

So all else (rate) being equal, your HELOC method is a functional direct equivalent to my mortgage + $0 HELOC method, with the exception of the nominal advantage provided by the slightly lower ADB and (contrary to my previous understanding) naturally increasing liquidity over time without having to redo the HELOC. However, all else is rarely equal too. In the real world your method only maintains any advantage as long as you can guarantee the variable HELOC rates stay equal to, or lower than, the mortgage rate...Which again [disclaimer] appears to be the exception more than the rule. Especially if you consider the total monthly payments being discussed anyway, there would also be no reason not to go with a shorter-than 30 year term, thereby qualifying for the lowest fixed interest rate possible.

However, if the variable HELOC rate ends up higher than the fixed mortgage rate, then mortgage + $0 HELOC method would typically gain the upper hand again. And the higher the rates go over the course of the repayment period, the more advantage my method would appear to gain.

Thus it would generally seem that your HELOC method would actually be best suited to periods of falling rates and those looking to take advantage of continually (re)investing the naturally increasing liquidity, while my mortgage + $0 HELOC method would be best suited to periods of rising rates and those simply averse to the added risk of variable rates.

[Jeremy Z.]

@Joshua S.

"because all debt is exactly the same no matter what according to the detractors"

You just keep demonstrating your ignorance about what we are trying to convey to you here. Statement after statement, you keep showing that you still don't have a handle on some core principles of financial math. Your last post was riddled with them, but that one might take the cake.

[Joshua S.]

Originally posted by @Jeremy Z.:

@Joshua S.

"because all debt is exactly the same no matter what according to the detractors"

You just keep demonstrating your ignorance about what we are trying to convey to you here. Statement after statement, you keep showing that you still don't have a handle on some core principles of financial math. Your last post was riddled with them, but that one might take the cake.

My point is that the math everyone keeps stating is deliberately comparing $10,000 on the mortgage and $10,000 on the HELOC as the same exact thing, the "swapping one type of debt for another" argument.

What I'm getting at is that we live in the real world and what matters is the true real world cost of doing business. For example, when I got my first rental I thought it would be amazing and I'd be making tons of money. A bunch of maintenance calls and a couple bad tenants later and I realize it's as much about building equity as it is about cash flow and it's not all peachy in landlord land. I make money, but it's nowhere near what I thought because of the associated costs.

The REAL WORLD COST of $10,000 on the front end of a $200,000 / 4% mortgage is $21,000 in interest and 2.5 years. That's what the calculators say. It's what the amortization table says. There's no disputing it. It's not rocket science brain surgery. It's because as you pay it you are also paying these massive interest charges that get in the way of paying it down quickly. Slapping 4% on it and defending it because that's what the bank told you is ridiculous. Imagine that instead of paying interest, you just pay your principal portion for every payment, but you have to fly it to the lender and personally deliver checks. Your plane tickets are about $660/month. Is that real world enough for you? The interest you pay - whether or not it's 4% annual interest divided by 12 months amortized over 30 years blah blah blah - 1) stops you from paying down your principal and 2) is a non-refundable fee you're paying to the lender to have their money out. The real world cost to pay that money back on their schedule is $21,000 in interest and 2.5 years and that's a waste compared to having more of your money go toward principal where you can get it back later.

The REAL WORLD COST of $10,000 on a HELOC is $370 in interest and 10 months because you are putting all of your income squarely up against it instead of letting your money rot in a checking account. People keep talking about "making payments on a HELOC", but your income is going in every two weeks - what payments? It's like if you have a minimum payment on a credit card and you put a $3000 payment on there. Are they still looking for the $35 from you? You pay off the HELOC in your normal day to day life because all of your money goes toward it. Therefore, when you calculate the real world cost of one vs the other, there's no comparison. It's way better and more efficient to have the money on the HELOC where you can pay it down quickly and painlessly. But you guys are too focused on the math to see the reality of the situation, that's all I was saying. I've been asking you guys to come up with the calculations that account for the difference in speed and ones that address how interest is saved when you prepay principal, but it went from a calculation flood to a calculation drought. I AM interested in the math, but I'm interested in the math as it pertains to the differences between the two approaches, not the strict, regimented, all debts must be paid on the same time table, let's ignore any real world differences math.

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

"because all debt is exactly the same no matter what according to the detractors"

You just keep demonstrating your ignorance about what we are trying to convey to you here. Statement after statement, you keep showing that you still don't have a handle on some core principles of financial math. Your last post was riddled with them, but that one might take the cake.

My point is that the math everyone keeps stating is deliberately comparing $10,000 on the mortgage and $10,000 on the HELOC as the same exact thing, the "swapping one type of debt for another" argument.

What I'm getting at is that we live in the real world and what matters is the true real world cost of doing business. For example, when I got my first rental I thought it would be amazing and I'd be making tons of money. A bunch of maintenance calls and a couple bad tenants later and I realize it's as much about building equity as it is about cash flow and it's not all peachy in landlord land. I make money, but it's nowhere near what I thought because of the associated costs.

The REAL WORLD COST of $10,000 on the front end of a $200,000 / 4% mortgage is $21,000 in interest and 2.5 years. That's what the calculators say. It's what the amortization table says. There's no disputing it. It's not rocket science brain surgery. It's because as you pay it you are also paying these massive interest charges that get in the way of paying it down quickly. Slapping 4% on it and defending it because that's what the bank told you is ridiculous. Imagine that instead of paying interest, you just pay your principal portion for every payment, but you have to fly it to the lender and personally deliver checks. Your plane tickets are about $660/month. Is that real world enough for you? The interest you pay - whether or not it's 4% annual interest divided by 12 months amortized over 30 years blah blah blah - 1) stops you from paying down your principal and 2) is a non-refundable fee you're paying to the lender to have their money out. The real world cost to pay that money back on their schedule is $21,000 in interest and 2.5 years and that's a waste compared to having more of your money go toward principal where you can get it back later.

The REAL WORLD COST of $10,000 on a HELOC is $370 in interest and 10 months because you are putting all of your income squarely up against it instead of letting your money rot in a checking account. People keep talking about "making payments on a HELOC", but your income is going in every two weeks - what payments? It's like if you have a minimum payment on a credit card and you put a $3000 payment on there. Are they still looking for the $35 from you? You pay off the HELOC in your normal day to day life because all of your money goes toward it. Therefore, when you calculate the real world cost of one vs the other, there's no comparison. It's way better and more efficient to have the money on the HELOC where you can pay it down quickly and painlessly. But you guys are too focused on the math to see the reality of the situation, that's all I was saying. I've been asking you guys to come up with the calculations that account for the difference in speed and ones that address how interest is saved when you prepay principal, but it went from a calculation flood to a calculation drought. I AM interested in the math, but I'm interested in the math as it pertains to the differences between the two approaches, not the strict, regimented, all debts must be paid on the same time table, let's ignore any real world differences math.

 This is mind boggling stupid. I know what you think you're saying with your "real world" costs of being a landlord example. Doesn't apply here at all. Please, learn educate yourself on financial math. PLEASE.

Did it not sway you at all that, Mindy, a public face of the internet's biggest real estate investing community and who hosts a podcast about money, said this strategy is "fruitless"?

Burn your money for all I care. All we can do is point out why you're wrong, it's on you to open your mind to it.

[Shiloh Lundahl]

@Chris May, @Jeremy Z., @Joshua S., @Nick Moriwaki The reason you guys are all still argueing about this is because it is not a logical problem/debate it is an emotional problem/debate therefore it can not be resolved logically. You each have different emotional connections to debt and risk and availability of money and how the numbers calculate. And because of your emotional connection to these things you are unlikely to prove your point to one another.

Here are some things worth considering:

1. Maxing out a revolving line of credit, including a HELOC, can negatively effect your credit score.

2. A HELOC rate can adjust higher over time and can also be frozen.

3. Any time you pay more towards the principle of a loan you will pay less in interest over the life of the loan.

4. The average person usually doesn’t have the discipline to pay a lot more toward a conventional loan if they don’t have to. Especially if there is fear that they won’t have access to the money if they really needed it.

5. Reaching smaller benchmarks such as 10k to make large principle pay down chunks can be motivating and encourage one to continue to follow through more than the logical pay down method may motivate. I have a friend who is a fan of this method and has been able to pay down his mortgage, ultimately saving about 50k since last September using this method. 

6. The amount of time that it takes to follow through with this method may not make up for the money saved and interest versus the making higher monthly payments method.

7. A conventional home loan  is some of the cheapest money available. Rather than paying down the mortgage, figuring out how to put your money to its highest and best use may have a substantially greater effect on building wealth than paying down a home mortgage would.

8. There are tax advantages to paying interest on one’s own home and tax advantages of acquiring more rental properties and having depreciation expenses.

9. This debate reminds me of the question, “which diet is best?” The answer is, the one that works for you.”

For some, this method will work wonderful and it will help them meet their emotional needs. For others, saving the money and buying investment properties will help them meet their goals and emotional needs. Again, as I said before, this question/debate does not have a logical answer because it is more emotional about meeting emotional needs than finding the best logical answer.

[Chris May]

Originally posted by @Shiloh Lundahl:

@Chris May, @Jeremy Z., @Joshua S., @Nick Moriwaki The reason you guys are all still argueing about this is because it is not a logical problem/debate it is an emotional problem/debate therefore it can not be resolved logically. You each have different emotional connections to debt and risk and availability of money and how the numbers calculate. And because of your emotional connection to these things you are unlikely to prove your point to one another.

Here are some things worth considering:

1. Maxing out a revolving line of credit, including a HELOC, can negatively effect your credit score.

2. A HELOC rate can adjust higher over time and can also be frozen.

3. Any time you pay more towards the principle of a loan you will pay less in interest over the life of the loan.

4. The average person usually doesn’t have the discipline to pay a lot more toward a conventional loan if they don’t have to. Especially if there is fear that they won’t have access to the money if they really needed it.

5. Reaching smaller benchmarks such as 10k to make large principle pay down chunks can be motivating and encourage one to continue to follow through more than the logical pay down method may motivate. I have a friend who is a fan of this method and has been able to pay down his mortgage, ultimately saving about 50k since last September using this method. 

6. The amount of time that it takes to follow through with this method may not make up for the money saved and interest versus the making higher monthly payments method.

7. A conventional home loan  is some of the cheapest money available. Rather than paying down the mortgage, figuring out how to put your money to its highest and best use may have a substantially greater effect on building wealth than paying down a home mortgage would.

8. There are tax advantages to paying interest on one’s own home and tax advantages of acquiring more rental properties and having depreciation expenses.

9. This debate reminds me of the question, “which diet is best?” The answer is, the one that works for you.”

For some, this method will work wonderful and it will help them meet their emotional needs. For others, saving the money and buying investment properties will help them meet their goals and emotional needs. Again, as I said before, this question/debate does not have a logical answer because it is more emotional about meeting emotional needs than finding the best logical answer.

 Shiloh, respectfully, I think you're misinterpreting the real point of contention in this debate.

Several of us have said there's nothing wrong with using a HELOC as a forced financial discipline tool. It wouldn't help me but everyone is different so whatever helps organize things in your head is fine.

The disagreement is very specific. The people who push this strategy claim that interest is saved merely by moving part of the mortgage principal to a HELOC--which is false. That's the only point I am arguing.

Nick's strategy is different. He uses a HELOC as more of a risk offset (for lack of a better term) and is more comfortable paying more principal to a HELOC. I can't disagree with this method because it's just personal preference.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Shiloh Lundahl:

@Chris May, @Jeremy Z., @Joshua S., @Nick Moriwaki The reason you guys are all still argueing about this is because it is not a logical problem/debate it is an emotional problem/debate therefore it can not be resolved logically. You each have different emotional connections to debt and risk and availability of money and how the numbers calculate. And because of your emotional connection to these things you are unlikely to prove your point to one another.

Here are some things worth considering:

1. Maxing out a revolving line of credit, including a HELOC, can negatively effect your credit score.

2. A HELOC rate can adjust higher over time and can also be frozen.

3. Any time you pay more towards the principle of a loan you will pay less in interest over the life of the loan.

4. The average person usually doesn’t have the discipline to pay a lot more toward a conventional loan if they don’t have to. Especially if there is fear that they won’t have access to the money if they really needed it.

5. Reaching smaller benchmarks such as 10k to make large principle pay down chunks can be motivating and encourage one to continue to follow through more than the logical pay down method may motivate. I have a friend who is a fan of this method and has been able to pay down his mortgage, ultimately saving about 50k since last September using this method. 

6. The amount of time that it takes to follow through with this method may not make up for the money saved and interest versus the making higher monthly payments method.

7. A conventional home loan  is some of the cheapest money available. Rather than paying down the mortgage, figuring out how to put your money to its highest and best use may have a substantially greater effect on building wealth than paying down a home mortgage would.

8. There are tax advantages to paying interest on one’s own home and tax advantages of acquiring more rental properties and having depreciation expenses.

9. This debate reminds me of the question, “which diet is best?” The answer is, the one that works for you.”

For some, this method will work wonderful and it will help them meet their emotional needs. For others, saving the money and buying investment properties will help them meet their goals and emotional needs. Again, as I said before, this question/debate does not have a logical answer because it is more emotional about meeting emotional needs than finding the best logical answer.

 Shiloh, respectfully, I think you're misinterpreting the real point of contention in this debate.

Several of us have said there's nothing wrong with using a HELOC as a forced financial discipline tool. It wouldn't help me but everyone is different so whatever helps organize things in your head is fine.

The disagreement is very specific. The people who push this strategy claim that interest is saved merely by moving part of the mortgage principal to a HELOC--which is false. That's the only point I am arguing.

Nick's strategy is different. He uses a HELOC as more of a risk offset (for lack of a better term) and is more comfortable paying more principal to a HELOC. I can't disagree with this method because it's just personal preference.

Shiloh, I actually think that's a great summation of this argument. Those are some of the points that I've been trying to get across, so I appreciate you articulating them a little better than I do. I'm not taking this very seriously, so I tend to crack jokes and these guys think I'm an idiot partly because of it. I, in turn, make more jokes because 'who cares' and the argument goes on.

Chris, I understand your point that paying 4% in this vehicle and paying 5-8% in that vehicle, with everything else being equal will not net you any savings. I do, I get that. But I've said repeatedly that everything else is not equal and asked you to get away from the idea that you are simply paying on two debts, which you refuse to do. In the case of the HELOC you are using all of your income to depress your ADB and pay off the highest possible amount each month to save interest and only taking it back as you need it, not simply "making a payment". Plus, 99.9% of your money goes toward principal whereas with the mortgage about 33% does. Those are DIFFERENCES that you are not willing to acknowledge or account for so that you can keep saying there are no interest savings with a straight face. You already stated that if someone shortened his commute by switching jobs - oops, by shortening his career - that you wouldn't accept that his results are different because he explained it wrong. That's all that happened here. I had some misconceptions that the interest was calculated differently and stuff like that - I admit some of my statements have been off base, which I understand now. But you are unable to admit that even though I might have explained it wrong there are differences in the real world costs associated with both approaches. I acknowledged and conceded these points AND asked for you to show me (if I am wrong) where the savings comes from when you prepay principal in case there's a better way to explain it and you're "too busy". That's fine, but who is deliberately being obtuse and/or ignorant for the sake of this argument? It's not me. I've learned and changed my views accordingly and owned up to my mistakes and now I'm the one giving the explanation that no one can come up with an answer for besides "you need to learn financial math".

So, for the fifth time, show the math that roughly matches with the calculators and shows how prepaid principal savings are achieved OR if you can't come up with something better that my calculations (that worked out and matched), you can own up to the fact that the "miraculous" savings of this "magical" HELOC approach have nothing to do with math, but simply the differences in HOW you pay off the debt. Or, you know, you can go on denying the very clear differences for the sake of your ego, which is what it seems like you are intent on doing. Either way, it's been fun.

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Shiloh Lundahl:

@Chris May, @Jeremy Z., @Joshua S., @Nick Moriwaki The reason you guys are all still argueing about this is because it is not a logical problem/debate it is an emotional problem/debate therefore it can not be resolved logically. You each have different emotional connections to debt and risk and availability of money and how the numbers calculate. And because of your emotional connection to these things you are unlikely to prove your point to one another.

Here are some things worth considering:

1. Maxing out a revolving line of credit, including a HELOC, can negatively effect your credit score.

2. A HELOC rate can adjust higher over time and can also be frozen.

3. Any time you pay more towards the principle of a loan you will pay less in interest over the life of the loan.

4. The average person usually doesn’t have the discipline to pay a lot more toward a conventional loan if they don’t have to. Especially if there is fear that they won’t have access to the money if they really needed it.

5. Reaching smaller benchmarks such as 10k to make large principle pay down chunks can be motivating and encourage one to continue to follow through more than the logical pay down method may motivate. I have a friend who is a fan of this method and has been able to pay down his mortgage, ultimately saving about 50k since last September using this method. 

6. The amount of time that it takes to follow through with this method may not make up for the money saved and interest versus the making higher monthly payments method.

7. A conventional home loan  is some of the cheapest money available. Rather than paying down the mortgage, figuring out how to put your money to its highest and best use may have a substantially greater effect on building wealth than paying down a home mortgage would.

8. There are tax advantages to paying interest on one’s own home and tax advantages of acquiring more rental properties and having depreciation expenses.

9. This debate reminds me of the question, “which diet is best?” The answer is, the one that works for you.”

For some, this method will work wonderful and it will help them meet their emotional needs. For others, saving the money and buying investment properties will help them meet their goals and emotional needs. Again, as I said before, this question/debate does not have a logical answer because it is more emotional about meeting emotional needs than finding the best logical answer.

 Shiloh, respectfully, I think you're misinterpreting the real point of contention in this debate.

Several of us have said there's nothing wrong with using a HELOC as a forced financial discipline tool. It wouldn't help me but everyone is different so whatever helps organize things in your head is fine.

The disagreement is very specific. The people who push this strategy claim that interest is saved merely by moving part of the mortgage principal to a HELOC--which is false. That's the only point I am arguing.

Nick's strategy is different. He uses a HELOC as more of a risk offset (for lack of a better term) and is more comfortable paying more principal to a HELOC. I can't disagree with this method because it's just personal preference.

Shiloh, I actually think that's a great summation of this argument. Those are some of the points that I've been trying to get across, so I appreciate you articulating them a little better than I do. I'm not taking this very seriously, so I tend to crack jokes and these guys think I'm an idiot partly because of it. I, in turn, make more jokes because 'who cares' and the argument goes on.

Chris, I understand your point that paying 4% in this vehicle and paying 5-8% in that vehicle, with everything else being equal will not net you any savings. I do, I get that. But I've said repeatedly that everything else is not equal and asked you to get away from the idea that you are simply paying on two debts, which you refuse to do. In the case of the HELOC you are using all of your income to depress your ADB and pay off the highest possible amount each month to save interest and only taking it back as you need it, not simply "making a payment". Plus, 99.9% of your money goes toward principal whereas with the mortgage about 33% does. Those are DIFFERENCES that you are not willing to acknowledge or account for so that you can keep saying there are no interest savings with a straight face. You already stated that if someone shortened his commute by switching jobs - oops, by shortening his career - that you wouldn't accept that his results are different because he explained it wrong. That's all that happened here. I had some misconceptions that the interest was calculated differently and stuff like that - I admit some of my statements have been off base, which I understand now. But you are unable to admit that even though I might have explained it wrong there are differences in the real world costs associated with both approaches. I acknowledged and conceded these points AND asked for you to show me (if I am wrong) where the savings comes from when you prepay principal in case there's a better way to explain it and you're "too busy". That's fine, but who is deliberately being obtuse and/or ignorant for the sake of this argument? It's not me. I've learned and changed my views accordingly and owned up to my mistakes and now I'm the one giving the explanation that no one can come up with an answer for besides "you need to learn financial math".

So, for the fifth time, show the math that roughly matches with the calculators and shows how prepaid principal savings are achieved OR if you can't come up with something better that my calculations (that worked out and matched), you can own up to the fact that the "miraculous" savings of this "magical" HELOC approach have nothing to do with math, but simply the differences in HOW you pay off the debt. Or, you know, you can go on denying the very clear differences for the sake of your ego, which is what it seems like you are intent on doing. Either way, it's been fun.

I have said, repeatedly, that Nick's approach is not what this thread was originally about. His approach is different than what you were advocating for the majority of this debate. I've also said, repeatedly, that there's nothing wrong with using a HELOC as a financial discipline tool.

If you're more comfortable paying more every month to a HELOC than a mortgage because you can pull that money back out in an emergency, then have at it. That's a completely different strategy than what the original post was about, and different than what you were advocating the majority of the time.

I will also say, again, that from a risk perspective Nick's (and now apparently your) strategy is a little odd because you can keep a HELOC with zero balance and still have access in an emergency. Seems like an unnecessary step to put money on a HELOC just to pay it off. Not my preffered strategy, but to each their own.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Shiloh Lundahl:

@Chris May, @Jeremy Z., @Joshua S., @Nick Moriwaki The reason you guys are all still argueing about this is because it is not a logical problem/debate it is an emotional problem/debate therefore it can not be resolved logically. You each have different emotional connections to debt and risk and availability of money and how the numbers calculate. And because of your emotional connection to these things you are unlikely to prove your point to one another.

Here are some things worth considering:

1. Maxing out a revolving line of credit, including a HELOC, can negatively effect your credit score.

2. A HELOC rate can adjust higher over time and can also be frozen.

3. Any time you pay more towards the principle of a loan you will pay less in interest over the life of the loan.

4. The average person usually doesn’t have the discipline to pay a lot more toward a conventional loan if they don’t have to. Especially if there is fear that they won’t have access to the money if they really needed it.

5. Reaching smaller benchmarks such as 10k to make large principle pay down chunks can be motivating and encourage one to continue to follow through more than the logical pay down method may motivate. I have a friend who is a fan of this method and has been able to pay down his mortgage, ultimately saving about 50k since last September using this method. 

6. The amount of time that it takes to follow through with this method may not make up for the money saved and interest versus the making higher monthly payments method.

7. A conventional home loan  is some of the cheapest money available. Rather than paying down the mortgage, figuring out how to put your money to its highest and best use may have a substantially greater effect on building wealth than paying down a home mortgage would.

8. There are tax advantages to paying interest on one’s own home and tax advantages of acquiring more rental properties and having depreciation expenses.

9. This debate reminds me of the question, “which diet is best?” The answer is, the one that works for you.”

For some, this method will work wonderful and it will help them meet their emotional needs. For others, saving the money and buying investment properties will help them meet their goals and emotional needs. Again, as I said before, this question/debate does not have a logical answer because it is more emotional about meeting emotional needs than finding the best logical answer.

 Shiloh, respectfully, I think you're misinterpreting the real point of contention in this debate.

Several of us have said there's nothing wrong with using a HELOC as a forced financial discipline tool. It wouldn't help me but everyone is different so whatever helps organize things in your head is fine.

The disagreement is very specific. The people who push this strategy claim that interest is saved merely by moving part of the mortgage principal to a HELOC--which is false. That's the only point I am arguing.

Nick's strategy is different. He uses a HELOC as more of a risk offset (for lack of a better term) and is more comfortable paying more principal to a HELOC. I can't disagree with this method because it's just personal preference.

Shiloh, I actually think that's a great summation of this argument. Those are some of the points that I've been trying to get across, so I appreciate you articulating them a little better than I do. I'm not taking this very seriously, so I tend to crack jokes and these guys think I'm an idiot partly because of it. I, in turn, make more jokes because 'who cares' and the argument goes on.

Chris, I understand your point that paying 4% in this vehicle and paying 5-8% in that vehicle, with everything else being equal will not net you any savings. I do, I get that. But I've said repeatedly that everything else is not equal and asked you to get away from the idea that you are simply paying on two debts, which you refuse to do. In the case of the HELOC you are using all of your income to depress your ADB and pay off the highest possible amount each month to save interest and only taking it back as you need it, not simply "making a payment". Plus, 99.9% of your money goes toward principal whereas with the mortgage about 33% does. Those are DIFFERENCES that you are not willing to acknowledge or account for so that you can keep saying there are no interest savings with a straight face. You already stated that if someone shortened his commute by switching jobs - oops, by shortening his career - that you wouldn't accept that his results are different because he explained it wrong. That's all that happened here. I had some misconceptions that the interest was calculated differently and stuff like that - I admit some of my statements have been off base, which I understand now. But you are unable to admit that even though I might have explained it wrong there are differences in the real world costs associated with both approaches. I acknowledged and conceded these points AND asked for you to show me (if I am wrong) where the savings comes from when you prepay principal in case there's a better way to explain it and you're "too busy". That's fine, but who is deliberately being obtuse and/or ignorant for the sake of this argument? It's not me. I've learned and changed my views accordingly and owned up to my mistakes and now I'm the one giving the explanation that no one can come up with an answer for besides "you need to learn financial math".

So, for the fifth time, show the math that roughly matches with the calculators and shows how prepaid principal savings are achieved OR if you can't come up with something better that my calculations (that worked out and matched), you can own up to the fact that the "miraculous" savings of this "magical" HELOC approach have nothing to do with math, but simply the differences in HOW you pay off the debt. Or, you know, you can go on denying the very clear differences for the sake of your ego, which is what it seems like you are intent on doing. Either way, it's been fun.

I have said, repeatedly, that Nick's approach is not what this thread was originally about. His approach is different than what you were advocating for the majority of this debate. I've also said, repeatedly, that there's nothing wrong with using a HELOC as a financial discipline tool.

If you're more comfortable paying more every month to a HELOC than a mortgage because you can pull that money back out in an emergency, then have at it. That's a completely different strategy than what the original post was about, and different than what you were advocating the majority of the time.

I will also say, again, that from a risk perspective Nick's (and now apparently your) strategy is a little odd because you can keep a HELOC with zero balance and still have access in an emergency. Seems like an unnecessary step to put money on a HELOC just to pay it off. Not my preffered strategy, but to each their own.

Glad it's finally settled, everybody. Drinks on me.

[Jeremy Z.]

@Shiloh Lundahl

For me this was a logical debate, not an emotional one. The sole focus of debate for me was dispelling a myth - that segregating out a small portion of your mortgage allows a person to accelerate pay down of principal simply because they have "freed" it from the interest-heavy early payments of the mortgage. That was the argument a couple of members were making, and that was the main part I took issue with.

I have zero problem with someone using the HELOC approach, but I do want people to understand the actual numbers behind it. A couple of members clearly had a misconception of that particular aspect. I think those members then felt we were attacking their methods and that is where the emotions started coming out. It sounds like at least one of those members has a better understanding of the interest calculations now.

You make some great points in your list. I just wanted to clarify my stance.

[Nick Moriwaki]

@Shiloh Lundahl - You make some good points that I've seen before in threads regarding HELOCs.  Wanted to address a few to get more information and/or clarify from my perspective. 

1) Maxing out a revolving line of credit, including a HELOC, can negatively effect your credit score

I've seen this argument thrown around a lot. I have a few HELOCs and a PLOC. A couple are maxed out as I rearrange my debt based on interest rates and such, but I have not seen it impact my credit score at all. It shows up on my credit reports but not in the section regarding debt utilization (credit cards). I'm curious where this information comes from because I've asked around and no one else with a HELOC has seen this effect either.

2) A HELOC rate can adjust higher over time and can also be frozen. 

I've seen this one a few times and don't know if I've ever asked, but how does the frozen part work exactly.  I've also seen some posts where people say if anything financially changes, the bank could call the loan due.  I'm wondering how closely the banks would track your financial situation (e.g. - loss of job, value of house, etc...) to even know when to perform these actions and if it matters the balance you are carrying.  Seems like an odd

4) The average person usually doesn’t have the discipline to pay a lot more toward a conventional loan if they don’t have to. Especially if there is fear that they won’t have access to the money if they really needed it.

This is a major reason I advocate for the HELOC strategy. You still have access to the money when you need it while still paying more in the process. The only discipline needed is to not fall into the reverse trap of spending differently now that you have access to all your prior payments.

7) A conventional home loan is some of the cheapest money available. Rather than paying down the mortgage, figuring out how to put your money to its highest and best use may have a substantially greater effect on building wealth than paying down a home mortgage would.

See #4 above.  You keep access to your money to put to the best use at any time, not just when you've saved up enough from income minus mortgage payments.  And that money doesn't have to sit in a savings account earning you nothing until then.  However this is where the risk assessment comes in regarding future returns, interest rates, tax benefits, etc... 

I'd also like to add that this was not an emotional debate for me either. I am very passionate about this strategy because for me it's all in the numbers. I don't need to justify why a B-class property here outperforms your C-class property there. Or why an X-plex unit here outperforms your SFH. If done correctly, the numbers speak for themselves. The parts that can be debated are whether the savings shown are worth the risk associated with the strategy and that's the area I was trying to get to, and which you partly addressed.

[Joshua S.]

Originally posted by @Nick Moriwaki:

@Shiloh Lundahl - You make some good points that I've seen before in threads regarding HELOCs.  Wanted to address a few to get more information and/or clarify from my perspective.   

2) A HELOC rate can adjust higher over time and can also be frozen. 

I've seen this one a few times and don't know if I've ever asked, but how does the frozen part work exactly.  I've also seen some posts where people say if anything financially changes, the bank could call the loan due.  I'm wondering how closely the banks would track your financial situation (e.g. - loss of job, value of house, etc...) to even know when to perform these actions and if it matters the balance you are carrying.  Seems like an odd

I think what people mean here is more to do with the economy or housing starting to tank. If house prices go down then it obviously could affect your equity and if the bank doesn't act they could have a revolving line of free money hanging out there in a sense, because there's little or no equity backing up anymore. That's my understanding, anyway.

PS - You can all count me for a non-emotional vote, too. If anything, I was just trying to spice things up by dropping in jokes and pushing people, but this isn't that serious of a thing. It helped me understand a few things a little more clearly and reinforced that some people prefer to stay on the same path regardless of what you say. In the end, you guys are strangers and I couldn't really care less if anyone adopts the strategy beyond what I said originally, which was that I think it's a general shame that more people don't get it.

[Chris May]

@Nick Moriwaki - "1) Maxing out a revolving line of credit, including a HELOC, can negatively effect your credit score

I've seen this argument thrown around a lot. I have a few HELOCs and a PLOC. A couple are maxed out as I rearrange my debt based on interest rates and such, but I have not seen it impact my credit score at all. It shows up on my credit reports but not in the section regarding debt utilization (credit cards). I'm curious where this information comes from because I've asked around and no one else with a HELOC has seen this effect either."

------

I maxed out a HELOC last year and my consumer credit score dropped ~75 points. Recently, I applied for another mortgage, and when they pulled my credit the bank said my credit was about 50 points higher than that. Our loan guy said banks use a mortgage score and when you pull your own credit that's your consumer score. I don't fully understand it, but I guess there are different types of credit scores.

[Jeremy Z.]

@Joshua S.

To be clear, I do use an accelerated approach to a 30-year mortgage. I used a 15-year mortgage to purchase one of my properties because the rate was .75% lower than the 30-year at the time I took out the loan. The difference between the 15 and 30-year rate isn't always that large, but when it is I think it is worth considering. There is some added risk with a higher monthly obligation, but if accelerated pay down is your goal and you are comfortable with the payment the interest savings is considerable. Check the calculators. Yes, the 15-year mortgage locks up more of your cash, but for me the savings is worth it.

If your HELOC approach has you on pace to pay off your property in 20 years then a 15-year may not be feasible. But if you are paying $1,000 toward a HELOC every month on top of your regular mortgage payment then I would think the 15-year might be possible. And there is nothing that says you couldn't still use a HELOC approach on a 15-year mortgage.

I'm not suggesting you refinance into a 15-year. Just that you consider a 15-year vs a 30-year on future purchases.

[Shiloh Lundahl]

I find it funny that everyone responded saying that they were all responding logically rather than emotionally as if the comment saying that it was more an emotional problem/debate was something needing to be defended against.  Maybe others looking from the outside who have followed this thread are able to see the emotion involved in the thread more than those involved in the thread. I don’t know too many people who carry on a debate for 4 days that are not fueled by emotion. It is hard to be passionate without emotion. Logic would say “well I said my piece. I’ll let others figure it out.” Rather than spending the time and energy day after day arguing and defending their point of view. By the way, my comment  was not an insult, it was a observation stated in an attempt to help each of you understand why the others were not seeing it your way. I do this with the couples that I counsel with all the time and it helps them move past the arguements and towards resolution. If the comment was offensive to anyone, than I apologize.

To respond to @Nick Moriwaki, I do not have a conventional loan on my one of my primary homes. I only have a HELOC on it for around 370k and it is maxed out right now as the capital is being used in multiple deals. The HELOC adjusted from 2.99 to 5.5 a few months ago. Also one of my bankers who I am using to refinance a handful of properties said that because my HELOC was a revolving line, and it is maxed out, that it was negatively effecting my credit and he encouraged me to switch it to a conventional loan and it would be looked at differently on my credit and it would help me get loans easier.

As far as getting lines of credit closed or frozen, as my wife and I have utilized various lines of credit our credit score goes up and down drastically from 800 to 600 and back and forth. Lenders can do soft credit pulls without permission to see about where you are at with your credit and debt usage. If you look like you are starting to utilize more and more of your credit, your lenders are able to close accounts or freeze your ability to access more cash from your loan account. This has happened to 3 credit lines my wife had. Also, I have to reapply or verify my income for many of my loans or lines of credit every year to keep them open.

As for the method focused on in this thread, I usually don't have idle cash around to use this method. It is either being used to acquire deals or being used to pay down my different lines of credit that I have used to acquire deals. Because I am an active investor my ROI on deals is usually upwards of 100 to 300% APR on deals with many of them being an infinite return when I have none of my own money into the deal so it wouldn't make sense for me to use this method.

I could see how this model could be helpful for people without deal flow or who are looking to pay off debt. Right now I am in the building phase so my goal is not to pay off debt but to manage it along with manage the cash flow of our properties. In the future I may take a look at this method more closely, but since I am comfortable with leverage and feel I am more of a target for lawsuits when I have more equity, I will probably stay at 60-80% leveraged in my deals and personal homes because I am more comfortable with that.

[Joshua S.]

Originally posted by @Shiloh Lundahl:

I find it funny that everyone responded saying that they were all responding logically rather than emotionally as if the comment saying that it was more an emotional problem/debate was something needing to be defended against.  Maybe others looking from the outside who have followed this thread are able to see the emotion involved in the thread more than those involved in the thread. I don’t know too many people who carry on a debate for 4 days that are not fueled by emotion. It is hard to be passionate without emotion. Logic would say “well I said my piece. I’ll let others figure it out.” Rather than spending the time and energy day after day arguing and defending their point of view. By the way, my comment  was not an insult, it was a observation stated in an attempt to help each of you understand why the others were not seeing it your way. I do this with the couples that I counsel with all the time and it helps them move past the arguements and towards resolution. If the comment was offensive to anyone, than I apologize.

To respond to @Nick Moriwaki, I do not have a conventional loan on my one of my primary homes. I only have a HELOC on it for around 370k and it is maxed out right now as the capital is being used in multiple deals. The HELOC adjusted from 2.99 to 5.5 a few months ago. Also one of my bankers who I am using to refinance a handful of properties said that because my HELOC was a revolving line, and it is maxed out, that it was negatively effecting my credit and he encouraged me to switch it to a conventional loan and it would be looked at differently on my credit and it would help me get loans easier.

As far as getting lines of credit closed or frozen, as my wife and I have utilized various lines of credit our credit score goes up and down drastically from 800 to 600 and back and forth. Lenders can do soft credit pulls without permission to see about where you are at with your credit and debt usage. If you look like you are starting to utilize more and more of your credit, your lenders are able to close accounts or freeze your ability to access more cash from your loan account. This has happened to 3 credit lines my wife had. Also, I have to reapply or verify my income for many of my loans or lines of credit every year to keep them open.

As for the method focused on in this thread, I usually don't have idle cash around to use this method. It is either being used to acquire deals or being used to pay down my different lines of credit that I have used to acquire deals. Because I am an active investor my ROI on deals is usually upwards of 100 to 300% APR on deals with many of them being an infinite return when I have none of my own money into the deal so it wouldn't make sense for me to use this method.

I could see how this model could be helpful for people without deal flow or who are looking to pay off debt. Right now I am in the building phase so my goal is not to pay off debt but to manage it along with manage the cash flow of our properties. In the future I may take a look at this method more closely, but since I am comfortable with leverage and feel I am more of a target for lawsuits when I have more equity, I will probably stay at 60-80% leveraged in my deals and personal homes because I am more comfortable with that.

I appreciate your outside perspective and saying it looked emotional and that's fair. I can't speak for anyone else, but if it looked emotional or passionate from my angle, it's just because I enjoy a good debate and maybe a little bit because I felt frustrated that I wasn't being heard. I have absolute zero emotion about the HELOC idea itself and if anything (as I said in one of my other posts), I'm happy to be absolved of teaching friends and family about it lest it devolve into a math lesson about percentages instead of a discussion about different ways to pay debt.

No one was offended or insulted at you adding your two cents, I guarantee it. We were all mixing it up and enjoying pushing each other and the frustration and challenge of trying to make someone see each other's points of view. It was just a pickup game of ball where we all got knocked in the dirt at one time or another. During the game you get caught up in the moment, but when the egg timer goes off no one really cares, we all just want to make it home on time for dinner. But like I said, thanks for the input, I can understand your perspective, too. Have a good one.

[Brent Coombs]

$41.67 x 12 x 30 = $15,001 (plus, Joshua would likely still owe the $10k because it was a revolving line of credit the whole time, = $25k paid to the $10k HELOC). Hmmm. Saving?...

[Joshua S.]

Originally posted by @Brent Coombs:

$41.67 x 12 x 30 = $15,001 (plus, Joshua would likely still owe the $10k because it was a revolving line of credit the whole time, = $25k paid to the $10k HELOC). Hmmm. Saving?...

That's pretty funny, Brent. Your mortgage is shortened to about ten years, but you would just continue paying on the HELOC for another 20 years for fun. Bravo on the logic, bud. Oh, and proving my point about how little everyone comprehends the idea. I love it. :-D