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?

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

[Mike V.]

This is reminding me of my old financial accounting classes where what is correct isn’t intuitive. 

@Joshua S., I 100% follow your logic. It’s intuitive and ‘feels’ right. The problem is, your math is FLAWED and that’s what @Chris May has been trying to explain.

They have PROVEN this a while back with their spreadsheets and I think @Chris May is trying to correct you, so you don’t continue the spread of disinformation and confuse others. 

You’re welcome to use ANY strategies you’d like.  You can burn your money in a fire pit for all we care. But if you follow the math, you don’t have a leg to stand on which is why I think you’re not providing it with any of your responses. 

It’s great to have an opinion. Some people believe the earth is flat, but that opinion just doesn’t make it so.

The last thing we want are people to read this and believe the nonsense. I’m sorry if you genuinely don’t agree or understand.  Reread this thread and it should be more clear, IF you’re willing to give the math a chance.  It’s complicated, dry, and not very fun. But it will explain it. 

[Joe Splitrock]

@Joshua S. I want to help you understand.

1. Mortgages charge interest the same as all loans. When the balance is larger, more interest is charged. You keep calling it up front or front loaded, but that is not how it works. Your HELOC will charge you more interest on $10,000 balance than it will on $5000 balance. That doesn't mean it is front end loaded. Interest is simply a percentage of outstanding balance, so the larger the balance the larger the interest.

2. As discussed in line 1, interest is calculated based on outstanding principal, so YES the only way to reduce interest on any loan (including HELOC) is to pay down principal.

3. It seems you are implying that by using a HELOC, the money isn't tied up in the mortgage, but not really true. Once you put that $10,000 HELOC payment to the mortgage, the money becomes equity in the property (trapped). I know you are going to say, but you can take it out of the HELOC. In other words, you can take out another loan. It puts you back in the same place you started or worse if the HELOC interest rate is higher.

4. Not sure what the rich uncle has to do with it.

5. Liquidity is the ability to convert an asset into cash. Having a HELOC is not liquidity, it is access to credit. Like having any other loan or credit card. I recommend having a cash emergency fund versus using credit. It is less risky.

6. Why carry a continuous balance of $6000 on a HELOC? Most likely your mortgage interest rate is lower than your HELOC rate, so you would be better off to leave that $6000 on your mortgage. For example if your mortgage is 4.5%, then you are only paying $270 on the $6000. Maybe you could care less about paying $30 extra a year, but isn't the whole purpose here to save interest money?

[Steven D.]

I can't believe this is coming back to life after @Chris May and I posted actual amortization tables and real math. Feel free to review the math and compare to the people who are "skipping interest payments." You don't skip interest payments you pay a (usually) set interest rate on a principal balance. If the principal balance is lower the amount of interest you pay is lower, as @Joe Splitrock has tried to explain many times. Just a reminder to view the thread in its entirety and you will see that this option does not accelerate anything. 

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

Prove your theory. Create a Google spreadsheet that models the entire lifecycle of the HELOC and mortgage.

Show us the numbers. No point talking theory anymore. All the people disagreeing with you have proven this out in a spreadsheet. Now it's your turn.

[Steven D.]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

[Joshua S.]

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mortgage-payments-mostly-interest/

[Jeremy Z.]

Originally posted by @Nick Moriwaki:

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

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

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

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

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

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

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

Or you could just pay your mortgage down by that $50K, followed by additional payments to principle each month (with that $3000 monthly payment), and then take out a HELOC only when you need it. Using a HELOC from the start might provide some flexibility, but it's up to the individual to determine if it is worth the hassle. But let's be very clear - it isn't some magic strategy that allows you escape "front-loaded" interest on a "trick" mortgage, as @Joshua Smith thinks it is.

Many investors on this site believe they can achieve better returns than 5% by reinvesting their money, so they wouldn't consider paying their mortgage down early.

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mortgage-payments-mostly-interest/

 Everyone on this thread does know this. You are the one that is failing to do the math on the entire scenario (interest payments on HELOC, opportunity cost of money used toward early pay down, etc.) and therefore thinks this HELOC strategy is a magic bullet.

[Steven D.]

https://www.biggerpockets.com/forums/49/topics/329...

Here is another 15 pages most of which we tried to explain math to people, some of which eventually got it. 

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount? 

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount? 

 Distributive property of multiplication: r * ( m + h ) = r * m + r * h

r = interest rate, m = mortgage balance, h = HELOC balance

200,000 loan. Use HELOC to pay down 10,000.

.05/12 * (200,000) = .05/12 * (190,000 + 10,000) = .05/12 * (190,000) + .05/12 * (10,000)

Again, I did this for years. For a salary. On billions of dollars of amortizations. If you can't prove it, but I can... Maybe that should tell you something?

Moving 10,000 to a HELOC incurs the same amount of interest on the combined principal of the two loans, as just keeping the the entire balance on the mortgage.

The only part of this strategy that "works" is gaming the average daily balance calculation on the HELOC. However, again, even the best examples yield like $5 savings per month. If you're HELOC rate is higher, it kills the whole thing.

[Steven D.]

Plus there are often fees associated with opening a HELOC whether it be origination or appraisal fees.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount? 

 Distributive property of multiplication: r * ( m + h ) = r * m + r * h

r = interest rate, m = mortgage balance, h = HELOC balance

200,000 loan. Use HELOC to pay down 10,000.

.05/12 * (200,000) = .05/12 * (190,000 + 10,000) = .05/12 * (190,000) + .05/12 * (10,000)

Again, I did this for years. For a salary. On billions of dollars of amortizations. If you can't prove it, but I can... Maybe that should tell you something?

Moving 10,000 to a HELOC incurs the same amount of interest on the combined principal of the two loans, as just keeping the the entire balance on the mortgage.

The only part of this strategy that "works" is gaming the average daily balance calculation on the HELOC. However, again, even the best examples yield like $5 savings per month. If you're HELOC rate is higher, it kills the whole thing.

I get it, you're a math wiz. So you should be able to answer my simple question. Do you owe the full $513,000, the balance plus all the interest that was originally scheduled or do you owe the balance?

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount? 

 Distributive property of multiplication: r * ( m + h ) = r * m + r * h

r = interest rate, m = mortgage balance, h = HELOC balance

200,000 loan. Use HELOC to pay down 10,000.

.05/12 * (200,000) = .05/12 * (190,000 + 10,000) = .05/12 * (190,000) + .05/12 * (10,000)

Again, I did this for years. For a salary. On billions of dollars of amortizations. If you can't prove it, but I can... Maybe that should tell you something?

Moving 10,000 to a HELOC incurs the same amount of interest on the combined principal of the two loans, as just keeping the the entire balance on the mortgage.

The only part of this strategy that "works" is gaming the average daily balance calculation on the HELOC. However, again, even the best examples yield like $5 savings per month. If you're HELOC rate is higher, it kills the whole thing.

I get it, you're a math wiz. So you should be able to answer my simple question. Do you owe the full $513,000, the balance plus all the interest that was originally scheduled or do you owe the balance?

 You only owe the principal balance (plus a little interest), which proves the mortgage isn't "front-loaded" as you stated before.

If you just take out a HELOC to pay that down you will have interest payments on the HELOC, so it's a wash (unless your HELOC has a higher rate of interest, in which case you are losing money). Now if you use a bunch of savings and W2 income to aggressively pay down the HELOC you can save on interest, but you can do that without taking out a HELOC and only get one later if needed. Getting one now might provide some flexibility, but it also might have additional fees and requires time to obtain and manage. And many would argue you shouldn't pay down the mortgage/HELOC at 5%, and should instead invest your money elsewhere because you can make more than 5%.

A HELOC might provide a little flexibility that could be right for some people, but it isn't a magic bullet. The true vehicle for interest savings you are describing is using cash to pay down debt faster - HELOC or no HELOC.

[Eric M.]

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.

Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.

[Joshua S.]

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount? 

 Distributive property of multiplication: r * ( m + h ) = r * m + r * h

r = interest rate, m = mortgage balance, h = HELOC balance

200,000 loan. Use HELOC to pay down 10,000.

.05/12 * (200,000) = .05/12 * (190,000 + 10,000) = .05/12 * (190,000) + .05/12 * (10,000)

Again, I did this for years. For a salary. On billions of dollars of amortizations. If you can't prove it, but I can... Maybe that should tell you something?

Moving 10,000 to a HELOC incurs the same amount of interest on the combined principal of the two loans, as just keeping the the entire balance on the mortgage.

The only part of this strategy that "works" is gaming the average daily balance calculation on the HELOC. However, again, even the best examples yield like $5 savings per month. If you're HELOC rate is higher, it kills the whole thing.

I get it, you're a math wiz. So you should be able to answer my simple question. Do you owe the full $513,000, the balance plus all the interest that was originally scheduled or do you owe the balance?

 You only owe the principal balance (plus a little interest), which proves the mortgage isn't "front-loaded" as you stated before.

The payments are front loaded in the sense that if you pay them as scheduled most of the payment goes toward interest and very little toward principal. I don't understand why this is up for debate. Maybe you don't like the term "front loaded", but your early payments mostly go toward interest and very little to principal if you prefer the longer explanation.

Anyway, you're right, you owe the principal balance because the interest hasn't had a chance to accrue. In other words, you "skip" or "cancel" these payments from occurring when you pay principal down early. My mortgage (and probably yours) accrues around $30/day for a total of $9XX.00/month in interest. When I pay principal early - ie. bring down my balance, I then pay less interest because my balance is lower and the interest associated with those payments I skipped never has a chance to accrue on my mortgage. This is true whether you win the lotto and pay it off completely or pay off $10,000 or $50,000 chunks at a time. You can't be charged interest on money that isn't on the balance anymore.

I'm sure everyone agrees that if you won the lotto and paid off the mortgage, you aren't paying the scheduled interest associated with the rest of the loan, because it was "scheduled", but didn't actually accrue. You paid it off before it could be charged. So, why is it such a leap to the idea that if you pay off a large chunk of the loan you also cancel those scheduled payments and skip down to the next payment associated with your new balance? What is everyone missing about this? I don't get it.

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount? 

I disagree with the premise of your question. If you use a HELOC to pay 10k of a 200k mortgage, you haven't paid off ANY principal. You still owe 200k. Except now you're making payments to two loans instead of one. The only reason you pay the combined principal faster is because you're making greater combined payments.

If you were paying 1073 per month on your mortgage, and now you're paying 1073 per month PLUS $200 (or any amount on your HELOC), it's the same thing as just paying $1273 per month on your mortgage. You'll literally finish paying off the combined principal at the same time with either method. It's exactly the same.

The HELOC has nothing to do with it.

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Steven D.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Joshua S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.

2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.

I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.

Seriously. Model it out. Prove us wrong. Share your Google doc with the group.

Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now...  :-D

You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.

You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this. 

https://www.thetruthaboutmortgage.com/why-are-mort...

 I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.

Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".

200,000 loan, fixed 5%, 30 year

Month 1: interest is 200,000*(.05/12)=$833.33

Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.

Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.

And I'll say it yet again, prove your theory and show us the math.

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount? 

 Distributive property of multiplication: r * ( m + h ) = r * m + r * h

r = interest rate, m = mortgage balance, h = HELOC balance

200,000 loan. Use HELOC to pay down 10,000.

.05/12 * (200,000) = .05/12 * (190,000 + 10,000) = .05/12 * (190,000) + .05/12 * (10,000)

Again, I did this for years. For a salary. On billions of dollars of amortizations. If you can't prove it, but I can... Maybe that should tell you something?

Moving 10,000 to a HELOC incurs the same amount of interest on the combined principal of the two loans, as just keeping the the entire balance on the mortgage.

The only part of this strategy that "works" is gaming the average daily balance calculation on the HELOC. However, again, even the best examples yield like $5 savings per month. If you're HELOC rate is higher, it kills the whole thing.

I get it, you're a math wiz. So you should be able to answer my simple question. Do you owe the full $513,000, the balance plus all the interest that was originally scheduled or do you owe the balance?

 You only owe the principal balance (plus a little interest), which proves the mortgage isn't "front-loaded" as you stated before.

The payments are front loaded in the sense that if you pay them as scheduled most of the payment goes toward interest and very little toward principal. I don't understand why this is up for debate. Maybe you don't like the term "front loaded", but your early payments mostly go toward interest and very little to principal if you prefer the longer explanation.

Anyway, you're right, you owe the principal balance because the interest hasn't had a chance to accrue. In other words, you "skip" or "cancel" these payments from occurring when you pay principal down early. My mortgage (and probably yours) accrues around $30/day for a total of $9XX.00/month in interest. When I pay principal early - ie. bring down my balance, I then pay less interest because my balance is lower and the interest associated with those payments I skipped never has a chance to accrue on my mortgage. This is true whether you win the lotto and pay it off completely or pay off $10,000 or $50,000 chunks at a time. You can't be charged interest on money that isn't on the balance anymore.

I'm sure everyone agrees that if you won the lotto and paid off the mortgage, you aren't paying the scheduled interest associated with the rest of the loan, because it was "scheduled", but didn't actually accrue. You paid it off before it could be charged. So, why is it such a leap to the idea that if you pay off a large chunk of the loan you also cancel those scheduled payments and skip down to the next payment associated with your new balance? What is everyone missing about this? I don't get it.

We aren't missing that, we are saying that it is CASH that is saving you on interest, not the HELOC.

[Joshua S.]

Originally posted by @Eric M.:

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.

Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.

It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D

How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Eric M.:

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.

Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.

It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D

How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.

If you didn't take out the HELOC and instead just made those payments as additional principal toward you mortgage you would save the same amount. And then you could take out a HELOC later if needed.

Look, I'm not saying a HELOC is bad. They certainly serve a function. But they aren't the magic solution that they often get pitched as being.

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Eric M.:

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.

Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.

It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D

How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.

If you pay $50/month on a $10,000 HELOC, it will take you 431 months to pay off and will have paid a total of $21,550.

You've saved exactly nothing. Zilch. Zero. Nada. Goose egg. 

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Eric M.:

You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.

Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.

It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D

How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.

If you pay $50/month on a $10,000 HELOC, it will take you 431 months to pay off and will have paid a total of $21,550.

You've saved exactly nothing. Zilch. Zero. Nada. Goose egg. 

How clever and sarcastic of you. Obviously I meant $50 in interest costs. The balance is paid down each month by your surplus funds, but you already know that. But this is awesome, though, you proved my point! For the $10,000 to have equal costs on the mortgage and the HELOC, you'd have to pay take 35 years to pay off the HELOC. When you take 6-12 months depending on your discretionary income, you are obviously saving a ton vs what it would cost on the mortgage. I'm glad we could finally agree.