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Heloc to pay off mortgage faster
Originally posted by @Mike Dymski:
Option 1:
$165,000 x 4.5% / 365 days = $20.34 interest accrues per day when the principal balance is $165,000
$165,000 - $10,000 x 4.5% / 365 days = $19.11 interest accrues per day when the principal balance is $155,000
$20.34 - $19.11 = $1.23 interest saving per day due to one extra $10,000 principal payment
@Joshua S. Do we have common ground so far?
Yes, the calculations are correct and over the course of the year following that $10,000 payment you'd save about $445 going forward. But where do you account for the savings from the payments you skipped? When I made a $10,000 payment, I canceled $21,000 worth of scheduled interest that will never have a chance to accrue on my loan. And I just showed you on the Bankrate calculator that it's also the case using an unbiased source of info. Are you about to account for that somehow?
The content from the quoted post that I left in that snippet is something that I do not quite believe.
I have paid mortgages off in advance. When I made additional principal payments, it did not change the amount of the next payment due - it just lowered the amount of interest being charged on all future payments and reduced the number of remaining payments.
So you say this happened from your actual experience, so why don't you post redacted fixed-rate mortgage statements from before you used the approach you advocate and from after as well, so we can see that your lender actually changed (lowered) the amount of your payment due (and not just lowering the remaining principal balance).
Originally posted by @Joshua S.:
Originally posted by @Mike Dymski:
Option 1:
$165,000 x 4.5% / 365 days = $20.34 interest accrues per day when the principal balance is $165,000
$165,000 - $10,000 x 4.5% / 365 days = $19.11 interest accrues per day when the principal balance is $155,000
$20.34 - $19.11 = $1.23 interest saving per day due to one extra $10,000 principal payment
@Joshua S. Do we have common ground so far?
Yes, the calculations are correct and over the course of the year following that $10,000 payment you'd save about $445 going forward. But where do you account for the savings from the payments you skipped? When I made a $10,000 payment, I canceled $21,000 worth of scheduled interest that will never have a chance to accrue on my loan. And I just showed you on the Bankrate calculator that it's also the case using an unbiased source of info. Are you about to account for that somehow?
In other words, Mike, you're saying that for every $10,000 payment you save $445, which is an ROI of about 4.5% and that doesn't square with the savings from an actual, unbiased, fully informed, professional amortization calculator. I suspect it's because you can't accept that when you pay additional principal you cancel the associated interest payments and that's a mistake on your part. If you can't understand that, think about your total loan plus interest costs over 30 years. You have that number in mind? Now imagine you won the lotto and want to pay off your house tomorrow. Do you have to pay that full amount with interest? Absolutely not. Does your bank allow you to SKIP those interest payments because you're paying early? Definitely.
If this is true in the full payoff scenario, why would it not be true for $10,000 or $50,000 or $100,000? If you pay off that part of the balance, you skip the associated interest payments - THAT IS WHERE THE BULK OF THE SAVINGS COME FROM.
Originally posted by @Steve Babiak:
The content from the quoted post that I left in that snippet is something that I do not quite believe.
I have paid mortgages off in advance. When I made additional principal payments, it did not change the amount of the next payment due - it just lowered the amount of interest being charged on all future payments and reduced the number of remaining payments.
So you say this happened from your actual experience, so why don't you post redacted fixed-rate mortgage statements from before you used the approach you advocate and from after as well, so we can see that your lender actually changed (lowered) the amount of your payment due (and not just lowering the remaining principal balance).
No, you're right, Steve. I mispoke there. What I meant was that the following payments had $35 lower interest and therefore $35 higher principal portions in the payment, but the payment itself was the same amount. Thank you for catching that.
@Joshua S. "Mike, you're saying that for every $10,000 payment you save $445, which is an ROI of about 4.5% and that doesn't square with the savings from an actual, unbiased, fully informed, professional amortization calculator."
You guys are saying the same thing. He's stating the rate of return annually, you're providing the rate of return over the life of the loan.
6 of one, half dozen of the other.
I love how you can 100% prove something is WRONG by showing the math as @Chris May has over, and over, and over, yet still be told he’s wrong.
Using a helic to pay a mortgage has zero effect as you claim. You’re simply transferring the interest from one vessel to the other. PERIOD.
If you pay $10,000 in HELOC debt at 5% interest towards your principle, you're literally paying the same exact amount by lowering your mortgage by that same $10,000. You can try to spin it any way you want.
But you are, and continue to be factually incorrect. I’m beginning to wonder if you’re selling a ‘program’ or in some other way incentivized because this could quite possibly be the most obnoxious thread I’ve followed here.
You just repeat the same factually incorrect information over and over and over hoping to wear everyone out which appears to be working so you get the last comment in.
If you want to learn, take a financial accounting class at your local community college. But you clearly think you’re the smartest guy here and all the 100+ professionals here are wrong so I don’t think you’re interested in learning. Which is why I question your true motives.
It’s ok, you can keep believing 1+1 = 3. If people read this all and still PM you for business I guess that’s on them.
Originally posted by @Chris May:
@Joshua S. "Mike, you're saying that for every $10,000 payment you save $445, which is an ROI of about 4.5% and that doesn't square with the savings from an actual, unbiased, fully informed, professional amortization calculator."
You guys are saying the same thing. He's stating the rate of return annually, you're providing the rate of return over the life of the loan.
6 of one, half dozen of the other.
This doesn't make any sense. Bankrate's calculator says that you shave 20 years off of the loan in the scenario I'm proposing. $445 dollars saved each year is $4450 saved over that time. Their calculator says the savings is $100,000. Are you saying the calculator is wrong? If so, how so?
Originally posted by @Mike V.:
I love how you can 100% prove something is WRONG by showing the math as @Chris May has over, and over, and over, yet still be told he’s wrong.
Using a helic to pay a mortgage has zero effect as you claim. You’re simply transferring the interest from one vessel to the other. PERIOD.
If you pay $10,000 in HELOC debt at 5% interest towards your principle, you're literally paying the same exact amount by lowering your mortgage by that same $10,000. You can try to spin it any way you want.
But you are, and continue to be factually incorrect. I’m beginning to wonder if you’re selling a ‘program’ or in some other way incentivized because this could quite possibly be the most obnoxious thread I’ve followed here.
You just repeat the same factually incorrect information over and over and over hoping to wear everyone out which appears to be working so you get the last comment in.
If you want to learn, take a financial accounting class at your local community college. But you clearly think you’re the smartest guy here and all the 100+ professionals here are wrong so I don’t think you’re interested in learning. Which is why I question your true motives.
It’s ok, you can keep believing 1+1 = 3. If people read this all and still PM you for business I guess that’s on them.
No, I'm not selling a program or anything and I'm not trying to wear people out, I legitimately think it's a shame more people don't understand this, so I'm trying to help. I showed on Bankrate's amortization calculator that the ROI for paying an extra $10,000 principal each year is 100% and you take 20 years off of your mortgage. What is factually incorrect about that? Is their calculator broken somehow? Yes, I'm interested in learning. Do your own amortization calculator and walk me through it. Show me how paying $10,000 extra each year returns $500. Otherwise, you're asking me to trust someone's personal math more than an actual calculator. This should be a simple task if I'm so wrong.
Math and logic are obviously not effective enough tools here. There is literally a misunderstanding around interest rates, compound interest, and total interest. I don't think that you should be allowed to take out a mortgage without a basic understanding of interest, but obviously that isn't the case which has been proven here and throughout the financial crisis. Let's just look at it this way:
1. Josh wants to pay less interest on his mortgage.
2. He believes the best way to do that is to take a HELOC.
3. In the long run he really isn't losing much of anything, though he believes his gains are large when there really are none.
4. He is much better off paying his mortgage down then having that money available for other things.
5. By his own accord he is poor with math, the chance that his money would be lost to some pyramid scheme or other investment hoopla seems high with a lack of basic knowledge around interest rates and math.
6. At least with the mortgage pay down he is putting money somewhere where it may actually be recouped at some point.
You’re paying $10,000 more EACH year so of corse that will shorten the length of the loan and reduce your overall interest paid. That is what you’re seeing on bankrates calculator.
This, NO ONE disputes.
The whole, use a heloc and throw all your income in it is NONSENSE as @Chris May and several others have MATHEMATICALLY, 100% proven.
You’re arguing over ONE piece in a much larger pie. When you look at the WHOLE pie, that is where you will discover this is nonsense.
I’m not getting any deeper into this since everyone else already has. Reread this whole chain from the beginning. Focus on the math portion and if you have a specific question on someone else’s logic I’ll do my best to help. But you’re asking the wrong questions and with that no one can help.
Originally posted by @Joshua S.:
Originally posted by @Chris May:
@Joshua S. "Mike, you're saying that for every $10,000 payment you save $445, which is an ROI of about 4.5% and that doesn't square with the savings from an actual, unbiased, fully informed, professional amortization calculator."
You guys are saying the same thing. He's stating the rate of return annually, you're providing the rate of return over the life of the loan.
6 of one, half dozen of the other.
This doesn't make any sense. Bankrate's calculator says that you shave 20 years off of the loan in the scenario I'm proposing. $445 dollars saved each year is $4450 saved over that time. Their calculator says the savings is $100,000. Are you saying the calculator is wrong? If so, how so?
This is the problem with assuming you understand what's behind the numbers based solely on a number printed on your statement or a simple online calculator. It's like reading a newspaper article on diabetes, and then telling your doctor he's wrong when he diagnoses you with it. You're not an expert, but are pretending to be.
In any event, paying an extra 10,000 (of cash) towards your mortgage on day 1 decreases total interest paid over the life of the loan by $31,127. Decreases payoff time to 322 months.
That's a result of saving $468 in year one, $535 in year 2, year 3: $562, year 4: $591, etc
The interest savings compounds over the life of the loan.
* 200k loan, 5% fixed, 30 years
Originally posted by @Steven D.:
Math and logic are obviously not effective enough tools here. There is literally a misunderstanding around interest rates, compound interest, and total interest. I don't think that you should be allowed to take out a mortgage without a basic understanding of interest, but obviously that isn't the case which has been proven here and throughout the financial crisis. Let's just look at it this way:
1. Josh wants to pay less interest on his mortgage.
2. He believes the best way to do that is to take a HELOC.
3. In the long run he really isn't losing much of anything, though he believes his gains are large when there really are none.
4. He is much better off paying his mortgage down then having that money available for other things.
5. By his own accord he is poor with math, the chance that his money would be lost to some pyramid scheme or other investment hoopla seems high with a lack of basic knowledge around interest rates and math.
6. At least with the mortgage pay down he is putting money somewhere where it may actually be recouped at some point.
I don't need to be good with math, I have a bunch of different calculators that say the same thing. Here, I've dumbed it down even further for you guys and you can go to Quicken Loans amo calc and try it yourself to make sure I didn't fudge it somehow. All I did was apply an additional $10,000 payment each June and wow, look at that, $95,000 and 18 years savings. So, I guess the HELOC somehow costs me $95,000 and it evens out. I thought Chris the math wizard said it costs around $50/month / $600/year / $7200 over the 12 years (maximum if you maintain a $10,000 HELOC balance), but he must have left something out, right?
So, you know, for the 50th time if you have the $10,000 lying around and don't mind it being locked up in your mortgage then by all means. If don't have the money or you'd prefer to be more liquid maybe paying that $7200 over a decade to save $100,000 doesn't look so bad, huh?
@Joshua S. I posted this yesterday. Take a minute to absorb it. Then respond with specific questions if you have them.
"Scenario 1:
200k fixed rate loan. 30 years. 5% interest. Monthly payment is 1,073.64.
Day 1, use a HELOC to pay $99,185 on the mortgage. Now I have a 100,815 mortgage and a 99,185 HELOC. Mortgage will now be paid off in exactly 120 months.
But, I have a 100k HELOC that I have to make payments on. To pay off the HELOC in 120 months I have make a monthly payment of $1,052.01.
My combined payment between the HELOC and mortgage is $2,125.65. HELOC and morgage are both paid off after 120 months (yay early payoff!)
Scenario 2
Same mortgage. No HELOC. Pay $2,125.65 every month. Mortgage is also paid off in 120 months! The HELOC has nothing to do with it. You pay the exact same amount in both scenarios, and pay off the loan in the exact amount of time."
Maybe the missing piece is that you don't realize that the money you pay on the HELOC is interest + principle. In order to "save" the interest as you put it you have to take a HELOC. All of the HELOC payment is more money that you wouldn't have had to pay if you didn't take the HELOC for pay down. Here are 2 loan calculators for you easily available in excel. For ease $10000/12 months is $833.33/month.
If you just pay extra on your mortgage:
Please not the amount of early payments, this is the money out of your pocket that you are paying extra $116,666.20.
Your yearly HELOC:
So every year on your HELOC you are paying a total of $10273.29 out of your pocket.
To match just paying your mortgage you have to do this every year for ~11.75 years (141/12 how long your mortgage takes just paying the extra direct) . So $10273.29 x 11.75 = $120,711.18. That is extra money out of your pocket that your are paying if you did not take a HELOC. That is more than $116,666.20 that you would have just paid extra direct to the mortgage for early payoff. There is no savings and it is actually a little worse because you are borrowing money at 5% interest to pay money at 4% interest.
Originally posted by @Chris May:
@Joshua S. I posted this yesterday. Take a minute to absorb it. Then respond with specific questions if you have them.
"Scenario 1:
200k fixed rate loan. 30 years. 5% interest. Monthly payment is 1,073.64.
Day 1, use a HELOC to pay $99,185 on the mortgage. Now I have a 100,815 mortgage and a 99,185 HELOC. Mortgage will now be paid off in exactly 120 months.
But, I have a 100k HELOC that I have to make payments on. To pay off the HELOC in 120 months I have make a monthly payment of $1,052.01.
My combined payment between the HELOC and mortgage is $2,125.65. HELOC and morgage are both paid off after 120 months (yay early payoff!)
Scenario 2
Same mortgage. No HELOC. Pay $2,125.65 every month. Mortgage is also paid off in 120 months! The HELOC has nothing to do with it. You pay the exact same amount in both scenarios, and pay off the loan in the exact amount of time."
This is no more applicable today than it was yesterday. No one is advocating taking out a massive HELOC and paying it down over ten years.
Originally posted by @Joshua S.:
This is no more applicable today than it was yesterday. No one is advocating taking out a massive HELOC and paying it down over ten years.
LOL what? Am I being punked? Is Ashton Kutcher hiding in the other room?
Instead of taking out a $10,000 HELOC and aggressively paying it to $0 during that first year, you could aggressively SAVE $10,000 that first year and then make a lump sum payment to principle. Then repeat, just like you would with your HELOC strategy. You keep acting like your only option is to get the HELOC or leave the $10,000 in principal throughout the lifetime of the mortgage, which isn't true. Your argument, along with @Nick Moriwaki's, is that you can either use a HELOC, or stick to the full amortization schedule. Those aren't your only options.
The HELOC method might save you a little money over several years if you can stick to the plan, but you can achieve almost the same results through saving and lump-sum payments.
Edit: I should clarify that Nick's example does pay down the mortgage more aggressively than 30 years, but he is still throwing much of that money into savings where of course it is not going to help with your average daily balance.
Originally posted by @Nick Moriwaki:
...sorry Jeremy, your scenario of copying the HELOC strategy and living with no money just won't work...
I disagree. It works exactly the same, provided the same form of personal reserves is also maintained...Presumably either previously accumulated cash or unused HELOC funds. If one is comfortable exclusively using a HELOC as their personal reserves in the so-called 'HELOC method', they should be equally so in simply applying the exact same monthly funds directly in to the mortgage principle while merely carrying a HELOC with an otherwise perpetual $0 balance.
Originally posted by @Steven D.:
Maybe the missing piece is that you don't realize that the money you pay on the HELOC is interest + principle. In order to "save" the interest as you put it you have to take a HELOC. All of the HELOC payment is more money that you wouldn't have had to pay if you didn't take the HELOC for pay down. Here are 2 loan calculators for you easily available in excel. For ease $10000/12 months is $833.33/month.
If you just pay extra on your mortgage:
Please not the amount of early payments, this is the money out of your pocket that you are paying extra $116,666.20.
Your yearly HELOC:
So every year on your HELOC you are paying a total of $10273.29 out of your pocket.
To match just paying your mortgage you have to do this every year for ~11.75 years (141/12 how long your mortgage takes just paying the extra direct) . So $10273.29 x 11.75 = $120,711.18. That is extra money out of your pocket that your are paying if you did not take a HELOC. That is more than $116,666.20 that you would have just paid extra direct to the mortgage for early payoff. There is no savings and it is actually a little worse because you are borrowing money at 5% interest to pay money at 4% interest.
Steve, I think you have a fundamental misunderstanding of the concept. When you hold money in your checking account and wait for your bills to come in, it's doing nothing for you during that time. If you get a small HELOC on your house and use it to pay chunks toward your mortgage principal (I think everyone agrees there are substantial savings in doing that if the money is "free", correct?) and then basically use the HELOC as a checking account, you are putting all of your income and bills against it, it will gradually come down over the course of 10-12 months assuming you make about $1000/month more than you spend.
So, here's where I'm stuck. If you just took your income and put $1000 extra toward your mortgage each month to save on interest over the long haul, everyone thinks that's a great idea. The downside to doing it this way is that if all of your discretionary income is going toward the mortgage where you can't easily get it back, you are exposed to risk if you have an emergency or a job loss. The upside is that there is no "cost". You're simply using your own income.
Now if you use a HELOC to accomplish the same savings, ie. $10-$12,000 extra toward your mortgage each year, the opposite is true. You put money into the HELOC, but it's revolving so it's not locked away in your mortgage and is more liquid. And the downside is the cost. Let's say you are carrying a $10,000 balance at 5%. That's $42/month. So, I'm paying $42/month to be able to have all of my discretionary income working for me and saving me interest while maintaining more liquidity than if I just threw all of my discretionary at my mortgage. Does this make more sense?
Originally posted by @Chris May:
Originally posted by @Joshua S.:
This is no more applicable today than it was yesterday. No one is advocating taking out a massive HELOC and paying it down over ten years.
LOL what? Am I being punked? Is Ashton Kutcher hiding in the other room?
Do you really think this is what's happening? I said take out $10,000 at a time and pay it down over the course of the year by putting all of your income and expenses toward it. Wow.
@Joshua S. "I think everyone agrees there are substantial savings in doing that if the money is "free", correct?"
The money isn't free. That's what we keep trying to show you with all this fancy math. You keep glossing over it saying things like "it's only a $50 per month HELOC payment", but this point is the reason your theory is wrong.
Also, this idea that you need to use your HELOC as a checking account to have access to it, is fundamentally flawed. I can carry 0 HELOC balance, make $1000 extra monthly payments to my mortgage, and still have access to my HELOC whenever I want it.
Originally posted by @Joshua S.:
Originally posted by @Steven D.:
Maybe the missing piece is that you don't realize that the money you pay on the HELOC is interest + principle. In order to "save" the interest as you put it you have to take a HELOC. All of the HELOC payment is more money that you wouldn't have had to pay if you didn't take the HELOC for pay down. Here are 2 loan calculators for you easily available in excel. For ease $10000/12 months is $833.33/month.
If you just pay extra on your mortgage:
Please not the amount of early payments, this is the money out of your pocket that you are paying extra $116,666.20.
Your yearly HELOC:
So every year on your HELOC you are paying a total of $10273.29 out of your pocket.
To match just paying your mortgage you have to do this every year for ~11.75 years (141/12 how long your mortgage takes just paying the extra direct) . So $10273.29 x 11.75 = $120,711.18. That is extra money out of your pocket that your are paying if you did not take a HELOC. That is more than $116,666.20 that you would have just paid extra direct to the mortgage for early payoff. There is no savings and it is actually a little worse because you are borrowing money at 5% interest to pay money at 4% interest.
Steve, I think you have a fundamental misunderstanding of the concept. When you hold money in your checking account and wait for your bills to come in, it's doing nothing for you during that time. If you get a small HELOC on your house and use it to pay chunks toward your mortgage principal (I think everyone agrees there are substantial savings in doing that if the money is "free", correct?) and then basically use the HELOC as a checking account, you are putting all of your income and bills against it, it will gradually come down over the course of 10-12 months assuming you make about $1000/month more than you spend.
So, here's where I'm stuck. If you just took your income and put $1000 extra toward your mortgage each month to save on interest over the long haul, everyone thinks that's a great idea. The downside to doing it this way is that if all of your discretionary income is going toward the mortgage where you can't easily get it back, you are exposed to risk if you have an emergency or a job loss. The upside is that there is no "cost". You're simply using your own income.
Now if you use a HELOC to accomplish the same savings, ie. $10-$12,000 extra toward your mortgage each year, the opposite is true. You put money into the HELOC, but it's revolving so it's not locked away in your mortgage and is more liquid. And the downside is the cost. Let's say you are carrying a $10,000 balance at 5%. That's $42/month. So, I'm paying $42/month to be able to have all of my discretionary income working for me and saving me interest while maintaining more liquidity than if I just threw all of my discretionary at my mortgage. Does this make more sense?
Your access to that HELOC money is a function of how much you have already paid down on it throughout the year, correct? And you would have access to the same amount of money if you put it in your bank account, without having to pay $42/month for the privilege. Then you make a lump sum payment at the end of each year. The $42/month savings roughly matches the savings you would receive from maintaining a $10,000 lower balance on the mortgage throughout the year.
Let's call your checking account your emergency fund when you have no HELOC. If you drain your checking to pay your mortgage down and run into trouble your mortgage is still due. If you use your HELOC as an emergency fund and use that to pay your mortgage, when you run into trouble your HELOC and your mortgage are still due.
Originally posted by @Jeremy Z.:
Originally posted by @Joshua S.:
Originally posted by @Steven D.:
Maybe the missing piece is that you don't realize that the money you pay on the HELOC is interest + principle. In order to "save" the interest as you put it you have to take a HELOC. All of the HELOC payment is more money that you wouldn't have had to pay if you didn't take the HELOC for pay down. Here are 2 loan calculators for you easily available in excel. For ease $10000/12 months is $833.33/month.
If you just pay extra on your mortgage:
Please not the amount of early payments, this is the money out of your pocket that you are paying extra $116,666.20.
Your yearly HELOC:
So every year on your HELOC you are paying a total of $10273.29 out of your pocket.
To match just paying your mortgage you have to do this every year for ~11.75 years (141/12 how long your mortgage takes just paying the extra direct) . So $10273.29 x 11.75 = $120,711.18. That is extra money out of your pocket that your are paying if you did not take a HELOC. That is more than $116,666.20 that you would have just paid extra direct to the mortgage for early payoff. There is no savings and it is actually a little worse because you are borrowing money at 5% interest to pay money at 4% interest.
Steve, I think you have a fundamental misunderstanding of the concept. When you hold money in your checking account and wait for your bills to come in, it's doing nothing for you during that time. If you get a small HELOC on your house and use it to pay chunks toward your mortgage principal (I think everyone agrees there are substantial savings in doing that if the money is "free", correct?) and then basically use the HELOC as a checking account, you are putting all of your income and bills against it, it will gradually come down over the course of 10-12 months assuming you make about $1000/month more than you spend.
So, here's where I'm stuck. If you just took your income and put $1000 extra toward your mortgage each month to save on interest over the long haul, everyone thinks that's a great idea. The downside to doing it this way is that if all of your discretionary income is going toward the mortgage where you can't easily get it back, you are exposed to risk if you have an emergency or a job loss. The upside is that there is no "cost". You're simply using your own income.
Now if you use a HELOC to accomplish the same savings, ie. $10-$12,000 extra toward your mortgage each year, the opposite is true. You put money into the HELOC, but it's revolving so it's not locked away in your mortgage and is more liquid. And the downside is the cost. Let's say you are carrying a $10,000 balance at 5%. That's $42/month. So, I'm paying $42/month to be able to have all of my discretionary income working for me and saving me interest while maintaining more liquidity than if I just threw all of my discretionary at my mortgage. Does this make more sense?
Your access to that HELOC money is a function of how much you have already paid down on it throughout the year, correct? And you would have access to the same amount of money if you put it in your bank account, without having to pay $42/month for the privilege. Then you make a lump sum payment at the end of each year. The $42/month savings roughly matches the savings you would receive from maintaining a $10,000 lower balance on the mortgage throughout the year.
Well, I guess we're just going to have to agree to disagree, fellas. I find it interesting, though, that people will pay financial advisors, mutual fund fees, management fees, insurance premiums and all kinds of "unnecessary" fees, but when someone says they are happy to pay $42/month to keep their money working for them full time and maintain liquidity while saving a bunch of money people are just dumbfounded. Do any of you pay a tax professional or a mechanic or someone to put in new windows? Do you pay a babysitter, a landscaper, a cleaning service? Why don't you just do all those things yourself? You leverage the money you have to save / make money / improve your life.
I'm leveraging my $42/month to save thousands and years on my mortgage and not have to lock up all my discretionary income. Well worth it to me. I asked if anyone did it the other way using all of their discretionary and one guy said, "opportunity costs" and then it was crickets. So, you all see the savings, too, but 1) don't have the discretionary to take advantage of it, 2) don't want to lock up your funds, or 3) think the opportunity costs are too high vs the 100% ROI of paying additional mortgage principal (???). It's too bad there's not way to have your cake and eat it, too, right? Keep your investments on the side and still pay down your mortgage quicker for a small fee. Damn it, I wish there was a way! LOL
Have a good one, everybody. Sorry I couldn't help anyone see the benefits.
Originally posted by @Joshua S.:
Originally posted by @Jeremy Z.:
Originally posted by @Joshua S.:
Originally posted by @Steven D.:
Maybe the missing piece is that you don't realize that the money you pay on the HELOC is interest + principle. In order to "save" the interest as you put it you have to take a HELOC. All of the HELOC payment is more money that you wouldn't have had to pay if you didn't take the HELOC for pay down. Here are 2 loan calculators for you easily available in excel. For ease $10000/12 months is $833.33/month.
If you just pay extra on your mortgage:
Please not the amount of early payments, this is the money out of your pocket that you are paying extra $116,666.20.
Your yearly HELOC:
So every year on your HELOC you are paying a total of $10273.29 out of your pocket.
To match just paying your mortgage you have to do this every year for ~11.75 years (141/12 how long your mortgage takes just paying the extra direct) . So $10273.29 x 11.75 = $120,711.18. That is extra money out of your pocket that your are paying if you did not take a HELOC. That is more than $116,666.20 that you would have just paid extra direct to the mortgage for early payoff. There is no savings and it is actually a little worse because you are borrowing money at 5% interest to pay money at 4% interest.
Steve, I think you have a fundamental misunderstanding of the concept. When you hold money in your checking account and wait for your bills to come in, it's doing nothing for you during that time. If you get a small HELOC on your house and use it to pay chunks toward your mortgage principal (I think everyone agrees there are substantial savings in doing that if the money is "free", correct?) and then basically use the HELOC as a checking account, you are putting all of your income and bills against it, it will gradually come down over the course of 10-12 months assuming you make about $1000/month more than you spend.
So, here's where I'm stuck. If you just took your income and put $1000 extra toward your mortgage each month to save on interest over the long haul, everyone thinks that's a great idea. The downside to doing it this way is that if all of your discretionary income is going toward the mortgage where you can't easily get it back, you are exposed to risk if you have an emergency or a job loss. The upside is that there is no "cost". You're simply using your own income.
Now if you use a HELOC to accomplish the same savings, ie. $10-$12,000 extra toward your mortgage each year, the opposite is true. You put money into the HELOC, but it's revolving so it's not locked away in your mortgage and is more liquid. And the downside is the cost. Let's say you are carrying a $10,000 balance at 5%. That's $42/month. So, I'm paying $42/month to be able to have all of my discretionary income working for me and saving me interest while maintaining more liquidity than if I just threw all of my discretionary at my mortgage. Does this make more sense?
Your access to that HELOC money is a function of how much you have already paid down on it throughout the year, correct? And you would have access to the same amount of money if you put it in your bank account, without having to pay $42/month for the privilege. Then you make a lump sum payment at the end of each year. The $42/month savings roughly matches the savings you would receive from maintaining a $10,000 lower balance on the mortgage throughout the year.
Well, I guess we're just going to have to agree to disagree, fellas. I find it interesting, though, that people will pay financial advisors, mutual fund fees, management fees, insurance premiums and all kinds of "unnecessary" fees, but when someone says they are happy to pay $42/month to keep their money working for them full time and maintain liquidity while saving a bunch of money people are just dumbfounded. Do any of you pay a tax professional or a mechanic or someone to put in new windows? Do you pay a babysitter, a landscaper, a cleaning service? Why don't you just do all those things yourself? You leverage the money you have to save / make money / improve your life.
I'm leveraging my $42/month to save thousands and years on my mortgage and not have to lock up all my discretionary income. Well worth it to me. I asked if anyone did it the other way using all of their discretionary and one guy said, "opportunity costs" and then it was crickets. So, you all see the savings, too, but 1) don't have the discretionary to take advantage of it, 2) don't want to lock up your funds, or 3) think the opportunity costs are too high vs the 100% ROI of paying additional mortgage principal (???). It's too bad there's not way to have your cake and eat it, too, right? Keep your investments on the side and still pay down your mortgage quicker for a small fee. Damn it, I wish there was a way! LOL
Have a good one, everybody. Sorry I couldn't help anyone see the benefits.
I like what others are suggesting here, and I think it would work in your situation. Get the HELOC, but don't pay off the mortgage with it, just keep it for access to cash. Now aggressively pay off $10,000 of your mortgage over the year - you still have access to the HELOC. Saves you the same amount, actually more if you have a higher rate on the HELOC. Then you don't have to mess around with funneling funds/payments through your HELOC.
I suppose there could be a slight drawback to that strategy if the HELOC you had with a $0 balance got called/frozen due to loss of job, etc. Not sure how that would differ if you were carrying a balance on it. Seems like either way you lose access to the money.
Your original premise that a HELOC is cheap debt vs mortgage debt is still flawed.