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?

[Brent Coombs]

Originally posted by @Joshua S.:

Originally posted by @Brent Coombs:

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

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

It's a pity that you feel the need to wait 10 years before getting into new investing! 

All that HELOC power, wasted, paying down a low interest rate mortgage!

Btw, what's the point of never borrowing against equity once paid off? 

ie. How will you or your kids ever be better off if you stop investing? Cheers...

[Joshua S.]

Originally posted by @Brent Coombs:

Originally posted by @Joshua S.:

Originally posted by @Brent Coombs:

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

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

It's a pity that you feel the need to wait 10 years before getting into new investing! 

All that HELOC power, wasted, paying down a low interest rate mortgage!

Btw, what's the point of never borrowing against equity once paid off? 

ie. How will you or your kids ever be better off if you stop investing? Cheers...

Just a bunch more incorrect assumptions / misconceptions, Brent. On the contrary, using $10,000 at a time to pay down the mortgage gives me room to do other investing with the credit lines. I'm far from maxed out and also have plenty of reserves. A person could also use $5000 "chunks" if they were that worried about it. Plus, the thing that you guys keep missing over and over is that saving the mortgage interest IS an investment. My rentals are at about a 10% cap rate and as I've repeatedly tried to explain the early mortgage principal returns 100%.

Think about this for a second. Each $10,000 over 10 years ($100,000 total) nets $100,000 in interest savings. That's 100% ROI verified on financial calculators. No one can explain why this is wrong. But I'll do you one better than 100% ROI. The additional principal you pay is money you were already going to pay, anyway, so it's simply the act of paying it EARLY that nets you the savings. Therefore you're not even investing anything to get the return. Of course there are "opportunity costs", but you're passing up earning 5-10% elsewhere to earn 100%, so in my book it would only count as opportunity costs if you WEREN'T paying your mortgage down early. Not only that, but getting out of debt in 9-10 years allows plenty of time for investing for the rest of my life whereas your investing is just funding your 30 years on the mortgage treadmill. 

Really think about it, Brent, don't just react. You can do this! You owe your buddy $5,000 with 4% annual interest and a deadline of 5 years. But he says that if you pay him early you don't have to pay the interest. You don't even have to make payments. This is a good friend, he just wants interest if you take the full term to pay (different from a mortgage, I know, but easier to calculate). You have to pay either way, so scrape together the money, borrow, steal, whatever and pay early at zero cost or pay at the end of the term, but add on $1000 ($200 interest per year) because you took so long to pay. There's no investment to get that $1000 savings other than paying early, so you can't even calculate an ROI on it because it's free money. You got $1000 for no money. You'd be stupid not to do that "investment".

I'm sure you won't be able to follow any of that, but compare it with another investment. If I bought a gas station or a multifamily or something, I have to outlay some type of money to get the returns. With my mortgage, it's money that I'm scheduled to pay, anyway, so I'm only changing the timing of when I pay it to get the returns. I know I'm only Ben Affleck and you're Will Hunting, but that's free money in my world, which is even better than 100% ROI. Either way, this investment burns yours to the ground, so I wouldn't worry too much about my kids. :)

[Gary Floring]

Originally posted by @Joshua S.:

Originally posted by @Brent Coombs:

Originally posted by @Joshua S.:

Originally posted by @Brent Coombs:

 Plus, the thing that you guys keep missing over and over is that saving the mortgage interest IS an investment. My rentals are at about a 10% cap rate and as I've repeatedly tried to explain the early mortgage principal returns 100%.

Think about this for a second. Each $10,000 over 10 years ($100,000 total) nets $100,000 in interest savings. That's 100% ROI verified on financial calculators. No one can explain why this is wrong. But I'll do you one better than 100% ROI. The additional principal you pay is

Not only that, but it seems that everyone is focused on the "nominal" rate, or APR of a 30 year loan. What no one wants to mention, let alone DISCUSS in a logical debate, is the Total Interest Percentage (TIP) of the loan. In the early years of a 30 year, the effective TIP is well above 100%. Why can't we talk about that??? And the interest AMOUNT represented by that TIP is what is being attacked by the $10,000 chunks. Everyone wants to compare the nominal APR with the actual interest rate of the HELOC, but that is comparing apples to tomatoes.

[Scott L.]

This strategy is the Real Estate version of the perpetual motion machine in Physics, or perhaps a better analogy the "urban con game", 3 cups and a ping pong ball. You realize that the guy is actually palming the ping pong ball when shuffling the cups , right? Every once in a while he lets some little kid or old lady pick the right cup and doesn't palm the ball and pays off $3 to $1. Once the crowd is hooked, he goes back to palming the ball. :-)

After reading several hundred posts about the Velocity Banking and other mortgage payoff strategies, I find that they all depend on a few misconceptions that are then buried in an explosion of numbers and straw man examples. Here are the mathematical facts:

- You can only pay less interest on a given principal balance, for a given period of time, by getting a lower rate.

- You can only pay off a given principal debt faster by paying more cash towards the principal. You have to pay the entire amount of the debt somehow in order to satisfy the obligation.

All these purported strategies rely on you paying more principal, sooner than required by the 30 amortization schedule. If you do that, you will save interest. But this begs the question. Where does the additional early principal money come from? A HELOC you say....so now you moved the principal balance from a mortgage to a HELOC. This accelerates the amortization of the mortgage, thereby saving interest...but you now owe interest on the HELOC. Where does the money to pay the LOC principal come from? Why don't you just use it to pay the original mortgage faster?

Now another common misconception. 30 year FNMA mortgages calculate interest monthly, while HELOCs calculate interest daily, so you can rapidly advance the amortization by "chunking" your mortgage payments with a HELOC.

WRONG. Interest is calculated based on the daily principal balance from the last payment to the current payment. At the beginning of the loan you are given an amortization schedule of 360 even payments and a listing of how much will go to principal and how much to interest for each even payment. This schedule is only valid if the bank receives and applies the mortgage payment on the EXACT DUE date for all 360 payments. Otherwise the schedule is recalculated every month based on the DAILY principal balance. This is the way standard mortgages have worked for over 30 years.

There may be some psychological benefit to using a rolling LOC in helping budget your monthly inflow and outflow so as to pay off a mortgage early, but there is very little if any mathematical interest advantage unless you pay more CASH to principal faster...Again, the question, where does the cash come from?

[Joshua S.]

Originally posted by @Gary Floring:

Originally posted by @Joshua S.:

Originally posted by @Brent Coombs:

Originally posted by @Joshua S.:

Originally posted by @Brent Coombs:

 Plus, the thing that you guys keep missing over and over is that saving the mortgage interest IS an investment. My rentals are at about a 10% cap rate and as I've repeatedly tried to explain the early mortgage principal returns 100%.

Think about this for a second. Each $10,000 over 10 years ($100,000 total) nets $100,000 in interest savings. That's 100% ROI verified on financial calculators. No one can explain why this is wrong. But I'll do you one better than 100% ROI. The additional principal you pay is

Not only that, but it seems that everyone is focused on the "nominal" rate, or APR of a 30 year loan. What no one wants to mention, let alone DISCUSS in a logical debate, is the Total Interest Percentage (TIP) of the loan. In the early years of a 30 year, the effective TIP is well above 100%. Why can't we talk about that??? And the interest AMOUNT represented by that TIP is what is being attacked by the $10,000 chunks. Everyone wants to compare the nominal APR with the actual interest rate of the HELOC, but that is comparing apples to tomatoes.

That's what I've been saying, Gary. I think of it like when you're making your normal payments it's like you're making tiny principal payments and paying for plane tickets to fly them to the lender. It's that expensive to pay on their schedule. 

[Gary Floring]

Originally posted by @Scott L.:

" You can only pay less interest on a given principal balance, for a given period of time, by getting a lower rate."

If you pay off my car loan early, do you not pay less interest on the principle balance? If you paid off my mortgage early, did you not pay less interest on the principle balance?  Explain your statement, please....

[Scott L.]

Originally posted by @Gary Floring:

Originally posted by @Scott L.:

" You can only pay less interest on a given principal balance, for a given period of time, by getting a lower rate."

If you pay off my car loan early, do you not pay less interest on the principle balance? If you paid off my mortgage early, did you not pay less interest on the principle balance?  Explain your statement, please....

 If you pay principal earlier than required by the note, then you pay less interest. Great, if you had the extra money for paying principal early, why did you borrow the money in the first place? Or where did you get the principal sooner?

[Jeremy Z.]

@Gary Floring

"What no one wants to mention, let alone DISCUSS in a logical debate, is the Total Interest Percentage (TIP) of the loan."

That's offensive really. Other members on this thread have taken time to put together examples that show the total interest over time. It's super easy to calculate the total interest percentage at any given time. This is the problem here with you and @Joshua Smith. You think other members aren't aware of the concepts you are trying to explain, when the reality is they have already demonstrated those concepts through actual examples and the two of you just don't know what you are looking at.

[Joshua S.]

Originally posted by @Jeremy Z.:

@Gary Floring

"What no one wants to mention, let alone DISCUSS in a logical debate, is the Total Interest Percentage (TIP) of the loan."

That's offensive really. Other members on this thread have taken time to put together examples that show the total interest over time. It's super easy to calculate the total interest percentage at any given time. This is the problem here with you and @Joshua Smith. You think other members aren't aware of the concepts you are trying to explain, when the reality is they have already demonstrated those concepts through actual examples and the two of you just don't know what you are looking at.

Well, Jeremy, from my perspective if you understand so well the concepts we're talking about, then there would be a general consensus about a lot of this and there really isn't. It's been like pulling teeth to get people to acknowledge what to me seems like a simple truth:

You can save $100,000 and 20 years off of your loan by paying an extra $10,000 of principal per year. If that costs $5000 over the ten years to do it conveniently then who ________ cares???

That, to me, is stupefyingly easy to understand, yet everyone wants to split hairs over it.

1. You can do it without a HELOC.

Yes, and most people don't because there are drawbacks that we've covered a million times. The HELOC just makes it more convenient.

2. There is a cost.

Yes and there is a cost to any investment. If you're asking me to invest $5000 to get $95,000 and get out of debt 20 years early I will sign up every day and twice on Sunday.

3. You are just moving debt to a different loan. All else being equal, you are not saving anything.

All else is not equal. It has nothing to do with math. You are paying the debt in a completely different way. Again, we have covered this.

4. Mortgages are cheap money because they are 4%.

Mortgages are absolutely extortionate. People say credit cards are the devil, right? If you put a $1000 TV on a credit card at 18% and pay the minimum payment it will take 70 months and $1473 (47% interest) worth of payments to pay off. People use credit cards to buy things they can't truly afford and then pay a crazy amount of interest in order to live beyond their means. Mortgages are the EXACT SAME THING, but at 360 months and 67% interest. We are conditioned to do it, because we all need a place to live and have little choice with housing prices the way they are, but people also convince themselves they NEED a huge big screen TV. A person should take every advantage they can get to avoid paying the interest on a mortgage because they are practically being forced to buy a second home and only get one.

5. If you use all of your money to pay down the mortgage, you don't have the ability to invest.

This is an investment and a far better one. I've shown that over and over and then we just bump the objection wheel around to the next one and keep going. 

On and on and on, there are disagreements about the most simple aspects of this discussion that anybody who is willing to look outside the box can see. I thought, especially on a website with a bunch of free thinking investors, more people would be able to grasp the whole thing, but it is a damn shame that people like you can't get over the nitpicking and admit that it's a viable strategy. Wowowow. Oh well, I guess. :)

[Jeremy Z.]

@Joshua S.

It's been like pulling teeth to get people to acknowledge what to me seems like a simple truth:

You can save $100,000 and 20 years off of your loan by paying an extra $10,000 of principal per year.

You keep making up imaginary arguments that no one is having with you. Just like I said to Gary... this has been acknowledged by the people you are referring to long before you ever even posted on this thread. If you can't understand the examples given, that is on you.

To claim that 4% mortgages are the EXACT SAME THING as 18% credit cards shows us everything else we need to know about your understanding of financing.

Best of luck to you. If you keep powering through your $10,000 HELOC every year your ignorance of the math won't really hurt you much anyway.

[Chris May]

@Joshua S. Are you saying that if you had $1000, a 4% mortgage, and a credit card, that you would rather pay that $1000 towards your mortgage instead of the card?

[Nick Moriwaki]

Originally posted by @Chris May:

@Joshua S. Are you saying that if you had $1000, a 4% mortgage, and a credit card, that you would rather pay that $1000 towards your mortgage instead of the card?

 I hope not....

Josh - I've modified my spreadsheet to show (I think) what everyone is trying to tell you.  Only focus on the mortgage and mortgage + additional columns.  By paying the additional $833.33 to the mortgage each month ($10K a year) you realize the same $100K+ and almost 20 years of savings.  Also, this doesn't eat into the liquid cash that you already had.  Hopefully this helps.

[Jeremy Z.]

@Joshua S.

There is a simple reason a mortgage has such a large initial interest amount compared to your other loan examples... It is a much larger loan. It's not a trick. It's not a scam. It's just a damn big chunk of money, amortized over a very long time. Run the numbers on a $10,000 loan at 4% (and amortized over 30 years) and you will see the same "front loaded" interest/principal ratio.

Still think that credit card is the same? Run the numbers on paying off a $200,000 credit card debt at 18%.

And before you make the argument that you would only put a small portion on the 18% credit card, what happens when you can't make extra payments toward principle all the sudden? That higher interest rate starts adding up fast.

[Brent Coombs]

@Joshua S., regarding my and others' objection 5 (If you use all of your money to pay down the mortgage, you don't have the ability to invest), you wrote: "This is an investment and a far better one. I've shown that over and over and then we just bump the objection wheel around to the next one and keep going", I knew that I'd got you to admit where you were coming from (even though you acknowledged several times that you'd still have the option to use your HELOC for investing, or emergencies, instead of paying down your interest early). I say: Why is it "far better"?

Another point that I hope you're taking into account for your own life is where you wrote: "people also convince themselves they NEED a huge big screen TV", please remember that the simplest way of saving all that interest on $10k you keep rambling on about, is by not borrowing it in the first place! eg. Borrow $190k, not $200k. Voila! $21k in interest, saved!

["You got $10,000 for no money. You'd be stupid not to do that "investment""]...

[Joshua S.]

Originally posted by @Chris May:

@Joshua S. Are you saying that if you had $1000, a 4% mortgage, and a credit card, that you would rather pay that $1000 towards your mortgage instead of the card?

No, of course not. Some traditional knowledge is accurate and "pay off high interest debt before lower interest debt" is one of those things. I wasn't equating them mathematically, but the fact that you went there is an example of what I was trying to tell you: it's extremely difficult for you to see past the equations to anything else in this debate.

I was equating them strictly in the sense that they are both ways to buy things you can't truly afford and pay a ton of interest because you are living beyond your means. Of course 18% interest is more than 4% interest. What I'm trying to tell you is that all you guys see is 4% and think that's cheap because it's much lower than 18%. In other words, you use the comparison between the numbers to obscure the fact that 4% is still extortionate.

Pretty much anyone will tell you when looking for investments that the best investment is to pay off high interest debt first, eg. credit cards, and then they will ignore that 4% because "that's the cheapest money you will ever borrow". I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do. A mortgage is basically like getting a credit card at a low interest rate to buy a house and then making minimum payments for 30 years and wondering where all your money is going. Making minimum payments on credit cards the plague of the financial world, but making minimum payments on your mortgage is business as usual because we need to save up and buy rentals. Sad slide whistle.

[Joshua S.]

Originally posted by @Jeremy Z.:

@Joshua S.

There is a simple reason a mortgage has such a large initial interest amount compared to your other loan examples... It is a much larger loan. It's not a trick. It's not a scam. It's just a damn big chunk of money, amortized over a very long time. Run the numbers on a $10,000 loan at 4% (and amortized over 30 years) and you will see the same "front loaded" interest/principal ratio.

Still think that credit card is the same? Run the numbers on paying off a $200,000 credit card debt at 18%.

And before you make the argument that you would only put a small portion on the 18% credit card, what happens when you can't make extra payments toward principle all the sudden? That higher interest rate starts adding up fast.

I didn't say it was a trick or a scam. I said that it's extortionate. I would definitely say most people don't know what they are paying, because everyone says 4% is cheap money, but it's not a "scam". I understand that it's because it's a larger dollar amount amortized over a long time and it's right there in the documents. 4% per year, 67% total. So, don't read into what I'm saying to take your own meaning. When I used the term front loaded I didn't mean that it was a trick. Maybe that it was unfair to make the customer pay off interest first, but I understand it's a function of how high the debt is at first. The term front loaded simply means you pay way more interest in the beginning and that's true. You really seem to be reading between the lines for things that aren't there instead of listening to what I'm saying.

As I said to Chris, the point of the credit card comparison was not the rate of interest, eg 18% vs 4%. It was the fact that a responsible person will look at a $1000 big screen and go, "You know, I can't really afford that, so let me save up over time or get something cheaper", but that same person will not say, "Wow, this is a $200,000 house and I can't afford that, so I better find something cheaper". They will pay $350,000 for that house by putting it on the 4% credit card (aka their mortgage) and making minimum payments. Yes, of course the rate is different, but other than that it's exactly the same as misusing your credit card and living beyond your means. 

Maybe we are "forced" to do this to an extent and I accept that, but we don't have to accept making minimum payments or trying to find 10% investments when we have a 100% investment right under our noses.

[Joshua S.]

Originally posted by @Nick Moriwaki:

Originally posted by @Chris May:

@Joshua S. Are you saying that if you had $1000, a 4% mortgage, and a credit card, that you would rather pay that $1000 towards your mortgage instead of the card?

 I hope not....

Josh - I've modified my spreadsheet to show (I think) what everyone is trying to tell you.  Only focus on the mortgage and mortgage + additional columns.  By paying the additional $833.33 to the mortgage each month ($10K a year) you realize the same $100K+ and almost 20 years of savings.  Also, this doesn't eat into the liquid cash that you already had.  Hopefully this helps.

No, I get that. If a person finds it easier to just put extra principal toward the mortgage, that's great. I truly understand that you can pay off the mortgage early simply by paying additional principal. But as we've said, you don't get the benefit of eliminating the dead money in your checking account, using the bank's money to pay down the mortgage faster than you could save the same amount, depressing the ADB of a portion of your mortgage, moving a portion of the mortgage to where more of your income automatically goes toward principal, having the flexibility of paying the money and still having access to it, etc. Trust me, I know you can do it without the HELOC, I just don't get why you would forgo all of these other benefits if you are a so-called free thinking investor.

[Chris May]

@Joshua S. - "I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do."

"it's extremely difficult for you to see past the equations to anything else in this debate."

---------

Prepaying your principal is just about the worst investment anyone can make.  You're accusing me of getting stuck in the math, but you're oblivious to it. 

A one-time, $10,000 cash payment in month one towards a $200k loan at 5% saves you $31,127 in interest. The rest of the mortgage will be paid off in ~27 years.

If you, instead, put that money in the stock market, which historically returns 10% per year, you would have $144,209 after 27 years.

Prepaying your principal cost you $103,082.

[Joshua S.]

Originally posted by @Chris May:

@Joshua S. - "I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do."

"it's extremely difficult for you to see past the equations to anything else in this debate."

---------

Prepaying your principal is just about the worst investment anyone can make.  You're accusing me of getting stuck in the math, but you're oblivious to it. 

A one-time, $10,000 cash payment in month one towards a $200k loan at 5% saves you $31,127 in interest. The rest of the mortgage will be paid off in ~27 years.

If you, instead, put that money in the stock market, which historically returns 10% per year, you would have $144,209 after 27 years.

Prepaying your principal cost you $103,082.

Again, I can see how that works out mathematically, but I don't think you're not looking at the full picture, so here's what I see and you can tell me where it's wrong.

In my strategy, I am making $10,000 cash payments each year for ten years which totals $100,000. The savings on my interest is $100,000 or 100% ROI over ten years.

Let's do this same strategy with the market returns you quoted. $10,000/year for ten years for a total investment of $100,000. Your ending balances after each year look like this. 

$11,000

$23,100

$36,410

$51,051

$67,156

$84,871

$104,358

$125,794

$149,374

$175,311

I added $10,000 each year and then multiplied by 1.1 to calculate your additional investment and ten percent return. Your ending balance after ten years is $175,311. You invested $100,000 and got $75,000, so it's a total ROI of 75% over ten years. Great job, but I beat you at 100% and you are still in debt for another 20 years on your mortgage whereas I'm paid off and free to invest pretty much all my income for the rest of my career.

Now this part seems like gloating since I already beat you by 25%, but as I said, I also didn't even invest anything, really. I was going to pay that money, anyway, so if you can find your inner zen financial master you will realize that all I did was change the timing of these payments to get my returns. You can't even calculate the return on that, because it's free money. It cost me $75,000 in "opportunity" vs doing your strategy, but can you even call it that if I made $100,000?? I don't. If anything, the opportunity costs are yours, in my opinion. Another difference would be that you can have good and bad years with your strategy, which can affect the outcome. My returns are guaranteed because they are already built into my current financing.

I'm certainly not ignoring the math, bro, I promise. But I believe you are ignoring the bigger picture.

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

@Joshua S. - "I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do."

"it's extremely difficult for you to see past the equations to anything else in this debate."

---------

Prepaying your principal is just about the worst investment anyone can make.  You're accusing me of getting stuck in the math, but you're oblivious to it. 

A one-time, $10,000 cash payment in month one towards a $200k loan at 5% saves you $31,127 in interest. The rest of the mortgage will be paid off in ~27 years.

If you, instead, put that money in the stock market, which historically returns 10% per year, you would have $144,209 after 27 years.

Prepaying your principal cost you $103,082.

Again, I can see how that works out mathematically, but I don't think you're not looking at the full picture, so here's what I see and you can tell me where it's wrong.

In my strategy, I am making $10,000 cash payments each year for ten years which totals $100,000. The savings on my interest is $100,000 or 100% ROI over ten years.

Let's do this same strategy with the market returns you quoted. $10,000/year for ten years for a total investment of $100,000. Your ending balances after each year look like this. 

$11,000

$23,100

$36,410

$51,051

$67,156

$84,871

$104,358

$125,794

$149,374

$175,311

I added $10,000 each year and then multiplied by 1.1 to calculate your additional investment and ten percent return. Your ending balance after ten years is $175,311. You invested $100,000 and got $75,000, so it's a total ROI of 75% over ten years. Great job, but I beat you at 100% and you are still in debt for another 20 years on your mortgage whereas I'm paid off and free to invest pretty much all my income for the rest of my career.

Now this part seems like gloating since I already beat you by 25%, but as I said, I also didn't even invest anything, really. I was going to pay that money, anyway, so if you can find your inner zen financial master you will realize that all I did was change the timing of these payments to get my returns. You can't even calculate the return on that, because it's free money. It cost me $75,000 in "opportunity" vs doing your strategy, but can you even call it that if I made $100,000?? I don't. If anything, the opportunity costs are yours, in my opinion. Another difference would be that you can have good and bad years with your strategy, which can affect the outcome. My returns are guaranteed because they are already built into my current financing.

I'm certainly not ignoring the math, bro, I promise. But I believe you are ignoring the bigger picture.

 Yikes. That's not how you calculate that. At all.

You're only giving my plan 10 years of gains, but you're giving your plan more than 10 years to collect gains.

[Joshua S.]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

@Joshua S. - "I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do."

"it's extremely difficult for you to see past the equations to anything else in this debate."

---------

Prepaying your principal is just about the worst investment anyone can make.  You're accusing me of getting stuck in the math, but you're oblivious to it. 

A one-time, $10,000 cash payment in month one towards a $200k loan at 5% saves you $31,127 in interest. The rest of the mortgage will be paid off in ~27 years.

If you, instead, put that money in the stock market, which historically returns 10% per year, you would have $144,209 after 27 years.

Prepaying your principal cost you $103,082.

Again, I can see how that works out mathematically, but I don't think you're not looking at the full picture, so here's what I see and you can tell me where it's wrong.

In my strategy, I am making $10,000 cash payments each year for ten years which totals $100,000. The savings on my interest is $100,000 or 100% ROI over ten years.

Let's do this same strategy with the market returns you quoted. $10,000/year for ten years for a total investment of $100,000. Your ending balances after each year look like this. 

$11,000

$23,100

$36,410

$51,051

$67,156

$84,871

$104,358

$125,794

$149,374

$175,311

I added $10,000 each year and then multiplied by 1.1 to calculate your additional investment and ten percent return. Your ending balance after ten years is $175,311. You invested $100,000 and got $75,000, so it's a total ROI of 75% over ten years. Great job, but I beat you at 100% and you are still in debt for another 20 years on your mortgage whereas I'm paid off and free to invest pretty much all my income for the rest of my career.

Now this part seems like gloating since I already beat you by 25%, but as I said, I also didn't even invest anything, really. I was going to pay that money, anyway, so if you can find your inner zen financial master you will realize that all I did was change the timing of these payments to get my returns. You can't even calculate the return on that, because it's free money. It cost me $75,000 in "opportunity" vs doing your strategy, but can you even call it that if I made $100,000?? I don't. If anything, the opportunity costs are yours, in my opinion. Another difference would be that you can have good and bad years with your strategy, which can affect the outcome. My returns are guaranteed because they are already built into my current financing.

I'm certainly not ignoring the math, bro, I promise. But I believe you are ignoring the bigger picture.

In other words, Chris, you are wrong: prepaying your principal is definitely, absolutely NOT the worst investment anyone can make. There are much worse investments including the one you proposed.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

@Joshua S. - "I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do."

"it's extremely difficult for you to see past the equations to anything else in this debate."

---------

Prepaying your principal is just about the worst investment anyone can make.  You're accusing me of getting stuck in the math, but you're oblivious to it. 

A one-time, $10,000 cash payment in month one towards a $200k loan at 5% saves you $31,127 in interest. The rest of the mortgage will be paid off in ~27 years.

If you, instead, put that money in the stock market, which historically returns 10% per year, you would have $144,209 after 27 years.

Prepaying your principal cost you $103,082.

Again, I can see how that works out mathematically, but I don't think you're not looking at the full picture, so here's what I see and you can tell me where it's wrong.

In my strategy, I am making $10,000 cash payments each year for ten years which totals $100,000. The savings on my interest is $100,000 or 100% ROI over ten years.

Let's do this same strategy with the market returns you quoted. $10,000/year for ten years for a total investment of $100,000. Your ending balances after each year look like this. 

$11,000

$23,100

$36,410

$51,051

$67,156

$84,871

$104,358

$125,794

$149,374

$175,311

I added $10,000 each year and then multiplied by 1.1 to calculate your additional investment and ten percent return. Your ending balance after ten years is $175,311. You invested $100,000 and got $75,000, so it's a total ROI of 75% over ten years. Great job, but I beat you at 100% and you are still in debt for another 20 years on your mortgage whereas I'm paid off and free to invest pretty much all my income for the rest of my career.

Now this part seems like gloating since I already beat you by 25%, but as I said, I also didn't even invest anything, really. I was going to pay that money, anyway, so if you can find your inner zen financial master you will realize that all I did was change the timing of these payments to get my returns. You can't even calculate the return on that, because it's free money. It cost me $75,000 in "opportunity" vs doing your strategy, but can you even call it that if I made $100,000?? I don't. If anything, the opportunity costs are yours, in my opinion. Another difference would be that you can have good and bad years with your strategy, which can affect the outcome. My returns are guaranteed because they are already built into my current financing.

I'm certainly not ignoring the math, bro, I promise. But I believe you are ignoring the bigger picture.

 Yikes. That's not how you calculate that. At all.

You're only giving my plan 10 years of gains, but you're giving your plan more than 10 years to collect gains.

No, this is what I've been talking about. There's some sort of fundamental misunderstanding of where the savings come from. If I pay off my mortgage tomorrow and completely skip the rest of the scheduled interest payments on my loan, you wouldn't say that it took 20 some odd years to get those savings. I saved them with the act of paying early, period. I never allowed the interest to accrue because I gave the money back earlier than planned. 

I can't believe you can't get this. If you rack up a $1000 TV on your CC and pay it off with infinity minimum payments, your friends and family will laugh at you because you are just letting interest run on you and paying 50% more for that TV. If you pay it off early, you save the interest that was scheduled if you had paid it the way the bank allowed / preferred you to do it.

A mortgage is the same thing. You pay off early, you save / skip / cancel / avoid interest. There's no other 20 years to it. It's paid off. Just like if you plunk down $1000 on your CC they stop charging you interest because you gave the money back. I can't believe this is what this whole thing is about. The reason you pay interest is because of the time you are taking to pay it back. The interest charges are literally the money you pay to have their money out on loan. When you give it back over time like they want you to, you pay their interest charges. When you give it back sooner the interest is stopped / canceled. This is why I was making the lottery comparison. The interest isn't charged no matter what, IT'S SCHEDULED in case you need the 30 years to pay back. If you pay it off tomorrow with lotto winnings they just want the balance because they don't have to wait any longer to get it back.

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

@Joshua S. - "I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do."

"it's extremely difficult for you to see past the equations to anything else in this debate."

---------

Prepaying your principal is just about the worst investment anyone can make.  You're accusing me of getting stuck in the math, but you're oblivious to it. 

A one-time, $10,000 cash payment in month one towards a $200k loan at 5% saves you $31,127 in interest. The rest of the mortgage will be paid off in ~27 years.

If you, instead, put that money in the stock market, which historically returns 10% per year, you would have $144,209 after 27 years.

Prepaying your principal cost you $103,082.

Again, I can see how that works out mathematically, but I don't think you're not looking at the full picture, so here's what I see and you can tell me where it's wrong.

In my strategy, I am making $10,000 cash payments each year for ten years which totals $100,000. The savings on my interest is $100,000 or 100% ROI over ten years.

Let's do this same strategy with the market returns you quoted. $10,000/year for ten years for a total investment of $100,000. Your ending balances after each year look like this. 

$11,000

$23,100

$36,410

$51,051

$67,156

$84,871

$104,358

$125,794

$149,374

$175,311

I added $10,000 each year and then multiplied by 1.1 to calculate your additional investment and ten percent return. Your ending balance after ten years is $175,311. You invested $100,000 and got $75,000, so it's a total ROI of 75% over ten years. Great job, but I beat you at 100% and you are still in debt for another 20 years on your mortgage whereas I'm paid off and free to invest pretty much all my income for the rest of my career.

Now this part seems like gloating since I already beat you by 25%, but as I said, I also didn't even invest anything, really. I was going to pay that money, anyway, so if you can find your inner zen financial master you will realize that all I did was change the timing of these payments to get my returns. You can't even calculate the return on that, because it's free money. It cost me $75,000 in "opportunity" vs doing your strategy, but can you even call it that if I made $100,000?? I don't. If anything, the opportunity costs are yours, in my opinion. Another difference would be that you can have good and bad years with your strategy, which can affect the outcome. My returns are guaranteed because they are already built into my current financing.

I'm certainly not ignoring the math, bro, I promise. But I believe you are ignoring the bigger picture.

 Yikes. That's not how you calculate that. At all.

You're only giving my plan 10 years of gains, but you're giving your plan more than 10 years to collect gains.

No, this is what I've been talking about. There's some sort of fundamental misunderstanding of where the savings come from. If I pay off my mortgage tomorrow and completely skip the rest of the scheduled interest payments on my loan, you wouldn't say that it took 20 some odd years to get those savings. I saved them with the act of paying early, period. I never allowed the interest to accrue because I gave the money back earlier than planned. 

I can't believe you can't get this. If you rack up a $1000 TV on your CC and pay it off with infinity minimum payments, your friends and family will laugh at you because you are just letting interest run on you and paying 50% more for that TV. If you pay it off early, you save the interest that was scheduled if you had paid it the way the bank allowed / preferred you to do it.

A mortgage is the same thing. You pay off early, you save / skip / cancel / avoid interest. There's no other 20 years to it. It's paid off. Just like if you plunk down $1000 on your CC they stop charging you interest because you gave the money back. I can't believe this is what this whole thing is about. The reason you pay interest is because of the time you are taking to pay it back. The interest charges are literally the money you pay to have their money out on loan. When you give it back over time like they want you to, you pay their interest charges. When you give it back sooner the interest is stopped / canceled. This is why I was making the lottery comparison. The interest isn't charged no matter what, IT'S SCHEDULED in case you need the 30 years to pay back. If you pay it off tomorrow with lotto winnings they just want the balance because they don't have to wait any longer to get it back.

 If you pay down your mortgage today with $10k, it takes you the life of the original loan, 30 years, to realize that "investment" gain.

41.67 in month one, 41.84 in month 2, 42.01 in month 3, etc.

You don't realize that gain the moment you pay the loan. What are you talking about? This is like investing 101.

If I put $10k in the stock market today and it'll be worth ~$26k in 10 years, I can't say I already made $16k .

Do you have a financial advisor or anything? If this is how you're projecting gains on your real estate business you're leaving piles of money on the table.

[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 @Chris May:

@Joshua S. - "I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do."

"it's extremely difficult for you to see past the equations to anything else in this debate."

---------

Prepaying your principal is just about the worst investment anyone can make.  You're accusing me of getting stuck in the math, but you're oblivious to it. 

A one-time, $10,000 cash payment in month one towards a $200k loan at 5% saves you $31,127 in interest. The rest of the mortgage will be paid off in ~27 years.

If you, instead, put that money in the stock market, which historically returns 10% per year, you would have $144,209 after 27 years.

Prepaying your principal cost you $103,082.

Again, I can see how that works out mathematically, but I don't think you're not looking at the full picture, so here's what I see and you can tell me where it's wrong.

In my strategy, I am making $10,000 cash payments each year for ten years which totals $100,000. The savings on my interest is $100,000 or 100% ROI over ten years.

Let's do this same strategy with the market returns you quoted. $10,000/year for ten years for a total investment of $100,000. Your ending balances after each year look like this. 

$11,000

$23,100

$36,410

$51,051

$67,156

$84,871

$104,358

$125,794

$149,374

$175,311

I added $10,000 each year and then multiplied by 1.1 to calculate your additional investment and ten percent return. Your ending balance after ten years is $175,311. You invested $100,000 and got $75,000, so it's a total ROI of 75% over ten years. Great job, but I beat you at 100% and you are still in debt for another 20 years on your mortgage whereas I'm paid off and free to invest pretty much all my income for the rest of my career.

Now this part seems like gloating since I already beat you by 25%, but as I said, I also didn't even invest anything, really. I was going to pay that money, anyway, so if you can find your inner zen financial master you will realize that all I did was change the timing of these payments to get my returns. You can't even calculate the return on that, because it's free money. It cost me $75,000 in "opportunity" vs doing your strategy, but can you even call it that if I made $100,000?? I don't. If anything, the opportunity costs are yours, in my opinion. Another difference would be that you can have good and bad years with your strategy, which can affect the outcome. My returns are guaranteed because they are already built into my current financing.

I'm certainly not ignoring the math, bro, I promise. But I believe you are ignoring the bigger picture.

 Yikes. That's not how you calculate that. At all.

You're only giving my plan 10 years of gains, but you're giving your plan more than 10 years to collect gains.

No, this is what I've been talking about. There's some sort of fundamental misunderstanding of where the savings come from. If I pay off my mortgage tomorrow and completely skip the rest of the scheduled interest payments on my loan, you wouldn't say that it took 20 some odd years to get those savings. I saved them with the act of paying early, period. I never allowed the interest to accrue because I gave the money back earlier than planned. 

I can't believe you can't get this. If you rack up a $1000 TV on your CC and pay it off with infinity minimum payments, your friends and family will laugh at you because you are just letting interest run on you and paying 50% more for that TV. If you pay it off early, you save the interest that was scheduled if you had paid it the way the bank allowed / preferred you to do it.

A mortgage is the same thing. You pay off early, you save / skip / cancel / avoid interest. There's no other 20 years to it. It's paid off. Just like if you plunk down $1000 on your CC they stop charging you interest because you gave the money back. I can't believe this is what this whole thing is about. The reason you pay interest is because of the time you are taking to pay it back. The interest charges are literally the money you pay to have their money out on loan. When you give it back over time like they want you to, you pay their interest charges. When you give it back sooner the interest is stopped / canceled. This is why I was making the lottery comparison. The interest isn't charged no matter what, IT'S SCHEDULED in case you need the 30 years to pay back. If you pay it off tomorrow with lotto winnings they just want the balance because they don't have to wait any longer to get it back.

 If you pay down your mortgage today with $10k, it takes you the life of the original loan, 30 years, to realize that "investment" gain.

41.67 in month one, 41.84 in month 2, 42.01 in month 3, etc.

You don't realize that gain the moment you pay the loan. What are you talking about? This is like investing 101.

If I put $10k in the stock market today and it'll be worth ~$26k in 10 years, I can't say I already made $16k .

Do you have a financial advisor or anything? If this is how you're projecting gains on your real estate business you're leaving piles of money on the table.

Then how do you explain the lottery scenario? I'll take a stab at it with your logic. Basically, if I closed on a loan yesterday and I'm on the hook for $200,000 principal plus $150,000 interest if I pay it over 30 years, but today I won the lottery and got $200,000. I decide to drop the $200,000 on the lender, which stops the $150,000 from ever accruing. You agree I don't owe $350,000 in this scenario, btw, right? I can just pay the principal because I'm giving it back early - hopefully we can at least agree on that much. 

So, what you're saying is that my savings are happening hypothetically over the next 30 years. Every month I accrue another $600 savings or so until I get my $150,000 in returns over 30 years. I can understand that perspective. All savings are hypothetical in a sense, because you're contrasting what you DID DO with what you could have done. You buy a car to get to work and then you say, "Boy, I wish I'd have bought a bike, because there's no gas or maintenance to pay for, etc." 

So, maybe here's what you're missing. Even though my savings are supposedly accruing over time, I have "locked them in" by stopping them from ever accruing. My lender can't change their mind and decide to start charging me interest on money I don't have anymore. I gave it back to them. In other words, if I had gone the other way and bought the bike, my savings vs the car would have been locked in. I can count on them. I don't automatically have an extra $10,000 plus gas and maintenance in my account, which is what you are getting at, but at the same time I know for 100% certainty that if I continue on my current path with the bike I will net that savings. In the case of the mortgage there's zero guess work, though, about gas and maintenance. I know exactly how much I save when I prepay principal and it's a 100% ROI doing it in the described way.

Now hopefully we're talking the same language, but the bottom line is the same. I netted 100% vs your 75% and got out of debt in 10 years. 

Continue down the path and see how it works out. Over the following 20 years if you continue your strategy you end up with about $1,800,000, but you are also paying on the house and more importantly paying that interest which takes you down to $1,700,000. If I take the $22,000/year I was spending on the house and put it into the market for the same 20 years I end up with $1,400,000. You come out a bit ahead, but remember I got $100,000 for changing the timing of my payments (essentially got it for free), which brings me up to $1,500,000 and I was out of debt 20 years sooner, which gave me flexibility, too. Some of my returns were guaranteed and free based on simply changing the timing of my payments.

So, I guess my point is that we're both right - you in the sense that savings are hypothetical and you have to accrue them over time and me in the sense that you can still lock them in by choosing one path over the other. You skip / block / cancel interest, etc. when you prepay principal and lock in those savings. So, although, you come out $200,000 ahead in this little experiment, I was out of debt sooner and had more flexibility and overall it was practically a wash, which means that prepaying principal is definitely not "just about the worst investment anyone can make".

[Brent Coombs]

@Joshua S., if you choose to repay your $200k 4%/y mortgage with your lottery winnings, rather than finding better than 4% (compounding) interest to invest in, then: you're a scaredy cat, not an investor! But, each to their own...