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?

[Joshua S.]

Actually, Brent, I think I just figured out a better way to explain this concept to you. Everyone kept saying that the $10,000 in question is the same regardless of whether it's on your mortgage or the HELOC, but I think this is what you are all missing. The $10,000 itself is only charging you X amount of interest when on the mortgage, but the scheduled payments themselves are charging you a huge amount of interest compared to the payment itself. In other words, out of a $1000 payment, $800 of it might be interest early on in a mortgage because the balance is so high. But this interest on your normal payment hasn't been "charged" or "accrued" until you get to that point in the loan. It is SCHEDULED to accrue and be paid, but when you knock the balance down to a lower level (again, forget the HELOC for a minute, maybe someone gave you the money), now you have skipped those scheduled payments and pick the loan up at the new balance. Because you skipped those payments the interest never had a chance to accrue and therefore you saved the money and never had to pay it.

If you can't grasp this concept - the idea that just because the interest is scheduled, does not mean you have to pay it - imagine you won the lottery and were able to pay off the whole thing in one shot. Do you pay the principal or the principal plus all the interest? 

Ok, now follow me here - those payments, the ones that are ~80% interest early on in the mortgage are loaded with interest from not only that first $10,000, but the entire loan. Not as a function of a scam or evil or anything like that, but because your balance is so high. The mortgage company could say, "Well, you owe us $210,000 in interest over the next 30 years, so we're going to divide that by 360 payments and the interest portion of your payment will be $580/month", but they don't. They charge you based on how much you owe, so your payments are loaded with interest early on. In my case it was about $950/month. This is why you take 2 years and $20,000 in interest to pay off $10,000 - the interest is basically "getting in the way" of you paying off more principal. And it's also why if you give the money back earlier than is scheduled, they are now charging you based on a new amount and you are able to skip the interest charges associated with whatever you paid early. Does that make more sense? The $10,000 itself is "charging you" X amount of interest, but actually COSTING you a lot more, because when you pay it down on schedule you are paying interest on the rest of the loan at the same time. I think that's the piece everyone is missing. It's not about what the $10,000 is charging you, it's what it's actually COSTING you to pay it down. Those are two separate things. Imagine if your insurance company was charging you $100/month, but you also had to drive 100 miles to submit the payment. The charges and the actual cost are vastly different.

Anyway, in regards to the HELOC, when you take the $10,000 over to a revolving line of credit, you are paying it directly without the interest from a $XXX,XXX loan getting in the way. It's two completely different ways to pay the same money.

I don't know, in the end it doesn't matter if you guys get it, I'm just astounded that a group of adults who think they are financially savvy can't get this. I'm starting to think that it's ego and the fact that you're against it won't allow you to understand it. Like if I told you there was a button you could've been pressing and your mower would have mowed the lawn by itself all these years and you told me to _____ off because you're mad at yourself for not knowing any better.

[Don Konipol]

The explanation as to why some people believe that there are magical savings of interest to be had by paying early on mortgage loans, and their related misunderstanding that somehow mortgage holders are 'front ending interest' to screw them, is very simple.  They do not understand the concept of TIME VALUE OF MONEY.  And unless and until they do, they will be suseptible to believing that interest savings gained through prepaying principal is somehow related to exotic formulas, third party instruments, etc.

Indeed, a bigger question is if it is beneficial to pay off early, or pay down a low interest mortgage.  These same people also do not understand 'OPPORTUNITY COST'.  So as in the example provided, spending $10,000 today to save $20,000 in interest later is missing two further analytical steps.  First is the time value of money; $20,000 received in 5 years is worth less than $20,000 received today.  Related is the previously mentioned opportunity cost;. What income could the $10,000 used to pay down the mortgage be earning?  All other things being equal, if the $10,000 could earn a return equal to the interest rate paid on the mortgage, the mortgagor gains no financial benefit nor suffers any financial loss from this early pay down.

So, if the interest rate on the mortgage loan being considered for pay down is say 4%, and the borrower is a well informed investor whose goal is to maximize wealth, he would be foolish to pay down the mortgage note if (1) he can earn more than 4% by investing that $10,000, and (2) he has determined that the extra risk of having a $10,000 higher liability is offset by either the return provided by investing that $10,000 or the benefit of keeping that $10,000 liquid.

Please understand that paying off a mortgage early or paying down a mortgage note is not necessarily a bad, or a good strategy.  More analysis needs to be done to see if it is or isn't an ootimal strategy.

[Brent Coombs]

@Joshua S., you wrote "now you have skipped those scheduled payments and pick the loan up at the new balance". So what?

ie. So, when "your aunt gave it to you or you took it out of savings or won $10,000 on a scratch off card", all that means is: it's the same as borrowing less in the first place! 

ie. Your gobbledygook boils down to: borrow (say) $200k, but pay back as if you borrowed (say) $250k! 

[Scott L.]

Try my weird trick to pay off your mortgage faster!!!!! Pay more principal, sooner than required by the amortization schedule. Viola...you paid off the mortgage sooner and with less total interest than otherwise.  Now here's the problem. I own a business method patent on this strategy and every time you do it, you owe me a royalty/licensing fee. So pay up.

[Joshua S.]

No, Don, everyone here understands opportunity cost. But many people have lost their life savings in the market, whereas mortgage interest savings is guaranteed and equity in your house a much more stable investment. Plus, being debt free is basically priceless. So, it's not a question of me or anyone else not understanding the variables at play. Some people might want to put their money in the market and HOPE for a better return while they toil away in debt. I prefer to take the guaranteed return and get out of debt. 

And when you say 4% return on mortgage interest savings, you're overlooking what I said just a couple posts back - I've put in around $30,000 in early principal and saved around $50,000 in interest. That's an ROI of 160% so far. It will come down as I go, because of diminishing returns (less to save so less is saved), but I'll still end up around 100% ROI. What type of investment do you know that gives you a guaranteed return of 100%? Again, I'm not conjuring up magic numbers, it's right there for you to read. Or you can look up any mortgage calculator you want and see that prepaying principal has a much higher ROI than 4%. I'm on the hook for $210,000 in interest, for example, on a $315,000 loan. But if I can manage $100,000 in prepaid principal over the next ten years or so I can save $100,000 on interest. ANY MORTGAGE CALCULATOR WILL TELL YOU THIS. It's a guaranteed ROI of 100%. I mean, Jesus Christ, just pull up any amortization calculator and do it, it's not hard. Here, I'll do it for you. See below - 10 annual prepaid lump sums of $10,000 to keep it really simple ($100,000 total) nets a savings of $107,000 or 107% ROI. I honestly pity all of you, I hope you eventually realize that there's more out there than what's in your head currently. What egos you all must have to see this plainly laid out for you and still refuse to see it. LOL Geez.

[Don Konipol]

@Joshua Smith You’re ridiculous argument just proved my points. You have NO understanding of time value of money and almost no understanding of opportunity cost. But you do have the arrogance to believe the obviously more educated, experienced and wiser investors on this forum are wrong and you are right. Keep earning 4% return and believing it’s 100% because you don’t account for (1) annualization of returns, (2) length of time until those returns are realized and (3) opportunity cost. Some people are quite happy in their ignorance. Unfortunately you seem to not be happy. Perhaps the large chip on your shoulder is a feeling of inferiority.

[Joshua S.]

It's funny, Don, I just showed all my calculations and backed it up with a screen shot of mortgage calculator results. Instead of refuting them with your own calculations you're refuting them with ideas. Go ahead and show me with numbers how it's wrong that if over the next ten years I put $100,000 in and get $100,000 back it's not 100% total ROI. That's what I've asked for over and over. Show me the calculations about that and/or the opportunity costs you're so worried about.

Well, you probably won't, so here, I'll do a comparison for you. If you put $10,000/year into the stock market with an annualized return of 9% you end up with $170,000 if you're in a tax deferred vehicle or $144,000 if you were taxed - see the pictures below. Congrats, you made a total return of 44-70% return over ten years. Awesome. But remember, that's if the stock market average holds up at 9%. You could hit a rough patch and end up with -9%. And, hey, you could make 18%, but that's your gamble.

Now look at the mortgage interest savings again. If I put in $10,000/year over ten years I'm not getting $44,000 back or $70,000 back, I'm getting $100,000 back and it's guaranteed because it's built into my loan. I'm currently on the hook for it, so I'm guaranteed the returns if I pay it back early. Not only that, but I got out of debt early and you still have your mortgage payment. 

So, you know, I'm not a financial genius like you guys are - maybe I'm wrong. If I'm wrong, SHOW ME. It will make me very happy to learn something if I'm wrong, but I'm not taking anyone's word for it, you need to show me.

And if it seems like there's a chip on my shoulder it's only because everyone says I'm wrong, but can't show me any legitimate math as to how it's wrong. It's like arguing with a bunch of teenagers who still believe in Santa and I'm showing them satellite images of the north pole. Man, I crack myself up sometimes! Show me the calculations.

Sincerely,

Show Me The Calculations

PS - Show me the calculations.

[Scott L.]

@Joshua S. You're not getting a 10% a year return on your investment in paying down a mortgage early, you're getting a 4% return on the early principal payments, ...from the point that you make them, to the point that the mortgage is paid off. A standard amortizing 30 year mortgage has the interest calculated on the daily balance between payments @ the stated rate of the loan. If you lower the balance by $10,000, you're saving 4% of $10,000. The hurdle rate to beat on these early payments is 4%. With debt payoff, the 4% "return" is guaranteed...there is that. But the question is can the money be better deployed elsewhere? I believe most folks on BP could find better investment opportunities for excess cash than paying down their primary residence mortgage. There are legitimate reasons for paying off your primary residence but they are not ROI based. It's more related to liquidity, asset protection, peace of mind and other psychological factors.

[Joshua S.]

Scott, I understand why a person would say that. It makes sense. If you borrowed money at a 4% rate then if you pay it back early that's all you're saving. But you're just regurgitating that instead of working it out for yourself. Go to any amortization calculator and plug your own numbers in and then put in $10,000 annual prepayments and look at the savings. Look, I've already done it for you with my numbers below. There is a total savings in my case of $107,000 after ten prepayments of $10,000 ($100,000 total). The TOTAL RETURN is just over 100%. 

Look, they say that you have a 4% annual rate, but it's really around 67% total interest over the 30 years. In my case on a $315,000 mortgage I'm scheduled to pay $210,000, which is more than enough to buy another smaller house. The simple act of paying some of the loan back early nets me a total ROI (not yearly, but total) of 100% and I'm showing you evidence of that fact.

Again, aside from just regurgitating what you think is correct. There is a screenshot below of an amortization calculator that contradicts what you are saying and supports me. How is it wrong exactly?

[Joshua S.]

Otherwise, Scott, there is a place called Assumption, Ohio and I think you'd really like it there. Lots of people who just assume instead of actually thinking through it and working it out. :-D

[Scott L.]

Originally posted by @Joshua S.:

Scott, I understand why a person would say that. It makes sense. If you borrowed money at a 4% rate then if you pay it back early that's all you're saving. But you're just regurgitating that instead of working it out for yourself. Go to any amortization calculator and plug your own numbers in and then put in $10,000 annual prepayments and look at the savings. Look, I've already done it for you with my numbers below. There is a total savings in my case of $107,000 after ten prepayments of $10,000 ($100,000 total). The TOTAL RETURN is just over 100%. 

Look, they say that you have a 4% annual rate, but it's really around 67% total interest over the 30 years. In my case on a $315,000 mortgage I'm scheduled to pay $210,000, which is more than enough to buy another smaller house. The simple act of paying some of the loan back early nets me a total ROI (not yearly, but total) of 100% and I'm showing you evidence of that fact.

Again, aside from just regurgitating what you think is correct. There is a screenshot below of an amortization calculator that contradicts what you are saying and supports me. How is it wrong exactly?

The problem with your calculation is the amortization calculator gives you two different "total" interest amounts. One for the normal 30 year 360 payment payoff. And one for the accelerated payoff. 

Here's the problem, the $100,000 you use for the 10 year payoff is gone. The difference is the 20 years (or more) you would get to use the $100,000 that you DIDN'T pay early. If you beat 4% on average over those 20 years, you will earn more than you pay in interest. 

It's math. You can't use one ROI method for one investment and then a different one for the comparison. 4% return on $100,000 invested over an average of 25 years ($10,000 extra a year for first 10 years) is....voila, about a 100% return....OR 4% a year.

[Chris May]

Originally posted by @Joshua S.:

Scott, I understand why a person would say that. It makes sense. If you borrowed money at a 4% rate then if you pay it back early that's all you're saving. But you're just regurgitating that instead of working it out for yourself. Go to any amortization calculator and plug your own numbers in and then put in $10,000 annual prepayments and look at the savings. Look, I've already done it for you with my numbers below. There is a total savings in my case of $107,000 after ten prepayments of $10,000 ($100,000 total). The TOTAL RETURN is just over 100%. 

Look, they say that you have a 4% annual rate, but it's really around 67% total interest over the 30 years. In my case on a $315,000 mortgage I'm scheduled to pay $210,000, which is more than enough to buy another smaller house. The simple act of paying some of the loan back early nets me a total ROI (not yearly, but total) of 100% and I'm showing you evidence of that fact.

Again, aside from just regurgitating what you think is correct. There is a screenshot below of an amortization calculator that contradicts what you are saying and supports me. How is it wrong exactly?

 This thread is completely exhausting. Amazing how many people jump in here to argue that using debt to pay your debt is a "system", yet clearly have no expertise and repeatedly tell people who do this for a living that they're wrong. Truly incredible. I actually suspect some are the same people on different accounts, but I digress.

Josh - I'll give you the same challenge we've given we've given everyone else: post an Excel workbook where you model out 1) the full lifecycle of a 30 year fixed amortizing loan 2) the same loan and HELOC over the lifecycle of both loans.

Every person who had attempted has either finally conceded they were wrong or disappeared after we pointed out holes in their model. Every. Single. One.

Show your work. I'm confident you will see where you're going wrong.

[Joshua S.]

Awesome, now we're getting somewhere. So, if I understand correctly basically you want to flash forward ten years and now I've got $100,000 to put in the market because I didn't pay it into my mortgage early. You want me to put that money into the market for 20 years and beat my 100% ROI, so let's see how it works out - screenshot below.

I kept it at 4% to give us a baseline, but I made $122,000 off of my $100,000 if I'm not paying taxes on it. Nice work and that's a fair point. But here are a couple issues I have with it. If I make 9% in the market I'm doing a great job, but if I make -9% I'm screwed, so that seems like a huge gamble compared to a guaranteed ROI.

Not only that, but now I'm waiting 30 years to have the chance to make more than I could've made in 10. In other words, that's not a fair comparison, either, because you're basically saying that instead of making a guaranteed return of 100% over the next ten years, I might as well hold onto the money to put into the stock market and HOPE I can beat the guaranteed return. AND I'M STILL IN DEBT while I'm hoping that this gamble pays off. 

So, choosing between the two scenarios is pretty simple for me.

1. Have a guaranteed 100% ROI over the next ten years and get out of debt. After ten years invest in the market with all the money that's not going toward debt anymore.

2. Continue to pay a ton to mortgage interest and save all my money to buy stocks. Hope my stocks make more than 4% per year (and 100% total) over 30 years to beat what I could've done in ten years. Finally get out of debt in 30 years and hope that my gamble paid off.

I'm going with #1. 

[Joshua S.]

Oh, hi, Chris. Pretty audacious of you to see that I'm using financial calculators to back up what I'm saying and ask for written proof as if I'm quoting from the fairy bible of finance or something. LOL You're right, my lack of Excel knowledge really proves something...... MY LACK OF EXCEL KNOWLEDGE. :-D

Take care and good luck with the trolling elsewhere.

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Scott, I understand why a person would say that. It makes sense. If you borrowed money at a 4% rate then if you pay it back early that's all you're saving. But you're just regurgitating that instead of working it out for yourself. Go to any amortization calculator and plug your own numbers in and then put in $10,000 annual prepayments and look at the savings. Look, I've already done it for you with my numbers below. There is a total savings in my case of $107,000 after ten prepayments of $10,000 ($100,000 total). The TOTAL RETURN is just over 100%. 

Look, they say that you have a 4% annual rate, but it's really around 67% total interest over the 30 years. In my case on a $315,000 mortgage I'm scheduled to pay $210,000, which is more than enough to buy another smaller house. The simple act of paying some of the loan back early nets me a total ROI (not yearly, but total) of 100% and I'm showing you evidence of that fact.

Again, aside from just regurgitating what you think is correct. There is a screenshot below of an amortization calculator that contradicts what you are saying and supports me. How is it wrong exactly?

 This thread is completely exhausting. Amazing how many people jump in here to argue that using debt to pay your debt is a "system", yet clearly have no expertise and repeatedly tell people who do this for a living that they're wrong. Truly incredible. I actually suspect some are the same people on different accounts, but I digress.

Josh - I'll give you the same challenge we've given we've given everyone else: post an Excel workbook where you model out 1) the full lifecycle of a 30 year fixed amortizing loan 2) the same loan and HELOC over the lifecycle of both loans.

Every person who had attempted has either finally conceded they were wrong or disappeared after we pointed out holes in their model. Every. Single. One.

Show your work. I'm confident you will see where you're going wrong.

[Scott L.]

----The street hustlers with the cups and ping pong balls...you know they're just palming the ball, right?  :-)   That's why you never pick the right cup.

Let's lay out the scenario, then see where it leads (without palming the ball). You have a $100,000 30 year mortgage @ 4% in year 0. At some points between years 0 - 10, you come into $100,000 in $10,000 chunks. For simplicity, we'll say $10,000 a year. You have a decision whether to pay those $10,000 payments into the mortgage or invest them. The simple question is, do you think you can find a better than 4% return. If you can't, pay down your mortgage and receive a "return" of 4%. Your only other choice is not the stock market. The point is, you are only getting a 4% return on the chunks you prepay on the mortgage...from the time you prepay, to the time your mortgage is paid off. If I had a spare $100K to invest over 10 years, I'd buy 3 SFR's in my market with 25% down on each and make about 12-15% cash on cash return. It would, of course require some risk and sweat equity, but in my view a better use for the cash.

This is coming from a person who DID pay off a $200,000 mortgage in 2.5 years 20 years ago. At the time (1998-2000) my interest rate was 7% and I did NOT expect to reasonably beat it in the market with 0 risk.

The math is simple. The return on paying down your mortgage early is the interest rate on the mortgage.

[Chris May]

Originally posted by @Joshua S.:

Oh, hi, Chris. Pretty audacious of you to see that I'm using financial calculators to back up what I'm saying and ask for written proof as if I'm quoting from the fairy bible of finance or something. LOL You're right, my lack of Excel knowledge really proves something...... MY LACK OF EXCEL KNOWLEDGE. :-D

Take care and good luck with the trolling elsewhere.

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Scott, I understand why a person would say that. It makes sense. If you borrowed money at a 4% rate then if you pay it back early that's all you're saving. But you're just regurgitating that instead of working it out for yourself. Go to any amortization calculator and plug your own numbers in and then put in $10,000 annual prepayments and look at the savings. Look, I've already done it for you with my numbers below. There is a total savings in my case of $107,000 after ten prepayments of $10,000 ($100,000 total). The TOTAL RETURN is just over 100%. 

Look, they say that you have a 4% annual rate, but it's really around 67% total interest over the 30 years. In my case on a $315,000 mortgage I'm scheduled to pay $210,000, which is more than enough to buy another smaller house. The simple act of paying some of the loan back early nets me a total ROI (not yearly, but total) of 100% and I'm showing you evidence of that fact.

Again, aside from just regurgitating what you think is correct. There is a screenshot below of an amortization calculator that contradicts what you are saying and supports me. How is it wrong exactly?

 This thread is completely exhausting. Amazing how many people jump in here to argue that using debt to pay your debt is a "system", yet clearly have no expertise and repeatedly tell people who do this for a living that they're wrong. Truly incredible. I actually suspect some are the same people on different accounts, but I digress.

Josh - I'll give you the same challenge we've given we've given everyone else: post an Excel workbook where you model out 1) the full lifecycle of a 30 year fixed amortizing loan 2) the same loan and HELOC over the lifecycle of both loans.

Every person who had attempted has either finally conceded they were wrong or disappeared after we pointed out holes in their model. Every. Single. One.

Show your work. I'm confident you will see where you're going wrong.

Model it out however you want. Do it on paper and take a picture for all I care. You're misinterpreting what an online calculator is telling you, one that isn't designed to show paying off debt with debt.

If you can't model out an amortization table with early payoffs (in Excel, on paper, or any other method), you have no business educating people who can do it, and have repeatedly on this thread.

You're not the first person to roll through here with screenshots of online loan calculators.

[Joshua S.]

Ok, let's try something else, Scott. Forget the mortgage and the HELOC and everything else, I just want to try to get on the same page with you numbers wise.

Let's say I invest in my daughter's lemonade stand and she's really kick *** at lemonade, so I put in $10,000 per year for ten years. She makes $10,000 back each year. So, all total I put in $100,000 and since I got the same amount back my total ROI was 100%, right?

Now look at it annualized. If I made $100,000 total over the ten years that breaks down to $10,000/year on average. If I averaged $10,000 return each year on a total investment of $100,000, then my annualized return is 10%, correct?

Remember, there's no mortgage, no cups, no ball, etc. - just you and I trying to calculate my investment return on my daughter's lemonade stand. Did I do the math correctly, or no? If it's wrong, that's fine - what did I get wrong?

Originally posted by @Scott L.:

----The street hustlers with the cups and ping pong balls...you know they're just palming the ball, right?  :-)   That's why you never pick the right cup.

Let's lay out the scenario, then see where it leads (without palming the ball). You have a $100,000 30 year mortgage @ 4% in year 0. At some points between years 0 - 10, you come into $100,000 in $10,000 chunks. For simplicity, we'll say $10,000 a year. You have a decision whether to pay those $10,000 payments into the mortgage or invest them. The simple question is, do you think you can find a better than 4% return. If you can't, pay down your mortgage and receive a "return" of 4%. Your only other choice is not the stock market. The point is, you are only getting a 4% return on the chunks you prepay on the mortgage...from the time you prepay, to the time your mortgage is paid off. If I had a spare $100K to invest over 10 years, I'd buy 3 SFR's in my market with 25% down on each and make about 12-15% cash on cash return. It would, of course require some risk and sweat equity, but in my view a better use for the cash.

This is coming from a person who DID pay off a $200,000 mortgage in 2.5 years 20 years ago. At the time (1998-2000) my interest rate was 7% and I did NOT expect to reasonably beat it in the market with 0 risk.

The math is simple. The return on paying down your mortgage early is the interest rate on the mortgage.

[Chris May]

Originally posted by @Joshua S.:

Let's say I invest in my daughter's lemonade stand and she's really kick *** at lemonade, so I put in $10,000 per year for ten years. She makes $10,000 back each year. So, all total I put in $100,000 and since I got the same amount back my total ROI was 100%, right?

No, your ROI was 0%. You sank $100,000 into a business that returned $100,000 to you.

Now look at it annualized. If I made $100,000 total over the ten years that breaks down to $10,000/year on average. If I averaged $10,000 return each year on a total investment of $100,000, then my annualized return is 10%, correct?

No. You invested $10,000 in year one, got $10,000 back in year one. You invested $100,000 over 10 years, and got $100,000 back over 10 years. ROI is 0%. You just said (above), using the same numbers, that your ROI was 100%. Now you're saying it's 10%. Which is it? (It's 0%).

[Scott L.]

@Joshua S. - In your above scenario your "return" on the $100,000 invested would in fact be $100,000. But that implies extremely high annualized returns, depending on the timing of the cash flows. You put in $10K in year 1, $10K in year 2.....etc. etc..  and you receive $100K all at once in year 10?  That would be about 20% annualized on your money invested. And I'm assuming that you retain ownership of the stand after year 10 so your $100,000 pure return, not just returning your capital.

This is where the comparison with the 30 year amortizing mortgage fails. With each $10,000 chunk, you are just "avoiding" the accrual of 4%/yr. on your mortgage, hence paying it off earlier, but you do not "get" your $100K back in year 10, you just save $400 a year on each $10K you put in....and only from the date you put it in.

[Chris May]

Originally posted by @Scott L.:

@Joshua S. - In your above scenario your "return" on the $100,000 invested would in fact be $100,000. But that implies extremely high annualized returns, depending on the timing of the cash flows. You put in $10K in year 1, $10K in year 2.....etc. etc..  and you receive $100K all at once in year 10?  That would be about 20% annualized on your money invested. And I'm assuming that you retain ownership of the stand after year 10 so your $100,000 pure return, not just returning your capital.

This is where the comparison with the 30 year amortizing mortgage fails. With each $10,000 chunk, you are just "avoiding" the accrual of 4%/yr. on your mortgage, hence paying it off earlier, but you do not "get" your $100K back in year 10, you just save $400 a year on each $10K you put in....and only from the date you put it in.

I should add that in my analysis, I assumed no ownership stake in the company. Without knowing what the future revenue stream and/or value of the business is, it's impossible to include that in the ROI calc. But Scott is correct if he assumes the ownership stake is still worth $100k and there is no future revenue stream.

[Joshua S.]

Sorry, I thought of this after I posted it, but was hoping you guys would accept it in good faith knowing what I meant. With my mortgage, the money is not gone, it's in the form of equity, which I keep / get back. So, to make the analogy correct my daughter gives me back my original investment plus 100% total return. In that case what is the total annualized return? 10%? 20%?

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Let's say I invest in my daughter's lemonade stand and she's really kick *** at lemonade, so I put in $10,000 per year for ten years. She makes $10,000 back each year. So, all total I put in $100,000 and since I got the same amount back my total ROI was 100%, right?

No, your ROI was 0%. You sank $100,000 into a business that returned $100,000 to you.

Now look at it annualized. If I made $100,000 total over the ten years that breaks down to $10,000/year on average. If I averaged $10,000 return each year on a total investment of $100,000, then my annualized return is 10%, correct?

No. You invested $10,000 in year one, got $10,000 back in year one. You invested $100,000 over 10 years, and got $100,000 back over 10 years. ROI is 0%. You just said (above), using the same numbers, that your ROI was 100%. Now you're saying it's 10%. Which is it? (It's 0%).

[Scott L.]

@Chris May --- Correct. Like I'm assuming the house is worth $100K at the end of the 10 years on the mortgage, so the only "return" you are getting on the money is avoiding the accrual of interest. And this doesn't even happen if you use a HELOC or other loan to get the capital.

[Chris May]

Originally posted by @Joshua S.:

Sorry, I thought of this after I posted it, but was hoping you guys would accept it in good faith knowing what I meant. With my mortgage, the money is not gone, it's in the form of equity, which I keep / get back. So, to make the analogy correct my daughter gives me back my original investment plus 100% total return. In that case what is the total annualized return? 10%?

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Let's say I invest in my daughter's lemonade stand and she's really kick *** at lemonade, so I put in $10,000 per year for ten years. She makes $10,000 back each year. So, all total I put in $100,000 and since I got the same amount back my total ROI was 100%, right?

No, your ROI was 0%. You sank $100,000 into a business that returned $100,000 to you.

Now look at it annualized. If I made $100,000 total over the ten years that breaks down to $10,000/year on average. If I averaged $10,000 return each year on a total investment of $100,000, then my annualized return is 10%, correct?

No. You invested $10,000 in year one, got $10,000 back in year one. You invested $100,000 over 10 years, and got $100,000 back over 10 years. ROI is 0%. You just said (above), using the same numbers, that your ROI was 100%. Now you're saying it's 10%. Which is it? (It's 0%).

 When is she giving you your $10k distributions? If she gives you a yearly distribution (rather than $100k at the end) then your return in year one is 100%, year 2 is 50% (10k/20k), year 3 is 33% and so on.

[Scott L.]

Originally posted by @Joshua S.:

Sorry, I thought of this after I posted it, but was hoping you guys would accept it in good faith knowing what I meant. With my mortgage, the money is not gone, it's in the form of equity, which I keep / get back. So, to make the analogy correct my daughter gives me back my original investment plus 100% total return. In that case what is the total annualized return? 10%? 20%?

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Let's say I invest in my daughter's lemonade stand and she's really kick *** at lemonade, so I put in $10,000 per year for ten years. She makes $10,000 back each year. So, all total I put in $100,000 and since I got the same amount back my total ROI was 100%, right?

No, your ROI was 0%. You sank $100,000 into a business that returned $100,000 to you.

Now look at it annualized. If I made $100,000 total over the ten years that breaks down to $10,000/year on average. If I averaged $10,000 return each year on a total investment of $100,000, then my annualized return is 10%, correct?

No. You invested $10,000 in year one, got $10,000 back in year one. You invested $100,000 over 10 years, and got $100,000 back over 10 years. ROI is 0%. You just said (above), using the same numbers, that your ROI was 100%. Now you're saying it's 10%. Which is it? (It's 0%).

 In your revised scenario the return is about 20% a year, assuming you put in $10,000 yr for each of 10 years and got $200,000 back end of year 10.  $100,000 cash plus your ownership stake of $100K (or she buys it out for $100K cash).

[Joshua S.]

Right, so coming back to the mortgage all told I made an average of $10,000/year on a total investment of $100,000 for an annual return of 10%. Or 100%, 50%, each year, etc. depending on how you break it down, but my point is that it never comes even close to being "4%". The 4% is a cloud that you're both having trouble seeing through. 

The bottom line is what I'm showing on the calculator. I can pay $10,000 chunks extra into my mortgage - GET TO KEEP IT IN THE FORM OF EQUITY - and save / make 100% total ROI or annualized ROI of 10% over ten years. That's as good as most other investments and it's guaranteed.