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.]

And you're right, Scott, I don't get distributions or a check for $100,000 at the end of ten years, but think about it like a business person. If you own a bakery and in your bottom line is $10,000/year for flour, but then you find a way to get it for free, didn't you just "make" $10,000/year by saving that amount?

[Chris May]

Originally posted by @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.

 Let's flip it around. If you invest $10,000 today, into a 10 year, 4% return CD at the bank, you will have $14,802 at the end of year 10. 

Questions:

1. On day one, what is your total return?
2. Over the life of the CD, what is your total return?
3. What is your annual rate of return?

Answers:

1. $0, 0%
2. 48%
3. 4%

The financial math on a liability works the same. If you pay $10,000 towards your mortgage, on day one you've saved $0, over the 30 year life of the loan you save XX% (some big number in line with what you're quoting), each year you save 4% in accrued interest. 4% is not a "cloud number", it's your rate of return.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @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.

 Let's flip it around. If you invest $10,000 today, into a 10 year, 4% return CD at the bank, you will have $14,802 at the end of year 10. 

Questions:

1. On day one, what is your total return?
2. Over the life of the CD, what is your total return?
3. What is your annual rate of return?

Answers:

1. $0, 0%
2. 48%
3. 4%

The financial math on a liability works the same. If you pay $10,000 towards your mortgage, on day one you've saved $0, over the 30 year life of the loan you save XX% (some big number in line with what you're quoting), each year you save 4% in accrued interest. 4% is not a "cloud number", it's your rate of return.

I disagree that it works the same and don't see any comparison between this situation and a CD. One big problem with this is that you guys keep saying if you pay off $10,000 you are only saving the interest CREATED by that $10,000, but it's simply not true. When you make your normal payment, it includes interest from the entire balance, correct? So, when you pay early why wouldn't it cancel out some of the interest from the entire balance? Your way makes no sense. The $10,000 in question contributes about $33 of interest per payment ($400/year / 12), ie. a drop in the bucket, but the rest of the interest you are paying in each payment is from the balance of the loan. Just pause and think about that for a second. The interest being "charged" or "created" by the $10,000 is $400, but the amount it is "costing" you to pay on their schedule is around $20,000, because you are paying interest on the entire loan at the same time. These are two different things.

So, get your amortization table out and consider where you are now vs all the payments you would skip if you dropped $10,000 on the loan today, ahead of schedule and no longer owe that higher amount. The savings is not $400 or even $4000, it's around $20,000 because to pay that $10,000 via regular payments (on schedule) means to pay interest from the entire loan with every payment. And conversely, to give them $10,000 early (ahead of schedule) means you no longer have to make those scheduled payments and you save all that associated interest - not just the $33/month the $10,000 was "charging" you, but the $20,000 it was "costing" you to pay it back slowly.

Anyway, you are saying that paying $10,000 early saves $400/year, but that doesn't even work out. Pretend for a minute that the amo calculators, although not necessarily perfect have teams of people behind them and all match up within a neat margin of error, so I'm not crazy to trust a hundred professionals and their calculators vs a few people on a random forum post. Just pretend that for a minute. When you put a $10,000 early payment onto bankrate, for example, it says your savings is $20,000 and about 21 months. This lines up exactly with the way I'm explaining the idea of skipping payments. On the other hand, saving $400/year for the remaining 28 years equals $11,200 and the last 21 months average $48/month in interest or about $1000 total. $11,200 + $1000 = $12,200 and does not match up with the $20,000 savings. Do you get what I'm saying? You can't say that an early payment of $10,000 saves $400/year and then ignore the fact that it doesn't add up to the savings quoted from a bunch of independent sources. Either you're wrong or the calculators are and it's not the calculators. Not only that, but you don't even have an alternate explanation other than to say the calculators "aren't perfect". If this is wrong, explain it.

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @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.

 Let's flip it around. If you invest $10,000 today, into a 10 year, 4% return CD at the bank, you will have $14,802 at the end of year 10. 

Questions:

1. On day one, what is your total return?
2. Over the life of the CD, what is your total return?
3. What is your annual rate of return?

Answers:

1. $0, 0%
2. 48%
3. 4%

The financial math on a liability works the same. If you pay $10,000 towards your mortgage, on day one you've saved $0, over the 30 year life of the loan you save XX% (some big number in line with what you're quoting), each year you save 4% in accrued interest. 4% is not a "cloud number", it's your rate of return.

I disagree that it works the same and don't see any comparison between this situation and a CD. One big problem with this is that you guys keep saying if you pay off $10,000 you are only saving the interest CREATED by that $10,000, but it's simply not true. When you make your normal payment, it includes interest from the entire balance, correct? So, when you pay early why wouldn't it cancel out some of the interest from the entire balance? Your way makes no sense. The $10,000 in question contributes about $33 of interest per payment ($400/year / 12), ie. a drop in the bucket, but the rest of the interest you are paying in each payment is from the balance of the loan. Just pause and think about that for a second. The interest being "charged" or "created" by the $10,000 is $400, but the amount it is "costing" you to pay on their schedule is around $20,000, because you are paying interest on the entire loan at the same time. These are two different things.

So, get your amortization table out and consider where you are now vs all the payments you would skip if you dropped $10,000 on the loan today, ahead of schedule and no longer owe that higher amount. The savings is not $400 or even $4000, it's around $20,000 because to pay that $10,000 via regular payments (on schedule) means to pay interest from the entire loan with every payment. And conversely, to give them $10,000 early (ahead of schedule) means you no longer have to make those scheduled payments and you save all that associated interest - not just the $33/month the $10,000 was "charging" you, but the $20,000 it was "costing" you to pay it back slowly.

Anyway, you are saying that paying $10,000 early saves $400/year, but that doesn't even work out. Pretend for a minute that the amo calculators, although not necessarily perfect have teams of people behind them and all match up within a neat margin of error, so I'm not crazy to trust a hundred professionals and their calculators vs a few people on a random forum post. Just pretend that for a minute. When you put a $10,000 early payment onto bankrate, for example, it says your savings is $20,000 and about 21 months. This lines up exactly with the way I'm explaining the idea of skipping payments. On the other hand, saving $400/year for the remaining 28 years equals $11,200 and the last 21 months average $48/month in interest or about $1000 total. $11,200 + $1000 = $12,200 and does not match up with the $20,000 savings. Do you get what I'm saying? You can't say that an early payment of $10,000 saves $400/year and then ignore the fact that it doesn't add up to the savings quoted from a bunch of independent sources. Either you're wrong or the calculators are and it's not the calculators. Not only that, but you don't even have an alternate explanation other than to say the calculators "aren't perfect". If this is wrong, explain it.

You breezed right past what I said--I suspect intentionally. It's also weird that you sound so, so, so much like David Dachtera, the original person pushing this craziness.

It's not that the amortization calculators "aren't perfect" it's that you're using them to prove something they weren't meant to do. It'd be like using a Toyota Corolla to trench a sewer line to your house... you're supposed to use a Caterpillar for that. Sure, they both have engines, but the Corolla won't dig a hole for you. The amortization calculator isn't showing you the rate at which you're saving interest (and it definitely not showing you a comparison against other investments), it's showing you total savings, and you're using fake financial math to reverse engineer a savings rate that proves your point. Problem is the people on this thread, who do this daily, are telling you that you're doing it wrong.

We don't need to prove why you're wrong, the answer is in this thread. We've modeled it out on spreadsheets more times than I can count. It's time for you to post dual amortization tables showing why you're right.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @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.

 Let's flip it around. If you invest $10,000 today, into a 10 year, 4% return CD at the bank, you will have $14,802 at the end of year 10. 

Questions:

1. On day one, what is your total return?
2. Over the life of the CD, what is your total return?
3. What is your annual rate of return?

Answers:

1. $0, 0%
2. 48%
3. 4%

The financial math on a liability works the same. If you pay $10,000 towards your mortgage, on day one you've saved $0, over the 30 year life of the loan you save XX% (some big number in line with what you're quoting), each year you save 4% in accrued interest. 4% is not a "cloud number", it's your rate of return.

I disagree that it works the same and don't see any comparison between this situation and a CD. One big problem with this is that you guys keep saying if you pay off $10,000 you are only saving the interest CREATED by that $10,000, but it's simply not true. When you make your normal payment, it includes interest from the entire balance, correct? So, when you pay early why wouldn't it cancel out some of the interest from the entire balance? Your way makes no sense. The $10,000 in question contributes about $33 of interest per payment ($400/year / 12), ie. a drop in the bucket, but the rest of the interest you are paying in each payment is from the balance of the loan. Just pause and think about that for a second. The interest being "charged" or "created" by the $10,000 is $400, but the amount it is "costing" you to pay on their schedule is around $20,000, because you are paying interest on the entire loan at the same time. These are two different things.

So, get your amortization table out and consider where you are now vs all the payments you would skip if you dropped $10,000 on the loan today, ahead of schedule and no longer owe that higher amount. The savings is not $400 or even $4000, it's around $20,000 because to pay that $10,000 via regular payments (on schedule) means to pay interest from the entire loan with every payment. And conversely, to give them $10,000 early (ahead of schedule) means you no longer have to make those scheduled payments and you save all that associated interest - not just the $33/month the $10,000 was "charging" you, but the $20,000 it was "costing" you to pay it back slowly.

Anyway, you are saying that paying $10,000 early saves $400/year, but that doesn't even work out. Pretend for a minute that the amo calculators, although not necessarily perfect have teams of people behind them and all match up within a neat margin of error, so I'm not crazy to trust a hundred professionals and their calculators vs a few people on a random forum post. Just pretend that for a minute. When you put a $10,000 early payment onto bankrate, for example, it says your savings is $20,000 and about 21 months. This lines up exactly with the way I'm explaining the idea of skipping payments. On the other hand, saving $400/year for the remaining 28 years equals $11,200 and the last 21 months average $48/month in interest or about $1000 total. $11,200 + $1000 = $12,200 and does not match up with the $20,000 savings. Do you get what I'm saying? You can't say that an early payment of $10,000 saves $400/year and then ignore the fact that it doesn't add up to the savings quoted from a bunch of independent sources. Either you're wrong or the calculators are and it's not the calculators. Not only that, but you don't even have an alternate explanation other than to say the calculators "aren't perfect". If this is wrong, explain it.

You breezed right past what I said--I suspect intentionally. It's also weird that you sound so, so, so much like David Dachtera, the original person pushing this craziness.

It's not that the amortization calculators "aren't perfect" it's that you're using them to prove something they weren't meant to do. It'd be like using a Toyota Corolla to trench a sewer line to your house... you're supposed to use a Caterpillar for that. Sure, they both have engines, but the Corolla won't dig a hole for you. The amortization calculator isn't showing you the rate at which you're saving interest (and it definitely not showing you a comparison against other investments), it's showing you total savings, and you're using fake financial math to reverse engineer a savings rate that proves your point. Problem is the people on this thread, who do this daily, are telling you that you're doing it wrong.

We don't need to prove why you're wrong, the answer is in this thread. We've modeled it out on spreadsheets more times than I can count. It's time for you to post dual amortization tables showing why you're right.

I'm not talking about a rate. I said that a $10,000 principal payment saves $20,000 in interest, backed it up, and explained why. You guys are saying that a $10,000 principal payment saves $400/year and can't explain why it doesn't match up to the calculator. The reason we were talking about rate is because Scott was stuck on 4% and I was trying to explain that the rate of return on principal repayment is nowhere near that low. Beyond that I couldn't care less about rate, it was his thing. 

So, again, $10,000 payment supposedly saves $400/year according to you, but how do you add that up to $20,000 savings?

[Scott L.]

@Joshua S. You fail to understand how the interest is calculated on a standard amortizing 30 year loan. For the initial amortization schedule, the bank calculates the amount of 360 equal payments (monthly for 30 years) that exactly pays the interest and principal of the loan. They provide you a schedule that tells you the exact interest and principal on each of those 360 payments...if they receive the funds on the exact due date every month for 30 years. Every time they receive a payment, scheduled or otherwise, they recalculate the interest from that point forward on the remaining balance. If you pay within +/- 5 days or so every required payment, the difference is negligible. If you pay $10,000 at once, you save 4% on that for the rest of the time the loan lasts (now shorter because of the additional principal). The savings is 4% of the amount (extra) invested, for the length of time that remains on the loan. I'm going to post a spreadsheet to show it. It's not rocket science, but you are misusing the amortization calculator if you say it shows you getting more than 4% return on the extra payments.

[Joshua S.]

Originally posted by @Scott L.:

@Joshua S. You fail to understand how the interest is calculated on a standard amortizing 30 year loan. For the initial amortization schedule, the bank calculates the amount of 360 equal payments (monthly for 30 years) that exactly pays the interest and principal of the loan. They provide you a schedule that tells you the exact interest and principal on each of those 360 payments...if they receive the funds on the exact due date every month for 30 years. Every time they receive a payment, scheduled or otherwise, they recalculate the interest from that point forward on the remaining balance. If you pay within +/- 5 days or so every required payment, the difference is negligible. If you pay $10,000 at once, you save 4% on that for the rest of the time the loan lasts (now shorter because of the additional principal). The savings is 4% of the amount (extra) invested, for the length of time that remains on the loan. I'm going to post a spreadsheet to show it. It's not rocket science, but you are misusing the amortization calculator if you say it shows you getting more than 4% return on the extra payments.

WHAT? How can you "misuse" an amortization calculator? Here, do it yourself. 

1. Go to this link. Don't change any assumptions at all for simplicity.

2. Notice where it says "Total Interest Paid" the amount is just under $136,000.

3. Click on "Add Extra Payments".

4. Put "10000" in where it says "as a one-time mortgage payment in" and click "APPLY EXTRA PAYMENTS".

5. Notice that the "Total Interest Paid" has gone down to around $110,000, which means a savings of around $26,000.

6. Then let me know how $400/year for 30 years ($12,000) equals $26,000. I think you're thinking of one of those 65 year loans.

You're right that it's not rocket science, that's for sure.

https://www.bankrate.com/calculators/mortgages/amo...

[Scott L.]

@Joshua S. Yeah...the problem is with Bankrate's Calculator...It leaves $165,000 for the principal amount when building the amortization table until you refresh. And it leaves the rate at 4.5% , so that's where you get $136,000. 

Try refreshing it with $100,000 and 4%...(the example we're discussing), and you get ~$71,000 for the 30 year amortization, which incidentally is exactly what I got in Excel. 

[Joshua S.]

Btw, I realize now that the calculator has 4.5% as the default, so obviously it's $450/year, but that still only equals $13,500. So, hopefully you get now that $400 or $450 per year can't possibly account for all the savings quoted by the calculator ($26,000 in this case) even if we just say it's a full 30 years. How could the calculator be THAT WRONG, right? Maybe you two just don't understand where the savings actually come from when you prepay mortgage principal. I know that's crazy, but once upon a time neither of you knew how to change a tire or send an email and you had to learn, right?

Ok, so here's how you can see what I've been talking about. You see the estimated payoff date is now May 2045, right? Obviously we started at Nov 2048 to calculate a 30 year loan from today's date, so that's about 3 years and 6 months (42 months total) saved time-wise. Now you see on the first line with that $10,000 extra it shows the interest portion as $619 and the next one down is $580? That means that making your $10,000 extra payment jumped you down the amortization schedule to that spot and you skipped all the payments in between. The interest portions $619 and $580 average out to $599.50 and the 42 payments you skipped at an average of $599.50 put you at a savings of $25,179, which is within a few hundred of the quoted $26,000. 

Now all I'm asking you is instead of regurgitating the same 4% stuff, refute what I'm actually saying to you if it's wrong and match your numbers up to the calculator within reason. Don't keep using numbers that come out to $13,500 and then shrugging that it must be right, anyway.

[Joshua S.]

Scott, listen. The mortgage amount and rate don't matter. I've been talking about my own mortgage of $315,000 this whole time and we have been using 4% for simplicity. The point is that when you make an extra $10,000 payment on their default setup the savings comes out to $26,000, but by your math at $450/year x 30 years the savings would be $13,500. What this means is that your assumption about where the savings are coming from is wrong. It's not simply the savings of $450/year because you took $10,000 off of the loan. It doesn't work out.

[Eric Nurmi]

@Dan Schwartz there is another way that allows for keeping cash and doing this same thing. I just came across it a few months ago via a friend in Dallas. It’s using a concept of infinite banking, but tweaking it to our real estate industry.

[Joshua S.]

And to take it a step further, Scott, even if you do use the example you posted an extra $10,000 payment saves about $19,000, which is still not $400/year for 30 years. You're wrong about how the interest savings occur, that's the problem.

[Scott L.]

Here's my example above that I did for the above with the Bankrate Calculator AND Excel. $100,000 loan at 4% 30 years, amortizing payment of $477.42 monthly. You pay it off per schedule in 30 years and you pay $71,537 in interest. 

If  you also make a $10,000 extra "chunk" principal payment with your month 12 payment, you pay it off 5 years earlier, in month 300, with $53,159 in interest paid for a difference of $18,378. 

If you instead had invested that $10,000 at 4% for 24 years, you would have $19,600...your $10,000 + $9,600 in interest.

[Joshua S.]

I don't really see what you're getting at, Scott, so I guess we'll leave it here. My point is that when you make additional principal payments you skip down the amortization table and the interest portions of the payments you skipped - THAT'S where the savings come from. I've done it on a bunch of different loan amounts, multiple calculators, learned it through watching a mortgage broker's presentation, and the numbers always match up, so I'm confident that it's right. But if anyone else can explain the savings shown on a reputable calculator with numbers that actually match up properly I'm all ears. Good luck.

[Scott L.]

Originally posted by @Joshua S.:

And to take it a step further, Scott, even if you do use the example you posted an extra $10,000 payment saves about $19,000, which is still not $400/year for 30 years. You're wrong about how the interest savings occur, that's the problem.

Yes you'd save $19,000 in interest over the 24 years, but if you invested the $10,000 and earned $9600 (4% * 24 years) on it you'd have $10,000 + $9600... $19,600.

[Joshua S.]

PS - Here's one more example for you from mortgagecalculator.org. As you can see, one extra payment of $10,000 shows a savings of around $20,000. When you look at the amo table the month after the $10,000 payment the interest portion jumps from $1012 down to $977 for an average of $994 and shortened the loan by 20 months. $994 x 20 = $19,890 which matches up with the savings shown. Do it on your own, see if you can come up with a better explanation, but as far as I'm concerned the savings definitely can't come from simply the interest of the $10,000 itself. It doesn't work out. When you pay additional principal you skip payments that included interest from the balance of the loan, which is why the savings are so high. 

And it follows that if you're getting 100% total ROI (roughly 10% per year) guaranteed and getting out of debt all at the same time, it's one of the best investments available. Have a good one.

[Scott L.]

Originally posted by @Joshua S.:

I don't really see what you're getting at, Scott, so I guess we'll leave it here. My point is that when you make additional principal payments you skip down the amortization table and the interest portions of the payments you skipped - THAT'S where the savings come from. I've done it on a bunch of different loan amounts, multiple calculators, learned it through watching a mortgage broker's presentation, and the numbers always match up, so I'm confident that it's right. But if anyone else can explain the savings shown on a reputable calculator with numbers that actually match up properly I'm all ears. Good luck.

Here it is using Bankrate. You're making/saving ~$400/yr on your $10,000. The tables are right here and you can duplicate it on Bankrate.

$8185 - $7778 = $407 savings in the 12 months after you make the $10,000 payment. The $7 comes from the monthly compounding built into an amortization and you would get the same with 4.00% interest or investment return if it had monthly payouts or compounding.

Your return on extra principal payments on a mortgage is exactly the loan interest rate x the time period involved, no more or no less. It doesn't matter if you make one extra payment or ten, or random ones at varying times, the return is always the rate on the loan.

[Joshua S.]

Originally posted by @Scott L.:

Originally posted by @Joshua S.:

I don't really see what you're getting at, Scott, so I guess we'll leave it here. My point is that when you make additional principal payments you skip down the amortization table and the interest portions of the payments you skipped - THAT'S where the savings come from. I've done it on a bunch of different loan amounts, multiple calculators, learned it through watching a mortgage broker's presentation, and the numbers always match up, so I'm confident that it's right. But if anyone else can explain the savings shown on a reputable calculator with numbers that actually match up properly I'm all ears. Good luck.

Here it is using Bankrate. You're making/saving ~$400/yr on your $10,000. The tables are right here and you can duplicate it on Bankrate.

$8185 - $7778 = $407 savings in the 12 months after you make the $10,000 payment. The $7 comes from the monthly compounding built into an amortization and you would get the same with 4.00% interest or investment return if it had monthly payouts or compounding.

Your return on extra principal payments on a mortgage is exactly the loan interest rate x the time period involved, no more or no less. It doesn't matter if you make one extra payment or ten, or random ones at varying times, the return is always the rate on the loan.

Wow, I guess I didn't realize that's how it worked. So, I just went to the calculator and jacked the mortgage amount up to $10,000,000 and the total interest paid is $8,240,671.15. Then I put in a principal payment of $10,000 and the interest went down to $8,212,337.92. So, you're saying that the $28,000 savings Bankrate is quoting is just a lie, I guess? The real savings is $400 x 30 years = $12,000 no matter what, huh? I wonder why they would lie like that. Maybe George Soros is paying them off or Ted Cruz's dad killed JFK or something. I just can't believe a reputable calculator would even have buttons to change things around if the answer is always just the annual amount of interest times the number of years. Crazy stuff. Did you know that Thanksgiving and Easter used to be on the same day, but the turkeys and bunnies couldn't get along?

[Scott L.]

It’s actually $10,000 @ 4% compounded for almost 30 years + original $10k which equals about $28k. If you up the principal amount the $10k ends up “earning” interest inside the loan for longer because it $10k doesn’t shorten the loan duration as much. I proved my point with the attached schedules and you continue to try to refute it by comparing total interest paid over different time periods with different cash flows. The return on the money from the time it is put in the loan is always equal to the interest rate for that time period. In this  case 4%. 

[Joshua S.]

Originally posted by @Scott L.:

It’s actually $10,000 @ 4% compounded for almost 30 years + original $10k which equals about $28k. If you up the principal amount the $10k ends up “earning” interest inside the loan for longer because it $10k doesn’t shorten the loan duration as much. I proved my point with the attached schedules and you continue to try to refute it by comparing total interest paid over different time periods with different cash flows. The return on the money from the time it is put in the loan is always equal to the interest rate for that time period. In this  case 4%. 

Sorry, Scott, but you're still not getting it. Bankrate says that a $10,000 payment on a $80,000 loan saves $19,000 ($57,500 - $38,500) in interest. But $10,000 compounds at 4% as follows according to financialmentor.com:

24 years monthly - $26,075.30 (24 years remaining on the loan after the $10,000 payment in this case)

24 years annually - $25,633.04

28 years monthly - $30,591.51 (28 years remaining on the typical loans we've been talking about)

28 years annually - $29,987.03

30 years monthly - $33,134.98 (30 years in case you think that the hypothetical compounding for the rest of the loan term matters)

30 years annually - $32,433.98

I just added in the annual numbers in case you were thinking the monthly numbers must be wrong. None of these amounts is even close to the $19,000 savings quoted by Bankrate. Do you notice how I keep moving the target / loan amount? It's because $10,000 x 4% for the remaining months can't possibly calculate the savings accurately on different loan amounts. A $10,000,000 loan and an $80,000 loan have different amounts of scheduled interest and different amounts of interest saved with an extra $10,000 payment, but you're trying to rubber stamp every loan with $10,000 compounded at 4% rate for the remaining years (or 30 years, that's unclear to me) and it's not possible. Again, if you want to see it in real time, just do it on your own. Compare the savings on a $10,000,000 loan and a $80,000 loan both with the extra $10,000 and all at 4% and you'll see the savings amounts are different. If the savings amounts are different then you can't possibly use the same numbers to get different answers. @Chris May knows I'm right, if he's honest he'll come and tell you.

[Chris May]

Originally posted by @Joshua S.:

I disagree that it works the same and don't see any comparison between this situation and a CD. One big problem with this is that you guys keep saying if you pay off $10,000 you are only saving the interest CREATED by that $10,000, but it's simply not true.

Thanks to the wonder of math, this isn't a subjective issue. Putting that 10,000 into the bank, or putting it against your mortgage are the same thing. You aren't saving $450 per month, you're saving 4.5% COMPOUNDED MONTHLY on $10,000 [10,000 * (1 + .045/12) ^ N where N = # of periods].

1. Put that 10,000 against your $165,000 mortgage at 4.5% in month one. Pay off your loan in 318 months, pay $110,409 in interest.
2. Put that $10,000 into the bank at 4.5%. Pay your $165,000 mortgage as usual. After 318 months, your bank account has grown to 10,000 * (1 + .045/12) ^ 318 = $32,879. Your mortgage balance is $32,431. Pay off your mortgage in month 318 with the money in your bank account, having paid $133,289 in interest, but having made $22,879 in interest. Total interest paid: $110,410 in interest.

It's the same thing. EXACTLY. THE. SAME. THING.

YOUR RATE OF RETURN IS 4.5% IN BOTH SCENARIOS.  

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

I disagree that it works the same and don't see any comparison between this situation and a CD. One big problem with this is that you guys keep saying if you pay off $10,000 you are only saving the interest CREATED by that $10,000, but it's simply not true.

Thanks to the wonder of math, this isn't a subjective issue. Putting that 10,000 into the bank, or putting it against your mortgage are the same thing. You aren't saving $450 per month, you're saving 4.5% COMPOUNDED MONTHLY on $10,000 [10,000 * (1 + .045/12) ^ N where N = # of periods].

1. Put that 10,000 against your $165,000 mortgage at 4.5% in month one. Pay off your loan in 318 months, pay $110,409 in interest.
2. Put that $10,000 into the bank at 4.5%. Pay your $165,000 mortgage as usual. After 318 months, your bank account has grown to 10,000 * (1 + .045/12) ^ 318 = $32,879. Your mortgage balance is $32,431. Pay off your mortgage in month 318 with the money in your bank account, having paid $133,289 in interest, but having made $22,879 in interest. Total interest paid: $110,410 in interest.

It's the same thing. EXACTLY. THE. SAME. THING.

Chris, the problem with this is that in number one your savings - or what the $10,000 hypothetically grew into in this comparison - is just under $26,000. That's what I've been trying to say / understand. The savings is $26,000 ($136,000 - $110,000) in your scenario, but by your own admission none of your bank account calculations match up with that, yet you're saying it's the same. How can $10,000 save you $26,000 on the mortgage and net you $22,879 in the bank and those two things be the same?

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

I disagree that it works the same and don't see any comparison between this situation and a CD. One big problem with this is that you guys keep saying if you pay off $10,000 you are only saving the interest CREATED by that $10,000, but it's simply not true.

Thanks to the wonder of math, this isn't a subjective issue. Putting that 10,000 into the bank, or putting it against your mortgage are the same thing. You aren't saving $450 per month, you're saving 4.5% COMPOUNDED MONTHLY on $10,000 [10,000 * (1 + .045/12) ^ N where N = # of periods].

1. Put that 10,000 against your $165,000 mortgage at 4.5% in month one. Pay off your loan in 318 months, pay $110,409 in interest.
2. Put that $10,000 into the bank at 4.5%. Pay your $165,000 mortgage as usual. After 318 months, your bank account has grown to 10,000 * (1 + .045/12) ^ 318 = $32,879. Your mortgage balance is $32,431. Pay off your mortgage in month 318 with the money in your bank account, having paid $133,289 in interest, but having made $22,879 in interest. Total interest paid: $110,410 in interest.

It's the same thing. EXACTLY. THE. SAME. THING.

Chris, the problem with this is that in number one your savings - or what the $10,000 hypothetically grew into in this comparison - is just under $26,000. That's what I've been trying to say / understand. The savings is $26,000 ($136,000 - $110,000) in your scenario, but by your own admission none of your bank account calculations match up with that, yet you're saying it's the same. How can $10,000 save you $26,000 on the mortgage and net you $22,879 in the bank and those two things be the same?

Because in scenario 2, you're saving the interest that you would have paid in months 319 to 360. Interest in those months (check your amortization table) would have been $2,681. 22,879 + 2,681 = $25,560.

In #1 and #2, you're paying $110,410 in interest. Just paying off the mortgage as usual over 30 years, you would pay $135,971. $135,971 - $110,410 = $25,561.

When I put my money in the bank, I make $22,879 in 318 months. When I take my bank account and put it towards my mortgage in month 318, I save the interest on the mortgage I would have paid in months 319-360.

[Steve Vaughan]

The goal and purpose of accelerated debt reduction is the important concept in all this, IMO.  Reducing debt is never a dumb idea. 

The deep in the weeds perfect calculation of dollars saved and opportunity cost of what $x could have dome somewhere else should be secondary. There may be better uses for money in a market saturated with great deals, but most aren't having that problem these days. LOL

The idea of using the HELOC intrigues me and I understand the concept. Is there a way to apply the same principle to an investment property? Primary home rates are much lower than investment loans. I can't see accelerating my 3.375% fixed rate home loan when I have 3 investment loans of 6%-6.5%, the largest being the 6.5% one.

I suppose the main drawback to paying down anything but your home is the credit line can't grow with the paydown of anything but the home?  That aside, has anybody used this concept to pay off higher rate investment loans instead of your home?  Thanks!

[Brent Coombs]

@Steve Vaughan, most of Joshua's posts have the premise of paying chunks of his own money off the principal, rather than borrowed (HELOC) money, so of course his pay off is accelerated accordingly! 

But I agree with the premise you raised (if I understood you correctly): it only makes sense to use a HELOC to pay down principal if the underlying interest rate of the HELOC is lower than the interest rate of the existing loan being accelerated! Cheers...