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?

[Steve Vaughan]

Originally posted by @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...

Thanks, Brent.  I like the way you look at it.  Don't borrow at a higher interest rate than what you are paying down.  Duh, right?

I think I've decided to pay down my 6.5% loan with savings, leaving my Heloc in-tact and untapped. I'm not doing a ton, just $25k. It will take 2 yrs off the loan at $2298/mo, so $55,168 in payments. That monthly over the 180 months remaining is $306. The interest reduction monthly is only $133, but gross (maybe just rationalizing LOL) savings of $306/mo is a good enough ROI for me in the deal flow desert I am in. The $25k is just sitting there earning 1.5% in a mmkt acct anyway.

Or.. pay off a $60k rental house loan at 6% entirely. FMV about $150. That equity would be much more tappable if ecessary than this 7-unit I've been discussing. Decisions, decisions. Cheers to you!

[Joshua S.]

Originally posted by @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.

Awesome, that makes a lot more sense. That's what I've been asking forever. Ok, so I understand that technically the rate of return is the rate that you borrowed the money at, but how do you reconcile that with what we said earlier about the real life results? If I pay $10,000 extra per year for ten years and save/make $100,000 off of it over that time, it comes out to 10% per year and 100% total ROI over the ten years from the layman's perspective. I think it goes back to the idea that I'm looking at the time I'm in the game and you're looking at the full 30 years, correct? Remember how that went? Wal-mart closes some stores, the future savings are added to their bottom line, and the stock goes up because shareholders can expect better performance going forward and all that. When I save the $100,000 over the next ten years, that's a real world result of avoiding liability and my "account" is at $200,000 in the sense that I kept my original $100,000 in equity and saved $100,000 in interest. I guess what I'm getting at is how do you reconcile the 4.5% thing with the layman's perspective I'm describing? Which piece am I not accounting for and why does it matter in terms of the real world results? Are you saying that it's just not happening or is it your whole "you must collect savings over the following 20 years" thing?

And there's no magic savings account with 4.5% interest, so let's come back to real life with that, too. If I put $10,000 per year for ten years into the stock market at 9% compounded monthly it comes out to $170,230.41. I have to hope I can get 9% to come close to my guaranteed $200,000 above. I get what you're saying that the rates of return are supposedly the same, I really do, but what I'm saying is that I can see my mortgage company (and amo calcs) telling me that I'm saving $100,000 with a $100,000 investment and paying my mortgage off in ten years, so are you saying that this real world result isn't actually happening or are you saying that it's happening, but I'm calculating it wrong?

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

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.

Awesome, that makes a lot more sense. That's what I've been asking forever. Ok, so I understand that technically the rate of return is the rate that you borrowed the money at, but how do you reconcile that with what we said earlier about the real life results? If I pay $10,000 extra per year for ten years and save/make $100,000 off of it over that time, it comes out to 10% per year and 100% total ROI over the ten years from the layman's perspective. I think it goes back to the idea that I'm looking at the time I'm in the game and you're looking at the full 30 years, correct? Remember how that went? Wal-mart closes some stores, the future savings are added to their bottom line, and the stock goes up because shareholders can expect better performance going forward and all that. When I save the $100,000 over the next ten years, that's a real world result of avoiding liability and my "account" is at $200,000 in the sense that I kept my original $100,000 in equity and saved $100,000 in interest. I guess what I'm getting at is how do you reconcile the 4.5% thing with the layman's perspective I'm describing? Which piece am I not accounting for and why does it matter in terms of the real world results? Are you saying that it's just not happening or is it your whole "you must collect savings over the following 20 years" thing?

And there's no magic savings account with 4.5% interest, so let's come back to real life with that, too. If I put $10,000 per year for ten years into the stock market at 9% compounded monthly it comes out to $170,230.41. I have to hope I can get 9% to come close to my guaranteed $200,000 above. I get what you're saying that the rates of return are supposedly the same, I really do, but what I'm saying is that I can see my mortgage company (and amo calcs) telling me that I'm saving $100,000 with a $100,000 investment and paying my mortgage off in ten years, so are you saying that this real world result isn't actually happening or are you saying that it's happening, but I'm calculating it wrong?

We keep going down rabbit holes. This started with you saying that using a HELOC to pay your mortgage is saving you interest. We say no. Then you try to step back and show with "simple examples" that prove what you're saying. Then I show you that your logic is wrong or the math incorrect. Then we get back to the same starting point.

I played along and showed that you're only "saving" 4.5% compounded interest. Not the ridiculous number you're quoting.

In this example from your last post, you say you make 10k per year for 10 years on 100k investment, saying that's 10% rate of return. It's not. You're calculating rate of return wrong. Earning 100% return over 10 years is 7.17% compounded annual return, not 10%. This is what I'm talking about. You're so far off on all of these things, and so sure of your belief, that it's impossible to redirect. There are just too many things you're not understanding and floating from one to the other in the same post and conflating different concepts with each other all in the same breath.

I'm trying to say all of this as respectfully as possible, but it's like you read a WebMD article, or found a website that shows how to calculate ideal resting heart rate, and now you're trying to do open heart surgery and educate everyone else how to do it. Meanwhile, actual doctors are telling you you're completely wrong, but you keep saying that they're being too technical and "that's not how it works in real life".

I'll ask one time: what is your ultimate point? What thesis are you trying to prove? That paying a mortgage with a HELOC saves on interest over the life of both loans?

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

Originally posted by @Joshua S.:

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.

Awesome, that makes a lot more sense. That's what I've been asking forever. Ok, so I understand that technically the rate of return is the rate that you borrowed the money at, but how do you reconcile that with what we said earlier about the real life results? If I pay $10,000 extra per year for ten years and save/make $100,000 off of it over that time, it comes out to 10% per year and 100% total ROI over the ten years from the layman's perspective. I think it goes back to the idea that I'm looking at the time I'm in the game and you're looking at the full 30 years, correct? Remember how that went? Wal-mart closes some stores, the future savings are added to their bottom line, and the stock goes up because shareholders can expect better performance going forward and all that. When I save the $100,000 over the next ten years, that's a real world result of avoiding liability and my "account" is at $200,000 in the sense that I kept my original $100,000 in equity and saved $100,000 in interest. I guess what I'm getting at is how do you reconcile the 4.5% thing with the layman's perspective I'm describing? Which piece am I not accounting for and why does it matter in terms of the real world results? Are you saying that it's just not happening or is it your whole "you must collect savings over the following 20 years" thing?

And there's no magic savings account with 4.5% interest, so let's come back to real life with that, too. If I put $10,000 per year for ten years into the stock market at 9% compounded monthly it comes out to $170,230.41. I have to hope I can get 9% to come close to my guaranteed $200,000 above. I get what you're saying that the rates of return are supposedly the same, I really do, but what I'm saying is that I can see my mortgage company (and amo calcs) telling me that I'm saving $100,000 with a $100,000 investment and paying my mortgage off in ten years, so are you saying that this real world result isn't actually happening or are you saying that it's happening, but I'm calculating it wrong?

Also, 10k annual investments, compounded monthly at 9% is 154k after 10 years, not the $170k you quoted.

I'm saying you're framing these concepts incorrectly AND calculating them wrong. It's a double whammy of wrong.

[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:

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.

Awesome, that makes a lot more sense. That's what I've been asking forever. Ok, so I understand that technically the rate of return is the rate that you borrowed the money at, but how do you reconcile that with what we said earlier about the real life results? If I pay $10,000 extra per year for ten years and save/make $100,000 off of it over that time, it comes out to 10% per year and 100% total ROI over the ten years from the layman's perspective. I think it goes back to the idea that I'm looking at the time I'm in the game and you're looking at the full 30 years, correct? Remember how that went? Wal-mart closes some stores, the future savings are added to their bottom line, and the stock goes up because shareholders can expect better performance going forward and all that. When I save the $100,000 over the next ten years, that's a real world result of avoiding liability and my "account" is at $200,000 in the sense that I kept my original $100,000 in equity and saved $100,000 in interest. I guess what I'm getting at is how do you reconcile the 4.5% thing with the layman's perspective I'm describing? Which piece am I not accounting for and why does it matter in terms of the real world results? Are you saying that it's just not happening or is it your whole "you must collect savings over the following 20 years" thing?

And there's no magic savings account with 4.5% interest, so let's come back to real life with that, too. If I put $10,000 per year for ten years into the stock market at 9% compounded monthly it comes out to $170,230.41. I have to hope I can get 9% to come close to my guaranteed $200,000 above. I get what you're saying that the rates of return are supposedly the same, I really do, but what I'm saying is that I can see my mortgage company (and amo calcs) telling me that I'm saving $100,000 with a $100,000 investment and paying my mortgage off in ten years, so are you saying that this real world result isn't actually happening or are you saying that it's happening, but I'm calculating it wrong?

We keep going down rabbit holes. This started with you saying that using a HELOC to pay your mortgage is saving you interest. We say no. Then you try to step back and show with "simple examples" that prove what you're saying. Then I show you that your logic is wrong or the math incorrect. Then we get back to the same starting point.

I played along and showed that you're only "saving" 4.5% compounded interest. Not the ridiculous number you're quoting.

In this example from your last post, you say you make 10k per year for 10 years on 100k investment, saying that's 10% rate of return. It's not. You're calculating rate of return wrong. Earning 100% return over 10 years is 7.17% compounded annual return, not 10%. This is what I'm talking about. You're so far off on all of these things, and so sure of your belief, that it's impossible to redirect. There are just too many things you're not understanding and floating from one to the other in the same post and conflating different concepts with each other all in the same breath.

I'm trying to say all of this as respectfully as possible, but it's like you read a WebMD article, or found a website that shows how to calculate ideal resting heart rate, and now you're trying to do open heart surgery and educate everyone else how to do it. Meanwhile, actual doctors are telling you you're completely wrong, but you keep saying that they're being too technical and "that's not how it works in real life".

I'll ask one time: what is your ultimate point? What thesis are you trying to prove? That paying a mortgage with a HELOC saves on interest over the life of both loans?

I don't know why you think I'm sure in my belief if I'm literally telling you that this is the layman's perspective and asking you to explain where it's wrong. If I had to estimate how many times I've asked you to clarify or explain I would say it's over 50 going back to a few months ago. And then from my perspective you shift the argument to some other angle or in this case you're saying there's just too much to unpack and therefore you can't answer the (simple?) questions I'm asking. 

So, here's my ultimate point - everyone is saying that this strategy "doesn't work" or maybe to be more exact "doesn't save interest" or whatever exact verbiage you want to put on it. But then your way of explaining that it "doesn't work" is basically to say that there are better ways or better investments or better snow owls or better lions. Everything is so much better that you can't see any benefits. If you're going to ride your bike to school it's not going to work because you're leaving your car behind. No, it will work and has certain other benefits that driving the car does not.

I can take my $10,000/year and save toward a business, I can put it toward stocks, I can save toward nothing in particular, I can spend it like everyone else does on nice cars and huge TVs, I can spend it at the strip club, buy another rental, I can put it toward the mortgage, I can put it toward the kids' college, I can give it to charity, etc. I can drive, bike, walk, take a train, take a plane, get a ride, telecommute, etc. You get it? I'm not saying that this is the only or best way to spend the money or that this is the only way to pay down your mortgage. What I'm saying is that it "works" in the sense that it's an easy way to make sure all of your extra money is going toward your mortgage and I feel that that's a pretty good place for it. And that prepaying your mortgage in any way saves you interest, which everyone knows. You're so mired in rates and math and that you'd rather drive than ride that you're not listening. That has been the case from the beginning. You refuse to see that even though I may be on my bike or on the train, I like the benefits I'm getting and that someone else might.

You may want to buy stocks or spend it at the strip club or whatever, but in my opinion you get a guaranteed return of [keeping all your money and getting another dollar for every dollar you put in]. Call that whatever rate you want, but I can't get a stock return like that much less a guaranteed one. I'm getting out of debt, something none of those other investments offer. The HELOC allows me to essentially stash my income in the mortgage and make sure it's working for me instead of sitting in a checking account waiting to be used. I'm paying each chunk of $10,000 with all of my income but still able to pay my bills, which is very different from just paying a chunk of my income toward the mortgage each month. Again, I realize I could surf to work, but I'm getting a ride in the back of a pickup and the benefits I'm getting suit me and anyone like me who would want them.

But instead of looking at the fact that it's a different way of paying, that you get a dollar for dollar return, that you're putting all your income to work in a user friendly way, etc. my math is wrong, I could just get a HELOC as a backup and dump my extra income on my mortgage every month, I could put it in the stock market, I could put it in a magical savings account with the same rate, I could huff glue and have a fist fight with my neighbor, I could wait for 30 years to collect all my savings together, etc. You're closed minded and not willing to admit the benefits of something that clearly has some, because you're defensive and don't want to admit that everything is not all about math and better / worse. You probably have investments right now that could be doing better, but you're doing something with it and even though they aren't "perfect" you like the benefits you are getting, correct?

[Chris May]

@Joshua S. So, here's my ultimate point - everyone is saying that this strategy "doesn't work" or maybe to be more exact "doesn't save interest" or whatever exact verbiage you want to put on it. But then your way of explaining that it "doesn't work"

OK. There are two things:

1. Using a HELOC to pay your mortgage absolutely does not save any money in interest*. The interest people claim to save (using amortization calculators), is really just getting shifted to the HELOC. The HELOC is a wholly unnecessary vehicle for paying your mortgage off early.
   
   1. * If the HELOC interest rate is lower, you will lower your overall interest paid by moving principal from mortgage to HELOC
2. Many people have chimed in to say "who cares if it works? why would somoene pay their mortgage early." The answer here is 1) it doesn't work and 2) wanting to pay your mortgage off early is an entirely personal decision, there's no right answer, and depends on your potential rate of return on other investments*.
   1. * The people who go down this rabbit hole almost always calculate rate of return on early mortgage payoff wrong (as you have been doing). If you want to compare to other investment options, the first step is to correctly calculate the rate of return of all potential investments.

[Joshua S.]

Originally posted by @Chris May:

@Joshua S. So, here's my ultimate point - everyone is saying that this strategy "doesn't work" or maybe to be more exact "doesn't save interest" or whatever exact verbiage you want to put on it. But then your way of explaining that it "doesn't work"

OK. There are two things:

1. Using a HELOC to pay your mortgage absolutely does not save any money in interest*. The interest people claim to save (using amortization calculators), is really just getting shifted to the HELOC. The HELOC is a wholly unnecessary vehicle for paying your mortgage off early.
   
   1. * If the HELOC interest rate is lower, you will lower your overall interest paid by moving principal from mortgage to HELOC
2. Many people have chimed in to say "who cares if it works? why would somoene pay their mortgage early." The answer here is 1) it doesn't work and 2) wanting to pay your mortgage off early is an entirely personal decision, there's no right answer, and depends on your potential rate of return on other investments*.
   1. * The people who go down this rabbit hole almost always calculate rate of return on early mortgage payoff wrong (as you have been doing). If you want to compare to other investment options, the first step is to correctly calculate the rate of return of all potential investments.

Haha. Prepaying mortgage principal saves money on interest - Suze Orman and Dave Ramsey will tell you that, it's mainstream financial knowledge - but because I'm using a HELOC to make it more convenient, it's no longer true.

Gotcha. I think we're officially done for now. I'll be back with more updates at some point and you can tell me white is black and black is white some more. 🤣

[Bill F.]

@Chris May 

You have the patience of a saint. There should be a special BP badge in honor of your sheer perseverance.

@Joshua S.

It is a free country, you can do whatever you want with your money. Using the velocity of capital method or whatever it's called these days, is your choice. Countless folks on BP have tried to tell you it isn't the most effective method because it costs more (unless your HELOC is at a lower rate than the mortgage) and introduces more risk.

It is up to you to decide if their advice fits your particular situation. Clearly you don't think it applies. That's cool.

It seems like you are afraid of what you don't understand (math, specifically the algebra behind the [FV=PV(1+rate)^periods] formula) and so you insult and degenerate those that use it to prove a point. 

You have made these concepts out to be some black box of high finance that must be simplified into layman's terms. They aren't. It's middle school math coupled with an understanding of basic personal finance concepts.

This video explains Time Value of Money. 

This one shows how to build your own amortization table instead of having to rely on the plain ones online. 

Finally this one explains the formula for calculating monthly payment of a mortgage. 

Those links can help you better understand and address this issue. If you don't want to look at them, that's cool too. If you chose not to, then don't make it someone else's responsibility to teach you these things or explain them in a way that suits your needs.

We all understand Time Value of Money and can use it to talk about this question and quantify basic assumptions about opportunity cost, interest rate risk, compounded annual growth rate, etc. You are the one that can't. For the purposes of this discussion, that's a problem. 

[Chris May]

but because I'm using a HELOC to make it more convenient, it's no longer true. 

Exactly. Much the same as using a credit card to pay a credit card doesn't save any interest until you use cash to pay off the second card.

[Joshua S.]

Originally posted by @Chris May:

but because I'm using a HELOC to make it more convenient, it's no longer true. 

Exactly. Much the same as using a credit card to pay a credit card doesn't save any interest until you use cash to pay off the second card.

It's funny that you say I'm wrong, but then you blatantly disregard the whole premise of what we've been talking about. Seems like trolling at this point and that's really too bad. Obviously when I pay my "first credit card" with my "second credit card" I then pay my second card off with cash every couple weeks when my income goes directly on the account. Isn't that what we've been talking about this entire time? You thought I was paying with the HELOC and then letting it sit there, huh? Wild. That's a very different strategy, so either you're not paying attention or you're deliberately misrepresenting my point. I'm not going to ask you which because it doesn't matter, I'm just saying that it's clearly one or the other.

So, here's the last thing I'd like to ask at this point, because I'm tired of the discussion and I'm hoping we can wrap it up for now. You said earlier that when I pay $10,000 I save $26,000 of interest in our Bankrate / hypothetical scenario, albeit in a different way from what I was initially describing. That's been deliberated and agreed upon and confirmed ten different ways. So, when I put the money on the HELOC so I can goof around and not save interest and whatever else you want to say about it, it's costing me about $114/month in HELOC interest and I'm on pace to pay it off in about ten months for a total of $1140.

Because I think that the HELOC / mortgage thing and especially PERCENTAGE RATES (which you are all about and I couldn't care less about) are obfuscating my point (perhaps deliberately on your part I'm now wondering), please, let's use an analogy for this question.

Imagine my Aunt Diane died and left me an inheritance of $10,000. The only strings are that I need to attend her funeral and pay an administrative fee to do the paper work at a total of $1140 for the plane ticket, hotel, and paperwork. So, now I have my $10,000 and I like the idea of saving on mortgage interest, so I put the $10,000 on my mortgage and save the $26,000 we've confirmed over and over. How much did I net out?

Now I know when I borrow money from the HELOC it's not an inheritance, but hear me out - I'm not taking out the checkbook and paying a car payment for example and then worrying I won't have enough for milk. The process of paying it down is seamless and organic and I don't have to watch my checking account balance or worry that I'm putting too much or too little toward whatever, the money is just paid back automatically as I go, so I don't miss it. It was just sitting there gathering dust before. If I want to buy a TV next month I buy it and that much less goes toward the mortgage and the month after that maybe we're a little more frugal and so on, but it gets paid when it gets paid. So, I know you'll probably disregard this point, but if my bills are paid and I have savings and investments and all my extra income automatically goes on my HELOC to chip away at it, what do I care - it's pretty much like free money to me. Kind of like those services such as Acorn that round up all your transactions and put the pennies in an investment account. Technically, you're setting aside money for investing, but since it's barely noticeable it's almost like free money in a sense, right? I know you'll never agree to that, because you're a math Nazi and all, but the average person can probably understand what I'm saying. Like how you don't miss the money that's going to your 401K every month, because it's behind the scenes. It's not that it's not happening, but it doesn't feel like you are funding your account because you never see the money and therefore don't miss it and your account just grows.

And aside from the "feel" I just described as I've told you before the $10,000 was already going to the mortgage, anyway, so technically I'm not spending anything extra on this prepaid principal "investment". You never addressed that last time (probably because you don't want to admit it), but it's true. Unlike investing in stocks or buying a business or any other investment, I already owe the mortgage as a huge liability, so paying it back early didn't actually cost me any money. Voila, it IS like an inheritance! Of course, you'll always have opportunity costs whether it's truly an inheritance or my extra income or whatever and I get that, but there are opportunity costs to everything. My kids cost me money and what could I do with all the money I spend on them, right? You make choices and you live with 'em. That's why when you guys go on about the opportunity costs and the time value of money and all that it makes me yawn. It's like wondering what your life would've been like if you took Stacey to the prom instead of Melissa. Who knows? Maybe Stacey eventually got a crack in her foundation or you had to take the tenants to court or she needed a new roof or something. Stacey is really a rental property, btw. Opportunity costs are just an educated guess, nothing more. They're really a pointless way to second guess yourself, to be honest. And I would say that generally when you give up a better rate on one investment you're usually getting something out of the other investment that compensates for it - higher liquidity, lower risk, guaranteed returns, etc. That's probably an unpopular view, too, but every time you go out to dinner that money could've paid for a college text book for your kids in 20 years, so I think it's very hypothetical / flimsy idea to worry about or let sway you.

So, hopefully this clarifies where I'm coming from. I pay $1140 to get another inheritance every year and put it on the mortgage and net out X savings and as long as my rich relatives keep dying I'm golden. Seriously, though, the $10,000 doesn't cost me anything to pay back both because it's seamless and it was going there, anyway, so I'm netting about $34,860 from this endeavor after I pay the HELOC interest, right?

[Bill F.]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

but because I'm using a HELOC to make it more convenient, it's no longer true. 

So, here's the last thing I'd like to ask at this point, because I'm tired of the discussion and I'm hoping we can wrap it up for now. You said earlier that when I pay $10,000 I save $26,000 of interest in our Bankrate / hypothetical scenario, albeit in a different way from what I was initially describing. That's been deliberated and agreed upon and confirmed ten different ways. So, when I put the money on the HELOC so I can goof around and not save interest and whatever else you want to say about it, it's costing me about $114/month in HELOC interest and I'm on pace to pay it off in about ten months for a total of $1140. ..

Because I think that the HELOC / mortgage thing and especially PERCENTAGE RATES (which you are all about and I couldn't care less about) are obfuscating my point (perhaps deliberately on your part I'm now wondering).

So, hopefully this clarifies where I'm coming from. I pay $1140 to get another inheritance every year and put it on the mortgage and net out X savings and as long as my rich relatives keep dying I'm golden. Seriously, though, the $10,000 doesn't cost me anything to pay back both because it's seamless and it was going there, anyway, so I'm netting about $34,860 from this endeavor after I pay the HELOC interest, right?

In short you are not netting $34,860 due to time vale of money and opportunity cost.

You use two different time periods, which makes for an inaccurate comparison.  

You pay $1,140/yr in interest on your HELOC and that in turn saves you $26,000 on your primary mortgage. This is true, but the savings on the mortgage is over 25-28 years, not one year like the HELOC interest.

You either need to compare lifetime HELOC interest payments to lifetime mortgage savings or yearly HELOC interest payments to yearly mortgage interest savings. Comparing the EMI formula to the compound interest formula will also show you that the only variable that matters is the rate, but you have somehow convinced yourself that rates don't matter.

Figure out how much you "saved" in mortgage interest over one year by prepaying $10k and compare that to the $1,140 it cost you to use the $10k HELOC for the year.

[Joshua S.]

Originally posted by @Bill F.:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

but because I'm using a HELOC to make it more convenient, it's no longer true. 

So, here's the last thing I'd like to ask at this point, because I'm tired of the discussion and I'm hoping we can wrap it up for now. You said earlier that when I pay $10,000 I save $26,000 of interest in our Bankrate / hypothetical scenario, albeit in a different way from what I was initially describing. That's been deliberated and agreed upon and confirmed ten different ways. So, when I put the money on the HELOC so I can goof around and not save interest and whatever else you want to say about it, it's costing me about $114/month in HELOC interest and I'm on pace to pay it off in about ten months for a total of $1140. ..

Because I think that the HELOC / mortgage thing and especially PERCENTAGE RATES (which you are all about and I couldn't care less about) are obfuscating my point (perhaps deliberately on your part I'm now wondering).

So, hopefully this clarifies where I'm coming from. I pay $1140 to get another inheritance every year and put it on the mortgage and net out X savings and as long as my rich relatives keep dying I'm golden. Seriously, though, the $10,000 doesn't cost me anything to pay back both because it's seamless and it was going there, anyway, so I'm netting about $34,860 from this endeavor after I pay the HELOC interest, right?

In short you are not netting $34,860 due to time vale of money and opportunity cost.

You use two different time periods, which makes for an inaccurate comparison.  

You pay $1,140/yr in interest on your HELOC and that in turn saves you $26,000 on your primary mortgage. This is true, but the savings on the mortgage is over 25-28 years, not one year like the HELOC interest.

You either need to compare lifetime HELOC interest payments to lifetime mortgage savings or yearly HELOC interest payments to yearly mortgage interest savings. Comparing the EMI formula to the compound interest formula will also show you that the only variable that matters is the rate, but you have somehow convinced yourself that rates don't matter.

Figure out how much you "saved" in mortgage interest over one year by prepaying $10k and compare that to the $1,140 it cost you to use the $10k HELOC for the year.

The reason the rate doesn't matter is because it's not costing me any money. If I put $10,000 in the stock market the rate matters because I'm trying to calculate my "return on investment". In this scenario the "investment" isn't costing anything, because of reasons I explained. That's why I compared it to getting an inheritance - it's free money. If you sign up for that Acorns service and every time you buy a cup of coffee they drop 32 cents in your investment account and then you make interest of off of it, that's free money, too, for all intents and purposes. You're not missing it. I have investments like stocks, rental properties, and savings that I eventually plan to invest when my kids are older. The money that's going to this process of paying my mortgage early is the money that was just languishing in my checking account and not helping me in any way. It's like Acorns but for my mortgage. It's the extra dollars lying around that I'm not using for anything else.

The only other thing is looking at opportunity costs, but I don't run my life around opportunity costs and most people don't. It's just an idea investors use to second guess decisions. If you buy a bakery, the opportunity cost is that you could have bought a rental property or another type of business or god knows what. The possibilities are infinite, so how do you calculate it? If I buy a bakery tomorrow for $50,000 and make $50,000/year what are my "opportunity costs"? Maybe that $50,000 could have bought me a salon that makes me $60,000/year or a tire shop that makes $30,000/year. To calculate opportunity costs you need to take infinite possibilities and select one for a direct comparison, which makes no sense. It's just an idea that doesn't have any bearing on the real world. And as I said, maybe I select the tire shop at the lower return vs the bakery because I believe it's insulated from a financial recession and safer money or it's in a better neighborhood or the marketing is lackluster and I believe there's more opportunity than with the bakery. What are all THOSE opportunity costs? If anything when comparing money sitting in your checking account waiting for bills vs money going to early mortgage principal, the "opportunity costs" add up when you just let the money sit there.

As far as the time question, that's fair to a point except Chris was doing the same 30 year thing and I already debunked it. If Target closes stores to save money the projected savings go to the bottom line immediately. They don't have to wait around for 30 years to collect the savings and then use the money. When I pay my mortgage early, I can project that in 10 years or so I will be out of debt and save $100,000 over that course of time. So, the $11,400 I pay in HELOC interest over the next ten years saves me $100,000 in mortgage interest over that time and it's almost 900% return on that money. It's "projected", but your whole life is projected. If I take 15 minutes and save 15% by switching to Geico, I don't have to sit around and wait for the returns, I know that 15% of my previous bill can now go toward gas if I want to take a trip.

This is what I've been talking about. You guys are so rigid about math and comparing numbers that you can't see the forest for the trees.

[Bill F.]

@Joshua S. Did you visit the links I posted in my previous reply?

[Chris May]

@Joshua S. If Target closes stores to save money the projected savings go to the bottom line immediately. They don't have to wait around for 30 years to collect the savings and then use the money.

I can tell you that this is unequivocally false. If those stores were a $1M per year drag on earnings, projected into the next 30 years, they could not recognize 30M in year 1, which is what you're doing. You're trying to recognize savings from money you don't owe yet. This is the part I keep trying to point out to you but, as Bill pointed out, you're insistent on conflating annualized and total rates of return when comparing investments.

@Bill F.'s last post is absolutely correct. You're acting like these are all obscure Goldman Sachs concepts. They're not. And refusing to take them seriously is the difference between playing in Little League (maybe even tee ball) vs the majors. You simply cannot make intelligent capital allocation decisions by willfully ignoring these concepts.

Suze Orman and the rest give basic, rule-of-thumb advice to financial rubes who don't know up from down. You can run your real estate business based on those rules and probably be fine, but you're going to get left behind by other folks who run their real estate business with these simple, bread-and-butter concepts. This is a website for real estate professionals and you're simply not acting like it.

The way to make mountains of cash in real estate is to understand your numbers, and intelligently weigh various investment decisions. You're just throwing darts at the wall (and I suspect losing money carrying mortgage principal on your HELOC because you don't understand how to calculate annualized returns). Feel free to do it, but deriding the rest of us for knowing our sh*t is a strange hill to die on when you're posting on a real estate knowledge sharing website.

[Joshua S.]

Originally posted by @Chris May:

@Joshua S. If Target closes stores to save money the projected savings go to the bottom line immediately. They don't have to wait around for 30 years to collect the savings and then use the money.

I can tell you that this is unequivocally false. If those stores were a $1M per year drag on earnings, projected into the next 30 years, they could not recognize 30M in year 1, which is what you're doing. You're trying to recognize savings from money you don't owe yet. This is the part I keep trying to point out to you but, as Bill pointed out, you're insistent on conflating annualized and total rates of return when comparing investments.

@Bill F.'s last post is absolutely correct. You're acting like these are all obscure Goldman Sachs concepts. They're not. And refusing to take them seriously is the difference between playing in Little League (maybe even tee ball) vs the majors. You simply cannot make intelligent capital allocation decisions by willfully ignoring these concepts.

Suze Orman and the rest give basic, rule-of-thumb advice to financial rubes who don't know up from down. You can run your real estate business based on those rules and probably be fine, but you're going to get left behind by other folks who run their real estate business with these simple, bread-and-butter concepts. This is a website for real estate professionals and you're simply not acting like it.

The way to make mountains of cash in real estate is to understand your numbers, and intelligently weigh various investment decisions against each other. You're just throwing darts at the wall (and I suspect losing money carrying mortgage principal on your HELOC because you don't understand how to calculate annualized returns). Feel free to do it, but deriding the rest of us for knowing our **** is a strange hill to die on when you're posting on a real estate knowledge sharing website.

That's cool, like I said we'll have to leave it here. I guess the only other thing I wanted to mention is that you guys are so focused on what else I'm not doing with my money - comparing what I'm doing to stocks or magical savings accounts, etc. - and you say I'm missing out and not making the best investment, fine. As I said, opportunity costs are a great way to wish your life away. What were the opportunity costs of all the toys my parents bought me when I was a kid since they could have invested in Apple, right? But you're chastising me for opportunity costs and not getting the best return and you're missing a glaring contradiction. I'm sure you all have money sitting in a checking account right now, correct? Maybe you're waiting for bills or saving up for a purchase or saving up for an investment, but the money is just sitting there currently, right? Earning nothing or next to nothing?

What are the opportunity costs there? I'm using my extra income / checking account to pay down a liability and save on mortgage interest and your money is just sitting there, so how can you guys tell me there are major opportunity costs to what I'm doing when in a direct comparison you're not doing anything with the equivalent funds? Obviously, we all have savings accounts, investments, etc. but in a direct comparison (again, the only way you can figure out opportunity costs) on income / checking accounts, my income is working on holding my mortgage balance down and yours is just sitting there, so who has opportunity costs - you or me? 

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

@Joshua S. If Target closes stores to save money the projected savings go to the bottom line immediately. They don't have to wait around for 30 years to collect the savings and then use the money.

I can tell you that this is unequivocally false. If those stores were a $1M per year drag on earnings, projected into the next 30 years, they could not recognize 30M in year 1, which is what you're doing. You're trying to recognize savings from money you don't owe yet. This is the part I keep trying to point out to you but, as Bill pointed out, you're insistent on conflating annualized and total rates of return when comparing investments.

@Bill F.'s last post is absolutely correct. You're acting like these are all obscure Goldman Sachs concepts. They're not. And refusing to take them seriously is the difference between playing in Little League (maybe even tee ball) vs the majors. You simply cannot make intelligent capital allocation decisions by willfully ignoring these concepts.

Suze Orman and the rest give basic, rule-of-thumb advice to financial rubes who don't know up from down. You can run your real estate business based on those rules and probably be fine, but you're going to get left behind by other folks who run their real estate business with these simple, bread-and-butter concepts. This is a website for real estate professionals and you're simply not acting like it.

The way to make mountains of cash in real estate is to understand your numbers, and intelligently weigh various investment decisions against each other. You're just throwing darts at the wall (and I suspect losing money carrying mortgage principal on your HELOC because you don't understand how to calculate annualized returns). Feel free to do it, but deriding the rest of us for knowing our **** is a strange hill to die on when you're posting on a real estate knowledge sharing website.

That's cool, like I said we'll have to leave it here. I guess the only other thing I wanted to mention is that you guys are so focused on what else I'm not doing with my money - comparing what I'm doing to stocks or magical savings accounts, etc. - and you say I'm missing out and not making the best investment, fine. As I said, opportunity costs are a great way to wish your life away. What were the opportunity costs of all the toys my parents bought me when I was a kid since they could have invested in Apple, right? But you're chastising me for opportunity costs and not getting the best return and you're missing a glaring contradiction. I'm sure you all have money sitting in a checking account right now, correct? Maybe you're waiting for bills or saving up for a purchase or saving up for an investment, but the money is just sitting there currently, right? Earning nothing or next to nothing?

What are the opportunity costs there? I'm using my extra income / checking account to pay down a liability and save on mortgage interest and your money is just sitting there, so how can you guys tell me there are major opportunity costs to what I'm doing when in a direct comparison you're not doing anything with the equivalent funds? Obviously, we all have savings accounts, investments, etc. but in a direct comparison (again, the only way you can figure out opportunity costs) on income / checking accounts, my income is working on holding my mortgage balance down and yours is just sitting there, so who has opportunity costs - you or me? 

Just to be clear, the point you're making about money in a checking account vs paying down debt is entirely valid*, but it's not the part I take issue with. The part that's making my head explode is you completely misrepresenting how much you're saving by doing the "use your HELOC as a checking account" method.

* We've confirmed that there is a savings by using your HELOC as a checking account if the mortgage and HELOC have the same interest rate, but it's immaterial. I think the examples we ran were on a 200k loan at 4%--savings over the life of the loan were like $70. When the HELOC rate was higher than the mortgage, it completely shattered any potential interest savings and resulted in a substantial net loss. That didn't even take fees into account.

So the next logical question was: if you have extra cash at the end of the month why wouldn't you put it on the mortgage directly? Sure, you can carry a portion of your mortgage balance on a HELOC, and put small amounts of extra cash against that... but there's very literally no point. If you really need the HELOC as a financial discipline tool then maybe it makes sense, but it still costs money to do it (and quite a bit more than people seemed to realize). You can always draw on your HELOC for an emergency regardless so the access to cash argument is moot, and the interest rate differences, fees, etc on the HELOC negate any immaterial benefit you receive from using your HELOC as a checking account. Nick M was arguing hard for the HELOC-as-a-checking-account method, and when we really dug into his numbers it became clear that he had an extremely attractive rate on his HELOC that DID make sense to do this. But almost nobody will have a -2% rate difference on their HELOC vs mortgage.

And that's the whole point of this debate... understanding exactly how much you're saving (especially total vs annualized savings) and why is critically important.

[Brent Coombs]

Originally posted by @Joshua S.:

Originally posted by @Chris May:

@Joshua S. So, here's my ultimate point - everyone is saying that this strategy "doesn't work" or maybe to be more exact "doesn't save interest" or whatever exact verbiage you want to put on it. But then your way of explaining that it "doesn't work"

OK. There are two things:

1. Using a HELOC to pay your mortgage absolutely does not save any money in interest*. The interest people claim to save (using amortization calculators), is really just getting shifted to the HELOC. The HELOC is a wholly unnecessary vehicle for paying your mortgage off early.
   
   1. * If the HELOC interest rate is lower, you will lower your overall interest paid by moving principal from mortgage to HELOC
2. Many people have chimed in to say "who cares if it works? why would somoene pay their mortgage early." The answer here is 1) it doesn't work and 2) wanting to pay your mortgage off early is an entirely personal decision, there's no right answer, and depends on your potential rate of return on other investments*.
   1. * The people who go down this rabbit hole almost always calculate rate of return on early mortgage payoff wrong (as you have been doing). If you want to compare to other investment options, the first step is to correctly calculate the rate of return of all potential investments.

Haha. Prepaying mortgage principal saves money on interest - Suze Orman and Dave Ramsey will tell you that, it's mainstream financial knowledge - but because I'm using a HELOC to make it more convenient, it's no longer true.

Gotcha. I think we're officially done for now. I'll be back with more updates at some point and you can tell me white is black and black is white some more. 🤣

Joshua, Joshua, you were doing so well with this post (even though I suspected sarcasm). If only you'd let Chris May's comments go, where he only wanted to clarify your post in terms of two credit cards.

But no, your (futile) agenda couldn't be kept quiet after all!

You then wrote: "I'm using my extra income / checking account to pay down a liability and save on mortgage interest", which (please let this sink in) is the only reason your mortgage is being paid off quicker! But the same could be done without requiring that second credit card called a HELOC!

I'll say it again: It's your extra income doing the work, not your HELOC!

[Well done especially to Chris, for trying to help Joshua understand the errors of his math]...

[Bill F.]

@Joshua S.

When did I chastise you for the way you spend your money? I have done no such things. That statement is demonstrably false. I went out of my way to make it clear how I understand and respect that this is your choice. The people in this thread have tried to show you some flaws with your plan to help you make a more informed choice, not to attack you. 

So lets dispense with the victim-hood mentality. 

You are correct that the majority of Americans don't think in terms of opportunity cost. The majority of Americans also cannot come up with $500 for an unexpected expense. The majority of Americans have terrible financial sense. The minority of Americas that do use opportunity cost in their personal financial decision making, more often than not, experience success far above average. So forgive me if I choose not to use a concept because others don't. 

You've demonstrated that you don't want to learn or engage with others honestly on this topic. Fair enough. It is your choice and one that, while I don't agree with, I support 100%. I wish you nothing but the best and hope your days are filled with people just like you.

[Justin H.]

Originally posted by @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...

This scenario is simply forcing over-payments by getting $10k larger of a loan than was necessary.  The majority of the $25.5k "savings" that you keep claiming does not actually come from the $10k itself, but rather the resulting thinly disguised monthly over-payments that you have built into the mortgage. 

Following the same link, try changing the mortgage amount down by $10k from $165k to $155k instead of making an extra payment, but then add in an extra monthly payment of $50.67 to get to the same total monthly out-of-pocket payment of $836.03 as to when it was a $165k mortgage. The payoff date and total interest are now the same as if you had thrown the $10k lump sum at it. That $50.67 of forced over-payment during the course of the 318 months of the accelerated payoff adds up to just over $16.5k...That's where most of your $25.5k "savings" is coming from, $16.5k of over-payments, not the $10k itself. There is also a savings of $2k from not paying the $50.67 per month excess from the 42 months cut off the mortgage.  The remaining $7k savings is all that can be attributed directly to the $10k over the life of the loan. 

As a 'sanity check, try adjusting the mortgage down to just $10k and the term to the same 318 months. Interestingly enough, it yields the same total of $7k in interest paid.  The math adds up both forwards and backwards, which it MUST in order to be correct...Otherwise you can end up with results like this:

a = b
a^2 = ab
a^2 - b^2 = ab-b^2
(a-b)(a+b) = b(a-b)
a+b = b
b+b = b
2b = b
2 = 1

[Chris May]

[double post]

[Chris May]

Originally posted by @Justin H.:

Originally posted by @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...

This scenario is simply forcing over-payments by getting $10k larger of a loan than was necessary.  The majority of the savings does not come from the $10k itself, but rather the thinly disguised over-payments. 

Following the same link, try changing the mortgage amount down by $10k from $165k to $155k instead of making an extra payment, but then add in an extra monthly payment of $50.67 to get to the same total monthly out-of-pocket payment of $836.03 as to when it was a $165k mortgage. The payoff date and total interest are now the same as if you had thrown the $10k lump sum at it. That $50.67 of forced over-payment during the course of the 318 months of the accelerated payoff adds up to just over $16.5k...That's where most of your $25.5k "savings" is coming from, $16.5k of over-payments, not the $10k itself. There is also a savings of $2k from not paying the $50.67 per month excess from the 42 months cut off the mortgage.  The remaining $7k savings is all that can be attributed directly to the $10k over the life of the loan. Interestingly enough, adjusting the mortgage down to just $10k and the term to the same 318 months yields the same total of $7k in interest.  The math adds up both forwards and backwards, which it MUST in order to be correct...Otherwise you can end up with results like this:

a = b
a^2 = ab
a^2 - b^2 = ab-b^2
(a-b)(a+b) = b(a-b)
a+b = b
b+b = b
2b = b
2 = 1

 YES YES YES. I was trying to make this point with my compounded interest savings comments a few posts back, but you said it more eloquently. I was actually going to go down this same path, but my post was already long enough. You're paying a 155k loan as if it were a 165k loan. You're forcing yourself into an $50 payment every month.

[Joshua S.]

Originally posted by @Chris May:

Originally posted by @Joshua S.:

Originally posted by @Chris May:

@Joshua S. If Target closes stores to save money the projected savings go to the bottom line immediately. They don't have to wait around for 30 years to collect the savings and then use the money.

I can tell you that this is unequivocally false. If those stores were a $1M per year drag on earnings, projected into the next 30 years, they could not recognize 30M in year 1, which is what you're doing. You're trying to recognize savings from money you don't owe yet. This is the part I keep trying to point out to you but, as Bill pointed out, you're insistent on conflating annualized and total rates of return when comparing investments.

@Bill F.'s last post is absolutely correct. You're acting like these are all obscure Goldman Sachs concepts. They're not. And refusing to take them seriously is the difference between playing in Little League (maybe even tee ball) vs the majors. You simply cannot make intelligent capital allocation decisions by willfully ignoring these concepts.

Suze Orman and the rest give basic, rule-of-thumb advice to financial rubes who don't know up from down. You can run your real estate business based on those rules and probably be fine, but you're going to get left behind by other folks who run their real estate business with these simple, bread-and-butter concepts. This is a website for real estate professionals and you're simply not acting like it.

The way to make mountains of cash in real estate is to understand your numbers, and intelligently weigh various investment decisions against each other. You're just throwing darts at the wall (and I suspect losing money carrying mortgage principal on your HELOC because you don't understand how to calculate annualized returns). Feel free to do it, but deriding the rest of us for knowing our **** is a strange hill to die on when you're posting on a real estate knowledge sharing website.

That's cool, like I said we'll have to leave it here. I guess the only other thing I wanted to mention is that you guys are so focused on what else I'm not doing with my money - comparing what I'm doing to stocks or magical savings accounts, etc. - and you say I'm missing out and not making the best investment, fine. As I said, opportunity costs are a great way to wish your life away. What were the opportunity costs of all the toys my parents bought me when I was a kid since they could have invested in Apple, right? But you're chastising me for opportunity costs and not getting the best return and you're missing a glaring contradiction. I'm sure you all have money sitting in a checking account right now, correct? Maybe you're waiting for bills or saving up for a purchase or saving up for an investment, but the money is just sitting there currently, right? Earning nothing or next to nothing?

What are the opportunity costs there? I'm using my extra income / checking account to pay down a liability and save on mortgage interest and your money is just sitting there, so how can you guys tell me there are major opportunity costs to what I'm doing when in a direct comparison you're not doing anything with the equivalent funds? Obviously, we all have savings accounts, investments, etc. but in a direct comparison (again, the only way you can figure out opportunity costs) on income / checking accounts, my income is working on holding my mortgage balance down and yours is just sitting there, so who has opportunity costs - you or me? 

Just to be clear, the point you're making about money in a checking account vs paying down debt is entirely valid*, but it's not the part I take issue with. The part that's making my head explode is you completely misrepresenting how much you're saving by doing the "use your HELOC as a checking account" method.

* We've confirmed that there is a savings by using your HELOC as a checking account if the mortgage and HELOC have the same interest rate, but it's immaterial. I think the examples we ran were on a 200k loan at 4%--savings over the life of the loan were like $70. When the HELOC rate was higher than the mortgage, it completely shattered any potential interest savings and resulted in a substantial net loss. That didn't even take fees into account.

So the next logical question was: if you have extra cash at the end of the month why wouldn't you put it on the mortgage directly? Sure, you can carry a portion of your mortgage balance on a HELOC, and put small amounts of extra cash against that... but there's very literally no point. If you really need the HELOC as a financial discipline tool then maybe it makes sense, but it still costs money to do it (and quite a bit more than people seemed to realize). You can always draw on your HELOC for an emergency regardless so the access to cash argument is moot, and the interest rate differences, fees, etc on the HELOC negate any immaterial benefit you receive from using your HELOC as a checking account. Nick M was arguing hard for the HELOC-as-a-checking-account method, and when we really dug into his numbers it became clear that he had an extremely attractive rate on his HELOC that DID make sense to do this. But almost nobody will have a -2% rate difference on their HELOC vs mortgage.

And that's the whole point of this debate... understanding exactly how much you're saving (especially total vs annualized savings) and why is critically important.

Well, I guess that's why we're not getting along. You look at exactly how much you're saving and total vs annualized as critically important and I don't see it as important at all. What I'm looking at is that my money is actually doing something instead of sitting there. In other words, you're right the HELOC is sort of a discipline tool, not a magical vehicle. But in my defense I feel like I keep saying that in different ways (although maybe not as succinctly) and pointing out the benefits in real world details (not rates, but that I'm paying a small amount to easily keep my money working for me) and you keep going back to what YOU see as important and being defensive and hostile instead of seeing any merit in what I'm describing.

It's like what I mentioned about the bakery and the tire shop. I'm telling you over and over that I know the tire place may make a little less money, but it's in a better neighborhood, they do zero marketing, it's insulated against financial downturns, etc. and you keep saying that I will make more with the bakery. I know that if I'm NOT paying HELOC interest, I'm paying less money than if I AM paying HELOC interest. I understand the points you've made - that I don't need the HELOC to pay extra toward principal, for example, but instead of acknowledging that we both understand it and moving forward from that point (and instead of discussing it with an open mind or accepting any of the benefits I'm describing) you're still trying to beat me over the head with it because that's what is important to YOU. There are better investments out there FOR YOU, because you don't care about getting out of debt as much as I do. The bakery makes more money, the bakery makes more money, the bakery makes more money. "I know, but the tire place......." THE BAKERY MAKES MORE MONEY, THE BAKERY MAKES MORE MONEY. I get it, Chris. I don't need the HELOC. I could just dump all my money on my mortgage at the end of the month and keep the HELOC as backup. There are better investment returns out there. Flashing red letters - I get it.

But at the same time, my money is working for me and yours is sitting in an account and you guys are chastising me about opportunity costs, which is hypocritical and you're not perfect, either. So, if we do move forward now or eventually, hopefully you can reboot your attitude (ie. get off your high horse) and realize that I'm not trying to convince you to do what I'm doing or it's the best thing ever, I'm trying to convince you (and any readers) that there are benefits that you don't seem to want to acknowledge because they are not a good fit for YOU. I'm getting out of debt early, I'm getting a guaranteed return, I'm getting a very high "PERCEIVED" return because I don't care that technically I might be saving over the next 30 years, I'm keeping my money working for me all the time instead of letting it sit in my account all year or even all month, I'm using "free money" to make a solid investment, etc.  You obviously don't care about that stuff and you'd rather stay in debt longer, let your money sit around in a checking account, earn a variable return on your investments, etc. - fine. We're totally good. To each his own, right? To each his own.

[Joshua S.]

PS - One thing I find especially funny that I forgot to mention before is that people take out business and school loans all the time based on the projected returns that they can make or some other advantages they can get, but paying a small amount to a separate vehicle so that you can easily keep your money working for you is the devil. LOL 

Like, for example, if there was a plumber that thought he could eventually make more money and/or make his life easier if he took out a loan to buy fancy new equipment that helped him with efficiency. Treat that guy like dirt because he's spending money to get certain advantages! String him up in the town square because he could get a better return on that money in the stock market!!! Aaaarggg! 😂

Anyway, just sayin'.

[Justin H.]

If we're going to get into unrelated analogies, lets at least try get them into the same ballpark.

The argument is not about taking out a student loan to get an education, or a small business loan to improve a business. The argument is about taking out an additional unsubsidized student loan to pay down an existing subsidized student loan, or taking out an additional personal loan to pay down an existing small business loan.

[Joshua S.]

Originally posted by @Justin H.:

If we're going to get into unrelated analogies, lets at least try get them into the same ballpark.

The argument is not about taking out a student loan to get an education, or a small business loan to improve a business. The argument is about taking out an additional unsubsidized student loan to pay down an existing subsidized student loan, or taking out an additional personal loan to pay down an existing small business loan.

Some businesses take out second or even third loans for various purposes, everyone knows that. I have a loan with the majority of my balance on it and a revolving line of credit that allows me to keep my money working for me. Everyone is stuck on the idea that "one is paying the other", but I look at it like I "installed" the credit line on the mortgage so I could use all my income toward keeping my mortgage balance down and then still use it to pay my bills. If a mainstream mortgage existed that did the same thing I'm sure everyone would think it's brilliant, but I'm an idiot for rigging it together. Classic!

This is the most unimaginative, uncreative, cynical group of people I've ever come across. :)