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?

[Gary Floring]

Originally posted by @Chris May:

@Joshua S. @Gary Floring

I'll jump into the math later, but here's an analogy:

You take the bus to work. It's always a reliable 5 minutes each way. You plan on working there for 10 years. That means you have a total of 26,400 commute minutes in your future (5 minutes x 2 x 22 days in month x 12 months in year x 10 years).

You have a midlife crisis and switch jobs. The new job is in the same building. You tell everyone you saved 26,400 of commuting minutes by ditching that crummy job. Your friends say "but you're still commuting 10 minutes each day, you didn't save any time". To which you respond "but I decided I'm actually going to work one more year". By your math, you're only commuting another 5 x 2 x 22 x 10 = 2,200 minutes.

 How about this scenario, using your analogy:

The guy originally signed a contract with his employer that he would work for 5,000 hours total [i.e., the "principle"]. The contract requires him to put in at least one hour per day, and at least five days a week, so he's on the hook to work at least 5 hours per week, or approx. 20 hrs. per month [i.e., his minimum "monthly payment"].  At that rate, it will take him almost 20 years to fulfill the contract. But the contract DOES allow him to work more if he wants to, as long as the total ["principle"]  is 5,000 hrs. Note that his commute time is ONE HOUR each way, so he spends TWO hours of commute time [i.e., "interest"] to put ONE hour of time [i.e.., "principle"] into the contract each day.

So the guy says to himself, "At this rate, I'll be paying extra [i.e., "interest"] for my transportation costs back and forth, my daily lattes and snacks at the building, a new wardrobe and shoes every year, AND an extra TWENTY YEARS chained to a job that pays extremely well, but I hate the idea the idea of spending all that extra money [i.e., "interest"] for incidentals, the time commuting, AND time at the office. In fact, my commute time [i.e., "interest"] alone will be over 10,000 hours!!!"

Then he decides that he'll accelerate the contract in a much shorter time, like maybe 5 years instead. So he starts putting in many more hours per day and per week, thus accelerating his required total time [5,000 hrs. in "principle"] into a much shorter ["amortization"] schedule. Won't he thus "save" over 15,000 hours of [i.e., "interest"] time commuting, not to mention all the other incidental costs? 

[Chris May]

Originally posted by @Gary Floring:

Originally posted by @Chris May:

@Joshua S. @Gary Floring

I'll jump into the math later, but here's an analogy:

You take the bus to work. It's always a reliable 5 minutes each way. You plan on working there for 10 years. That means you have a total of 26,400 commute minutes in your future (5 minutes x 2 x 22 days in month x 12 months in year x 10 years).

You have a midlife crisis and switch jobs. The new job is in the same building. You tell everyone you saved 26,400 of commuting minutes by ditching that crummy job. Your friends say "but you're still commuting 10 minutes each day, you didn't save any time". To which you respond "but I decided I'm actually going to work one more year". By your math, you're only commuting another 5 x 2 x 22 x 10 = 2,200 minutes.

 How about this scenario, using your analogy:

The guy originally signed a contract with his employer that he would work for 5,000 hours total [i.e., the "principle"]. The contract requires him to put in at least one hour per day, and at least five days a week, so he's on the hook to work at least 5 hours per week, or approx. 20 hrs. per month [i.e., his minimum "monthly payment"].  At that rate, it will take him almost 20 years to fulfill the contract. But the contract DOES allow him to work more if he wants to, as long as the total ["principle"]  is 5,000 hrs. Note that his commute time is ONE HOUR each way, so he spends TWO hours of commute time [i.e., "interest"] to put ONE hour of time [i.e.., "principle"] into the contract each day.

So the guy says to himself, "At this rate, I'll be paying extra [i.e., "interest"] for my transportation costs back and forth, my daily lattes and snacks at the building, a new wardrobe and shoes every year, AND an extra TWENTY YEARS chained to a job that pays extremely well, but I hate the idea the idea of spending all that extra money [i.e., "interest"] for incidentals, the time commuting, AND time at the office. In fact, my commute time [i.e., "interest"] alone will be over 10,000 hours!!!"

Then he decides that he'll accelerate the contract in a much shorter time, like maybe 5 years instead. So he starts putting in many more hours per day and per week, thus accelerating his required total time [5,000 hrs. in "principle"] into a much shorter ["amortization"] schedule. Won't he thus "save" over 15,000 hours of [i.e., "interest"] time commuting, not to mention all the other incidental costs? 

 Your story is analogous to paying more CASH towards the principal.

The mortgage/HELOC analogy would be: guy decides he's spending too much time at his job, so he gets a second job next door to his first job. But, he reduces his hours at Job #1 to 45 minutes, then when his shift ends he works 15 minutes at Job 2. Then goes home.

He earns the same amount every month and didn't reduce his commute time.

[Jeremy Z.]

Originally posted by @Gary Floring:

Originally posted by @Chris May:

@Joshua S. @Gary Floring

I'll jump into the math later, but here's an analogy:

You take the bus to work. It's always a reliable 5 minutes each way. You plan on working there for 10 years. That means you have a total of 26,400 commute minutes in your future (5 minutes x 2 x 22 days in month x 12 months in year x 10 years).

You have a midlife crisis and switch jobs. The new job is in the same building. You tell everyone you saved 26,400 of commuting minutes by ditching that crummy job. Your friends say "but you're still commuting 10 minutes each day, you didn't save any time". To which you respond "but I decided I'm actually going to work one more year". By your math, you're only commuting another 5 x 2 x 22 x 10 = 2,200 minutes.

 How about this scenario, using your analogy:

The guy originally signed a contract with his employer that he would work for 5,000 hours total [i.e., the "principle"]. The contract requires him to put in at least one hour per day, and at least five days a week, so he's on the hook to work at least 5 hours per week, or approx. 20 hrs. per month [i.e., his minimum "monthly payment"].  At that rate, it will take him almost 20 years to fulfill the contract. But the contract DOES allow him to work more if he wants to, as long as the total ["principle"]  is 5,000 hrs. Note that his commute time is ONE HOUR each way, so he spends TWO hours of commute time [i.e., "interest"] to put ONE hour of time [i.e.., "principle"] into the contract each day.

So the guy says to himself, "At this rate, I'll be paying extra [i.e., "interest"] for my transportation costs back and forth, my daily lattes and snacks at the building, a new wardrobe and shoes every year, AND an extra TWENTY YEARS chained to a job that pays extremely well, but I hate the idea the idea of spending all that extra money [i.e., "interest"] for incidentals, the time commuting, AND time at the office. In fact, my commute time [i.e., "interest"] alone will be over 10,000 hours!!!"

Then he decides that he'll accelerate the contract in a much shorter time, like maybe 5 years instead. So he starts putting in many more hours per day and per week, thus accelerating his required total time [5,000 hrs. in "principle"] into a much shorter ["amortization"] schedule. Won't he thus "save" over 15,000 hours of [i.e., "interest"] time commuting, not to mention all the other incidental costs? 

 Everyone on this thread agrees paying your debt faster leads to lower interest costs. No one has stated otherwise.

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Gary Floring:

Originally posted by @Chris May: 
"When you transfer a loan balance, you do not save any interest immediately." 

Proponents of using the HELOC strategy are claiming just the opposite: that the moment you apply the $10K line of credit to the mortgage, you immediately "save" (or skip, or avoid, or "never have to pay") tens of thousands of dollars of (future) amortized interest that otherwise would have to be paid had the $10K not been applied. How do you reconcile that claimed "savings" with your statement "...you do not save any interest immediately"?

"The future interest expense on a loan is a deferred liability."    If the mortgage interest in the scenario above is indeed saved, avoided, or skipped, why do you say it is "deferred"? Shouldn't that mortgage interest be permanently wiped out (never paid)?

 "Moving the debt to a different loan product just moves the interest liability with it. So this $21,000 "interest savings" you're seeing on the calculator is really just you moving $21,000 of interest expense to the HELOC. You don't bring down the future interest liability balance until you pay the HELOC principal."

???

But the annual interest amount incurred in paying down $10K on the HELOC is stated as approx. $300-$400. How does $21K of mortgage interest expense get "moved" to the HELOC ?!?

 The annual interest amount on that $10,000 portion of the original mortgage is also only $300-$400 (assuming the interest rates of mortgage and HELOC are the same). The interest on that $10,000 portion only comes to $21,000 over the full 30 year life of the loan. Pay it off faster and the total amount of interest accrued goes down, whether you do it in a HELOC or just tackle it in the mortgage.

This isn't trickery. If you need to - think of your mortgage as a bunch of $10,000 chunks. The only reason you pay so much interest in the beginning is because you have a bunch of them. If you want to move one into a HELOC and tackle it there, fine. Or you can just leave it in place and tackle it in your mortgage. But the interest accrued and paid is the same.

You're missing my point. Forget the HELOC for now, because it's obviously causing confusion. For the purpose of finding out where the savings actually come from, we're talking about income or lottery money right now. You're saying (correct me if I'm wrong) that when you pay that $10,000 principal the resulting savings come from that $400 you were going to pay annually over 30 years not being scheduled anymore.

But here's the thing that doesn't work out about that explanation and why skipping is a better way to describe it. It does not take 30 years to pay down $10,000 on the loan. On the Bankrate $200,000 / 4% we've been discussing it takes around 2.5 years. $400 annual interest for 2.5 years is $1000. So, if we go by your explanation of the savings, paying off the $10,000 with lotto winnings would save $1000. Paying off all 20 "$10,000 chunks" early at $1000 savings would net $20,000 savings. That's incongruous with what the calculator is telling us. It's incorrect. You found a calculation that came up with the right numbers when using the wrong inputs, but it doesn't work as a way to explain or calculate the savings when you look at how long you actually pay on that $10,000.

So, here's what's actually happening. While you're making that $10,000 worth of normal payments you are paying an average of $650 to interest each month (range of $666-$635) for 32 months. The REAL WORLD COST of paying down the $10,000 in this way is $20,800 (32x$650). Do it on Bankrate yourself and look at the amo table for $200,000 / 4%. When you plug in that you are making an extra $10,000 payment at the beginning it takes $21,000 and 2.5 years off the loan, which lines up with my explanation (32 months and $20,800) and does not work with your explanation. So, the only way the savings make sense, the only way to truly explain it is that you are literally skipping over these interest payments when you pay the principal early. That is where the savings come from. When paying the $10,000 in normal payments, the interest portion is more or less "getting in the way" of your money paying down the principal, so it costs you 2.5 years and $21,000 to do it that way. When you pay it early, you skip over having to make those interest payments. I mean, think about it. The reason you are paying interest is because you have the money out on loan. If you give it back early, they cancel the interest payments you were scheduled to make if you paid it back on their time line. 

I'm sure you guys are going to be shook by this, but it's the truth. Once you understand this, we can move on to the HELOC discussion, but the HELOC thing was going around in circles because you guys couldn't understand where the true savings were coming from.

 I some how overlooked this comment of yours earlier. In bold, you said:

"It does not take 30 years to pay down $10,000 on the loan."

That shows me you have a lack of understanding of what is being explained to you. I never stated it would take 30 years to pay off a $10,000 portion. I mentioned visualizing the mortgage in $10,000 chunks, if it helps you or Gary to see how paying toward the mortgage and paying toward the HELOC work essentially the same. Make $1,023 payments to your mortgage the same way you are to your HELOC and you will find that you knock off that first $10,000 chunk in virtually the same amount of time.

See my other comments about using the Extra Payment feature of Bankrate's amortization calculator. Run the example. I really don't know how to explain this any further. I'm trying hard to help you understand it, but eventually you either try the suggested examples we give you or you don't.

[Jeremy Z.]

Here is another statement of yours:

You're saying (correct me if I'm wrong) that when you pay that $10,000 principal the resulting savings come from that $400 you were going to pay annually over 30 years not being scheduled anymore.

I wouldn't think of it as not being schedule anymore. Think of it in simpler terms - once you pay the $10,000 off, it stops accruing interest. It's as simple as that. HELOC or no HELOC.

[Jeremy Z.]

Ok, one more thought because I can't help myself. You seem to be hung up on the amortization schedule and scheduled interest.

Here is an example to ponder:

Year 1 - You buy a house and take out a loan for $200,000 at 4%.

Year 2 - You come into a large some of money and pay off the remaining loan. Bankrate's calculator says you saved almost $144,000.

Year 3 - You sell the home.

Did you really save $144,000? No. You saved 1 year worth of interest because you ended up selling it anyway.

That savings that the calculator is showing you is only if you follow the full 30 year schedule. You keep comparing your HELOC approach to the full 30 year schedule. Compare your HELOC approach to a mortgage being paid in the same aggressive fashion.

Again, we aren't saying you're not saving by using the HELOC method. It is your claim that it allows you to pay faster that we take issue with. It might help you keep on an aggressive pay down schedule, but there is nothing* about the HELOC that allows your payments to chew through interest faster.

*Note: There IS an "average daily balance" aspect of using your HELOC as a checking account that can have a marginal effect on pay down time, but that is separate from the current discussion at hand.

[Chris May]

Originally posted by @Jeremy Z.:

Ok, one more thought because I can't help myself. You seem to be hung up on the amortization schedule and scheduled interest.

Here is an example to ponder:

Year 1 - You buy a house and take out a loan for $200,000 at 4%.

Year 2 - You come into a large some of money and pay off the remaining loan. Bankrate's calculator says you saved almost $144,000.

Year 3 - You sell the home.

Did you really save $144,000? No. You saved 1 year worth of interest because you ended up selling it anyway.

That savings that the calculator is showing you is only if you follow the full 30 year schedule. You keep comparing your HELOC approach to the full 30 year schedule. Compare your HELOC approach to a mortgage being paid in the same aggressive fashion.

Again, we aren't saying you're not saving by using the HELOC method. It is your claim that it allows you to pay faster that we take issue with. It might help you keep on an aggressive pay down schedule, but there is nothing* about the HELOC that allows your payments to chew through interest faster.

*Note: There IS an "average daily balance" aspect of using your HELOC as a checking account that can have a marginal effect on pay down time, but that is separate from the current discussion at hand.

HAHAHA I love that I'm not the only one throwing my phone at the wall from reading this thread.

[Jeremy Z.]

Originally posted by @Chris May:

Originally posted by @Jeremy Z.:

Ok, one more thought because I can't help myself. You seem to be hung up on the amortization schedule and scheduled interest.

Here is an example to ponder:

Year 1 - You buy a house and take out a loan for $200,000 at 4%.

Year 2 - You come into a large some of money and pay off the remaining loan. Bankrate's calculator says you saved almost $144,000.

Year 3 - You sell the home.

Did you really save $144,000? No. You saved 1 year worth of interest because you ended up selling it anyway.

That savings that the calculator is showing you is only if you follow the full 30 year schedule. You keep comparing your HELOC approach to the full 30 year schedule. Compare your HELOC approach to a mortgage being paid in the same aggressive fashion.

Again, we aren't saying you're not saving by using the HELOC method. It is your claim that it allows you to pay faster that we take issue with. It might help you keep on an aggressive pay down schedule, but there is nothing* about the HELOC that allows your payments to chew through interest faster.

*Note: There IS an "average daily balance" aspect of using your HELOC as a checking account that can have a marginal effect on pay down time, but that is separate from the current discussion at hand.

HAHAHA I love that I'm not the only one throwing my phone at the wall from reading this thread.

 It's been an exercise patience and persistence for sure. I feel like we've reached a breakthrough or an impasse, but then again I thought that about six pages ago! 

[Joshua S.]

Originally posted by @Jeremy Z.:

Originally posted by @Chris May:

Originally posted by @Jeremy Z.:

Ok, one more thought because I can't help myself. You seem to be hung up on the amortization schedule and scheduled interest.

Here is an example to ponder:

Year 1 - You buy a house and take out a loan for $200,000 at 4%.

Year 2 - You come into a large some of money and pay off the remaining loan. Bankrate's calculator says you saved almost $144,000.

Year 3 - You sell the home.

Did you really save $144,000? No. You saved 1 year worth of interest because you ended up selling it anyway.

That savings that the calculator is showing you is only if you follow the full 30 year schedule. You keep comparing your HELOC approach to the full 30 year schedule. Compare your HELOC approach to a mortgage being paid in the same aggressive fashion.

Again, we aren't saying you're not saving by using the HELOC method. It is your claim that it allows you to pay faster that we take issue with. It might help you keep on an aggressive pay down schedule, but there is nothing* about the HELOC that allows your payments to chew through interest faster.

*Note: There IS an "average daily balance" aspect of using your HELOC as a checking account that can have a marginal effect on pay down time, but that is separate from the current discussion at hand.

HAHAHA I love that I'm not the only one throwing my phone at the wall from reading this thread.

 It's been an exercise patience and persistence for sure. I feel like we've reached a breakthrough or an impasse, but then again I thought that about six pages ago! 

I'm trying to move on, guys. Here's my summary of what happened here, so hopefully we can put it to bed.

1. We all agree that paying extra principal is a good idea. Cool.

2. The HELOC thing is a way of keeping you disciplined and making it easy to keep all of your discretionary working toward the mortgage to accomplish #1.

3. Your answer to that is that you "could" just do the same thing without the HELOC, yet none of you seems to be doing it ostensibly because it's not very convenient or comfortable to figure out how much you can spare each month and then empty your checking onto the mortgage and hope you don't have any unexpected bills.

4. My answer to that is those are the exact benefits of the HELOC strategy. It's easy to put all of your discretionary into the mortgage without juggling anything or worrying that you are going to be short.

5. Your answer - but there's a cost.

6. My answer - yes, there's a cost, but if you aren't currently doing it because it's uncomfortable, why not pay a small cost to make it comfortable and be able to accomplish the goal?

7. Your answer - but you *COULD* do the same thing by simply taking all of your discretionary income at the end of the month and put it on the mortgage while using the HELOC as backup. This way there are no costs.

8. My answer - great, is that what you do currently?

9. Your answer - no, it's not very convenient to do that.

Etc etc etc etc etc etc Etc etc etc etc etc etcEtc etc etc etc etc etc
 Etc etc etc etc etc etcEtc etc etc etc etc etc
 Etc etc etc etc etc etcEtc etc etc etc etc etc in a never ending circle.

So, in other words, to me this is the conversation.

Hey, man, there's a really great new gym down the street and it's only $40/month. You should check it out.

Nah, I need to get in shape, but I don't want to pay for a gym when I can ride my bike around town for exercise.

Oh, that's cool. How often do you ride?

Almost never. We live in Seattle and it rains nine months out of the year, dummy.

Yeah, I know, that's kinda why I suggested the gym. You can ride indoors and check out the hotties and it's a pretty low cost. Just skip one dinner out a month and it's paid for.

Yeah, but it's not free. Why would I do that when I can just ride my bike?

Right, I get that, but you just said you don't get to ride your bike that much because of the rain.

I know. You get that we live in Seattle, right? 

Yeah, I know. So, I guess all I was saying is you can still ride your bike once in awhile when it's nice, but when it's not you can head to the gym.

Right, but there's a cost. 

It's a never ending argument, because you're fixated on the number one preferred strategy even though there are barriers to doing it. Instead of acknowledging the barriers and that it might be a good idea to pay a little bit of money to do the number two strategy you'd rather sit on your hands and just put your tax refund into the mortgage once in awhile or whatever the third best strategy would be. To me it just seems like you're throwing the baby out with the bathwater and we're just going in circles because no one wants to admit it might be a good idea to do the number two strategy. 

The only thing I'd be interested in at this point is the savings calculations behind what the calculators have come up with. I say that when you pay off extra principal you cancel or skip the interest payments and my calculations for that line up with calculators. If that's not true, I'd like to see the calculations that show the savings coming from a different avenue, but still equaling the amounts shown by the calculators. Let me know if you figure that one out.

[Jeremy Z.]

I'm not fully clear on what you are asking us to show in that last paragraph, but I'm pretty certain the calculations that have been presented already have the answers.

On another note, you did remind me that I need to start going to the gym more. Full agreement with you there. :)

[Steve Vaughan]

If it takes a Heloc to accomplish and focus a goal and take action to pay down debt it's not the worst thing one can do.

I'm looking into a Heloc because a recent cash buy below market used up most of my dry powder. Costs and pain to get it and maintain it are nominal and it's extremely flexible. If you end up hating it, close it. No harm.

But why do all this and have all this discussion over paying off the cheapest money you'll ever borrow- your primary res loan?  Fixed at 4% or even less? I get the security of paying off your home, but I for one have much higher rate and hassle rental and commercial apt loans that need to go first.  The 'cost' discussion changes when the loan you're paying down is in the 6s, is adjustable, callable or has other risk factors.

If you pay a loan off, make it one that sucks.

[Joshua S.]

Originally posted by @Jeremy Z.:

I'm not fully clear on what you are asking us to show in that last paragraph, but I'm pretty certain the calculations that have been presented already have the answers.

On another note, you did remind me that I need to start going to the gym more. Full agreement with you there. :)

No, everyone has been focused on calculating the mortgage vs HELOC numbers. What I'm saying is forget the HELOC for now, PLEASE. The calculators I presented may not be perfect, but they are not "wrong" or way off. I'm sure they are reasonably correct.

So, imagine someone gets a bonus or wins the lottery or any other free money you can imagine and you've never even heard of a HELOC. They put the free money toward their principal. Calculate the savings on Bankrate or Quicken or whoever and then show that work. If they say you save 2.5 years and $21,000 like my previous example, how did they arrive at those savings? What are the calculations that they did to arrive at those numbers and where do the savings come from? That's what I want to know. Again, please forget the HELOC.

I have my understanding of where the savings come from, but no one seems to want to set aside the HELOC and attack this question directly and I suspect it's because you know I'm right. So, just show me the calculations and how the money is saved and make sure it matches the results on the calculator. It's that simple. It should be pretty simple for you guys with all the other calculations I've seen.

Just to be clear, this request has absolutely nothing to do with a HELOC. There is no HELOC involved in this question whatsoever. The HELOC has been gagged and chained up like gimp and I'm not interested in anything related to the HELOC discussion at this time. I don't feel like counting, but I'm trying to get this NO HELOC thing up to about ten times, because this question has nothing to do with a HELOC. Please answer the question in a manner that is completely devoid of HELOCS. Thanks so much (not interested in answers regarding HELOCS right now).

Sincerely,

Please forget about the HELOC and show me exactly where paying extra principal saves on interest and make sure it matches the calculators. Thanks so much.

[Nick Moriwaki]

You can use my spreadsheet to see the numbers.  Ignore everything but the mortgage column.  Initially it starts with a $200K mortgage and $186K of mortgage over the life of the loan.  If you change the balance to $190K (paying the $10K), you can see how the interest and principal column changes (i.e. - jumping payments).  The updated total interest paid changes to $155K, the $21K difference you keep referring to.  

[Chris May]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

I'm not fully clear on what you are asking us to show in that last paragraph, but I'm pretty certain the calculations that have been presented already have the answers.

On another note, you did remind me that I need to start going to the gym more. Full agreement with you there. :)

No, everyone has been focused on calculating the mortgage vs HELOC numbers. What I'm saying is forget the HELOC for now, PLEASE. The calculators I presented may not be perfect, but they are not "wrong" or way off. I'm sure they are reasonably correct.

So, imagine someone gets a bonus or wins the lottery or any other free money you can imagine and you've never even heard of a HELOC. They put the free money toward their principal. Calculate the savings on Bankrate or Quicken or whoever and then show that work. If they say you save 2.5 years and $21,000 like my previous example, how did they arrive at those savings? What are the calculations that they did to arrive at those numbers and where do the savings come from? That's what I want to know. Again, please forget the HELOC.

I have my understanding of where the savings come from, but no one seems to want to set aside the HELOC and attack this question directly and I suspect it's because you know I'm right. So, just show me the calculations and how the money is saved and make sure it matches the results on the calculator. It's that simple. It should be pretty simple for you guys with all the other calculations I've seen.

Just to be clear, this request has absolutely nothing to do with a HELOC. There is no HELOC involved in this question whatsoever. The HELOC has been gagged and chained up like gimp and I'm not interested in anything related to the HELOC discussion at this time. I don't feel like counting, but I'm trying to get this NO HELOC thing up to about ten times, because this question has nothing to do with a HELOC. Please answer the question in a manner that is completely devoid of HELOCS. Thanks so much (not interested in answers regarding HELOCS right now).

Sincerely,

Please forget about the HELOC and show me exactly where paying extra principal saves on interest and make sure it matches the calculators. Thanks so much.

Homework assignment: learn how to do it, then prove us wrong.

I've spent too much time on this already.

[Mike V.]

@Joshua S., most epic troll ever. 

Can’t  believe I checked this 2 days later and it’s still going.  My god... why does everyone keep responding? 

Are we trying to break the response record in a single post?  Hasn’t this  been beaten to death already? 

The math has been done over 10 ways for the guy. There’s no chance this is real anymore. 

[Gary Floring]

Originally posted by @Steve Vaughan:

But why do all this and have all this discussion over paying off the cheapest money you'll ever borrow- your primary res loan?  Fixed at 4% or even less? 

Except for one tiny detail: you're not paying off a fixed 4% loan. That is merely the NOMINAL rate, otherwise known as simple interest rate, or APR. You should consider the ACTUAL interest rate over TIME, otherwise known as the Total Interest Percentage over the life of the loan. Huge Difference!!!

[Steve Vaughan]

Originally posted by @Gary Floring:

Originally posted by @Steve Vaughan:

But why do all this and have all this discussion over paying off the cheapest money you'll ever borrow- your primary res loan?  Fixed at 4% or even less? 

Except for one tiny detail: you're not paying off a fixed 4% loan. That is merely the NOMINAL rate, otherwise known as simple interest rate, or APR. You should consider the ACTUAL interest rate over TIME, otherwise known as the Total Interest Percentage over the life of the loan. Huge Difference!!!

Splitting hairs and whittling the point of my post down to...missed it.

I know even a 4% loan will cost over 60% of  the amount borrowed in interest over 30 yrs. I'm the one that paid off 19 rentals 14  or 15 pgs ago and shared how I did it.

Think of how much interest would be saved if you paid off a higher rate investment loan instead of solely focusing on the 3% one is my point. What if you paid off the 6% commercial one or the 5% rental one instead?  It would save 80-100% of the amount borrowed over time. You  missed the whole point Gary.

[Jeremy Z.]

Gary to the rescue!

[Mindy Jensen]

Originally posted by @Mike V.:

@Joshua S., most epic troll ever. 

Can’t  believe I checked this 2 days later and it’s still going.  My god... why does everyone keep responding? 

Are we trying to break the response record in a single post?  Hasn’t this  been beaten to death already? 

The math has been done over 10 ways for the guy. There’s no chance this is real anymore. 

This thread only has 16 pages. I know of at least two others with 50+ so you've got a long way to go to break the response record. (But please don't!)

The reality of this whole idea (which I would not categorize as a scam unless you're paying someone to help you with it) is that you have to stay on top of your finances and repayment schedules at all times in order to save pennies. Most people don't, won't or can't do this. 

I think it's dangerous to suggest this solution to a problem that didn't really need solving. People will read the confusing math, assume that this is going to save them tens of thousands of dollars and start down the path, but not see it through and end up paying more than they would have if they simply left it alone.

And whoever is propagating this idea, please don't re-explain it to me. I've got a pretty good handle on my finances, consider myself a fairly savvy investor in real estate and the stock market, and still think this is a fruitless endeavor. I actually have much stronger feelings against it, but as I work here and represent the company, I'll keep those to myself.

[Chris May]

@Mindy Jensen "This thread only has 16 pages. I know of at least two others with 50+ so you've got a long way to go to break the response record."

Challenge accepted!

But seriously, thanks for weighing in. Still think this is a great topic for the Money Podcast (part of the broader topic of financial math).

[Gary Floring]

Originally posted by @Mindy Jensen:

Originally posted by @Mike V.:

@Joshua S., most epic troll ever. 

Can’t  believe I checked this 2 days later and it’s still going.  My god... why does everyone keep responding? 

Are we trying to break the response record in a single post?  Hasn’t this  been beaten to death already? 

 Wooden stakes, silver bullets, 24K gold crosses....NOTHING seems to kill off this thread! 

Now watch someone come along after to this "bump" it back to life.... ;-)

[Brent Coombs]

Originally posted by @Gary Floring:

Originally posted by @Steve Vaughan:

But why do all this and have all this discussion over paying off the cheapest money you'll ever borrow- your primary res loan?  Fixed at 4% or even less? 

Except for one tiny detail: you're not paying off a fixed 4% loan. That is merely the NOMINAL rate, otherwise known as simple interest rate, or APR. You should consider the ACTUAL interest rate over TIME, otherwise known as the Total Interest Percentage over the life of the loan. Huge Difference!!!

Nope! (You are "paying off a fixed 4%/y loan". But there's many ways to pay principal earlier).

[But yep to your "watch someone come along after to this "bump" it back to life.... ;-)"]...

[Justin H.]

Originally posted by @Nick Moriwaki:

For example, if the property in the example is worth $275K then my scenario opens up a $220K HELOC (80% LTV) with a balance of $200K then dropping it to $150K with the cash instead of keeping the mortgage and opening up a $20K HELOC as buffer.

So you're getting approved not only for a $220k HELOC before even closing on the house, but a $200k mortgage as well? Combining to $420k of approvals on a $275k house, for a total initial LTV approval of 153%? Between this and the below-prime HELOC rates, you guys have some really interesting banks over there on the islands. You may need to start including disclaimers for these details when explaining what allows you to pull your ideas off.

[Nick Moriwaki]

Originally posted by @Justin H.:

Originally posted by @Nick Moriwaki:

For example, if the property in the example is worth $275K then my scenario opens up a $220K HELOC (80% LTV) with a balance of $200K then dropping it to $150K with the cash instead of keeping the mortgage and opening up a $20K HELOC as buffer.

So you're getting approved not only for a $220k HELOC before even closing on the house, but a $200k mortgage as well? Combining to $420k of approvals on a $275k house, for a total initial LTV approval of 153%? Between this and the below-prime HELOC rates, you guys have some really interesting banks over there on the islands. You may need to start including disclaimers for these details when explaining what allows you to pull your ideas off.

"FYI, my example is getting a HELOC that replaces the mortgage at the time of closing, not having enough equity to open a HELOC then make the transaction myself."

I don't know where I said I was getting approved for both at the same time. And it's not implied in my spreadsheet either. My scenario is replacing the mortgage with the HELOC instead of getting the $20K HELOC in second position.

Now that I hope that that's clear (and the other discussions have died down), I'm still looking for arguments against my scenario.  I rounded the monthly payment to resemble a mortgage that was paid for approximately 18 months before being converted.  Also, I don't use the promotional rates because it's not what makes the strategy work.  No disclaimers needed.

@Mindy Jensen  - I believe this is different than what most others have presented.  You don't need to stay on top of your finances, you save more than just pennies, and you don't forgo the ability to invest in future opportunities.  Thoughts?  

[Jeremy Z.]

@Nick Moriwaki

I still think you should be comparing two scenarios where equal payments are being applied toward the debt(s) each month. In your HELOC scenario, $2,000/mo is going toward the debt. However, in your Mortgage+Additional you have $1700/mo going toward debt and $300/mo going into savings, which inflates the "average daily balance" savings from the HELOC.

But overall I won't argue against your scenario. If you have the means and access to financing options to maintain a $50,000 lower balance you will see some significant interest savings. I do think your method has some risks that may or may not be less risky than just putting an extra $50,000 on your mortgage. I really can't judge that since I don't have a full understanding of the HELOC products you have been referring to.

The situation you are describing is quite different than the examples that are being propagated on Youtube, etc. Using your scenario to argue in general terms that the "HELOC approach works" is bound to mislead a lot of folks. You are definitely the exception here. Far too many others are spreading this idea with a fundamental misunderstanding of financial arithmetic. I appreciate that you don't fit into that camp.

Maybe you need a separate post titled "The HELOC Method is Unnecessary, Unless You Meet [These Criteria], Have Access to [These Financing Options] and Don't Mind [These Risks]".