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?

[Nick Moriwaki]

Originally posted by @Jeremy Z.:

@Nick Moriwaki

As a side question - are you saying the scenario is unique because no one uses it or that it isn't feasible to employ?

I'm saying it probably isn't feasible for most readers for several possible reasons:

• Not enough existing funds on hand to make it worth while
• Lack of access to the HELOC products you mention (wasn't it already determined that Hawaii has some unique products?)
• They have better ways to use the money (you can ignore this for the sake of example, but it needs to be factored in when considering the benefits)
• They prefer the safety of a fixed mortgage compared to a HELOC

I'm glad to hear this thread helped clear up some misconceptions you had about mortgage interest.

 Glad we're getting somewhere.  Let's see if we can clear up some of these issues.  

1) Not enough existing funds to make it worth while - what exactly do you mean by this? For simplicity let's stick with the example I used in the recent post ($200K mortgage, $50K savings --> $150K HELOC balance ($200K limit) and $0 savings). Are you referring to having $0 in savings as not enough funds? Because you could always pull whatever funds you needed from the $50K you dumped into the HELOC.

2) Lack of access to the HELOC products you mention - This is an interesting one. The only unique thing in Hawaii that I was aware of was the promotional interest rates. Are you folks not able to take a HELOC to pay off an existing debt (e.g. - that same mortgage)? It's interesting because even here, some loan officers are confused at the concept and will strictly look at a second position HELOC as the only option. If that is the case, then yes, this may be a niche strategy, but still very feasible for those with a decent amount of equity.

3) They have better ways to use the money - Using the HELOC does not keep you from realizing these opportunities. In fact, that's what makes the strategy so great, it allows you the best of both worlds. You can use an accelerated pay down strategy while waiting for an opportunity to present itself. Say you're eyeing the market for a rental property. Most people save money until a good rental hits the market and they're ready to buy. With the HELOC strategy you just store your savings in your HELOC (saving you whatever interest rate you're paying) until you're ready to close. Then just write the check from the HELOC. While the other person has money sitting in their savings earning 2%, you're saving 4% on your HELOC interest.

4) They prefer the safety of a fixed mortgage compared to a HELOC - Can't argue with this one and this depends on risk vs reward based on potential future scenarios. I've heard horror stories from some people regarding HELOCs and how they're called due if ever there is a market shift. But I'm thinking that was a market crash anomaly. Why would a bank call a LOC due if the property value drops? If you're still paying then the bank is still making the same interest that they are making on the mortgage (as we've discussed at length here in the forum).

[Jeremy Z.]

@Nick Moriwaki

1) I'm confused, are you not still assuming here that someone had $50K to "dump" into the HELOC?

2) I'm not an expert on what options are available. I'll assume it's a valid obstacle for some.

3) You can argue that it's a good strategy while you wait for an opportunity. For others it may not be worth the effort, or they may have an immediate opportunity.

4) Even if the risk is small (I'm not sure it is), the fallout would be large. Not worth the risk for many.

So many variables. Laying out what I said above, I find it hard to believe many people reading this would benefit. But I'm really not here to debate the merits, just here to educate readers that MORTGAGES ARE NOT FRONT-LOADED.

[Nick Moriwaki]

Originally posted by @Justin H.:

@Nick Moriwaki I'll grant you that doing it your very specific way would maintain some advantage up to a slightly higher interest rate on a first position HELOC as compared to a conventional mortgage...But as the interest rates diverge between the two, as they most commonly do for the rest of us schmucks, every time I run any type of math on any of these scenarios it keeps going back to showing that the rates still quickly become the dominant factor.

Let's model out an example to see if we're on the same page. I'll stick to $200K remaining mortgage with $50K savings. Mortgage is 4% with a payment of $1K/month and income is $5K/mo and expenses are $2K/mo ($3K cash flow/mo without factoring in the mortgage/HELOC). And let's say property value is high enough to obtain a $200K HELOC to replace the mortgage balance.

My numbers run out like this. You zero out the HELOC in 55 months paying just over $14K in interest to the bank. Meanwhile in those 55 months the $35K of mortgage payments went to interest. In addition, if you continued to make your minimum monthly payments to the mortgage, you would end up paying just north of $130K in interest over the course of 330 months. Meanwhile, after month 55, the HELOC strategy pays no additional interest (since the balance is paid off). I don't see these numbers as insignificant and I don't see this scenario as unreasonable. For kicks, I also inflated the HELOC interest 1% a year until completion and came out with an additional $5K in interest over an additional 2 months.

See the numbers here.  Let me know if you have any issues with the calculations.  You can ignore the middle column - that is there to compare a standard mortgage acceleration model.  

[Nick Moriwaki]

Originally posted by @Jeremy Z.:

@Nick Moriwaki

1) I'm confused, are you not still assuming here that someone had $50K to "dump" into the HELOC?

2) I'm not an expert on what options are available. I'll assume it's a valid obstacle for some.

3) You can argue that it's a good strategy while you wait for an opportunity. For others it may not be worth the effort, or they may have an immediate opportunity.

4) Even if the risk is small (I'm not sure it is), the fallout would be large. Not worth the risk for many.

So many variables. Laying out what I said above, I find it hard to believe many people reading this would benefit. But I'm really not here to debate the merits, just here to educate readers that MORTGAGES ARE NOT FRONT-LOADED.

1) The $50K could be anything really. The point there being that whatever money you had would be better served in the HELOC than in a bank account.

3) I honestly put very little effort in maintaining the strategy. Money comes in and I move it to pay off the HELOC. A few mouse clicks every few days is all it is.

Really? The reason I'm so persistent here is that I feel like many of us here can utilize the strategy (assuming obtaining the HELOC is not an issue) since we are all investors. But hey, to each his own. I definitely echo your sentiment in that people need to be open to seeing that mortgages are not hocus pocus interest loaded loans.

[Brent Coombs]

@Nick Moriwaki, sure, anyone who has $3k extra pocket money each month has plenty of options. But I'm with Jeremy here: you're "still assuming here that someone had $50K to 'dump' into the HELOC", whereas, your average mortgage-holder does not have an extra $3k every month to burn. 

The problem is: HELOCs are also marketed (by you too?) to those same "average" mortgage-holders! 

ie. If you want to be removed from my insult, please put a caveat in all your pro-HELOC posts to the effect that "HELOCs only suit folk whose income far exceeds their expenses"! Thank you. Cheers...

[Nick Moriwaki]

Originally posted by @Brent Coombs:

@Nick Moriwaki, sure, anyone who has $3k extra pocket money each month has plenty of options. But I'm with Jeremy here: you're "still assuming here that someone had $50K to 'dump' into the HELOC", whereas, your average mortgage-holder does not have an extra $3k every month to burn. 

The problem is: HELOCs are also marketed (by you too?) to those same "average" mortgage-holders! 

ie. If you want to be removed from my insult, please put a caveat in all your pro-HELOC posts to the effect that "HELOCs only suit folk whose income far exceeds their expenses"! Thank you. Cheers...

These are just numbers that are used in comparison to someone in the exact same situation. Feel free to change around the numbers as you see fit and see if you can show that the results are insignificant. Keep in mind that the $3K you refer to is not extra pocket money because that does not include the loan payment (mortgage or HELOC). So in reality it's $2K cash flow with the mortgage.

I made a quick adjustment to half the monthly cash flow from $2K to $1K and drop the savings account from $50K to $20K.  The results:

• HELOC paid off in 108 months with $34K in interest
• 108 months of mortgage interest is just under $65K
• Total mortgage interest is $130K in 330 months

The one difference is that total interest becomes comparable when running the conservative scenario of 1% yearly increase to the HELOC rate. The total interest in that scenario becomes $95K. Still $35K of total interest saved in comparison even when paying 14% at the end of the HELOC.

So I'm still not seeing your point that it only applies to people with large bank accounts or significant cash flow.    

[Derek Hookani]

No, it is not as simple as pay your mortgage with a HELOC and you will save money. There is a strategy to make it work. What I talk about below is based on using a HELOC to pay off your mortgage.

The HELOC strategy does work as long as you have positive cash flow each month and you put all that positive cash flow to the HELOC. Instead of keeping your money in a checking/savings account you put that money to work to keep the daily balance of the HELOC as low as you can for as long as you can since interest is calculated on daily balance. All expenses come out of it and ALL income goes into it applying all the positive cash flow to the HELOC balance. Every time you get a pay check, you make a HELOC payment. So if you get paid weekly, you are making a weekly payment to the HELOC dropping that daily balance each time. It will go up and down as you pay expenses and make payments so there is a strategy to timing of those events to maximize the effect.

Yes you can just make those same payments to a regular mortgage but I don't think anyone would be comfortable using all their "savings" each month to make an extra mortgage payment. That's one of the advantages of using a HELOC because if something comes up you still have access to that money. Once you make a mortgage payment say good bye to that money.

For this to work, you absolutely need positive cash flow and keep to your budget to keep that positive cash flow so you can put it to work to pay down the principle of the HELOC lowering the amount of interest you owe. It could be $300 or it could be $3000 in positive cash flow but if you put it all to the HELOC it will work. Of course the bigger your cash flow the faster your pay down gets. The HELOC gives you flexibility a mortgage won't but you have to be disciplined with your budget. This won't work for everyone.

Side note: not evident from above but because you are replacing your mortgage with your HELOC it is assumed that the amount of what your mortgage payment was would be applied to a HELOC payment. Add in the positive cash flow being applied and you are dropping the principle faster.

Wow, that post was a lot longer than I expected. Sorry for the long windedness.

Aloha, Ho'okani

[Dave Chow]

@Michael Mullins, why would you pay off your mortgage with heloc?  Is the interest rate much lower than the HELOC? Originally posted by @Michael Mullins:

A lot of people focus on the HELOC as if it's a magic tool that pays down your mortgage. Really it's the extra income and money from your checking and savings that is setting in the heloc that pays down your debt faster. My wife and I have paid down our primary mortgage and paid off one rental property using this strategy. But it's not going to work for everyone, you have to have a budget and spend less money then you make. It's the extra money you don't spend in your budget that allows you to have more MONEY to pay off the daily amount. We have a three year plan to pay off $150,000 that is left on the house.

Hope this helps.

[Justin H.]

Originally posted by @Nick Moriwaki:

Originally posted by @Justin H.:

@Nick Moriwaki I'll grant you that doing it your very specific way would maintain some advantage up to a slightly higher interest rate on a first position HELOC as compared to a conventional mortgage...But as the interest rates diverge between the two, as they most commonly do for the rest of us schmucks, every time I run any type of math on any of these scenarios it keeps going back to showing that the rates still quickly become the dominant factor.

Let's model out an example to see if we're on the same page. I'll stick to $200K remaining mortgage with $50K savings. Mortgage is 4% with a payment of $1K/month and income is $5K/mo and expenses are $2K/mo ($3K cash flow/mo without factoring in the mortgage/HELOC). And let's say property value is high enough to obtain a $200K HELOC to replace the mortgage balance.

My numbers run out like this. You zero out the HELOC in 55 months paying just over $14K in interest to the bank. Meanwhile in those 55 months the $35K of mortgage payments went to interest. In addition, if you continued to make your minimum monthly payments to the mortgage, you would end up paying just north of $130K in interest over the course of 330 months. Meanwhile, after month 55, the HELOC strategy pays no additional interest (since the balance is paid off). I don't see these numbers as insignificant and I don't see this scenario as unreasonable. For kicks, I also inflated the HELOC interest 1% a year until completion and came out with an additional $5K in interest over an additional 2 months.

See the numbers here.  Let me know if you have any issues with the calculations.  You can ignore the middle column - that is there to compare a standard mortgage acceleration model.  

That's not apples-to-apples. If somebody wants to pay down the mortgage ASAP, they'll be willing and able to put their entire excess monthly cash flow towards paying down additional principle rather than building their cash savings beyond the minimum necessary. So bump the monthly payment to the same $3k on the conventional mortgage. At that point there should only be 3 remaining variables. First is the interest rate, and the second is the average daily balance. I've already demonstrated that the former is much more powerful than the latter. Therefore the primary remaining risk/reward is keeping $50k in savings vs using it all to pay down the debt and maintaining access to it via a HELOC, but this can be applied to the mortgage situation with a $0 balance HELOC as well. The risk being that economic or employment conditions could cause the bank to lock up the liquidity of the HELOC, and thus losing access to the 'savings' being held there. Unlikely and uncommon, sure...But ultimately a possibility, and a risk that is not going to be for everybody. So if we further assume an equal personal risk tolerance between the options there, we're right back at the interest rate really being the real deciding factor as to which would be more advantageous.

[Joshua S.]

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

 From your very first post on this thread (page 7):

There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money

You absolutely thought mortgages were "front loaded" or stacked against the borrower compared to a HELOC. You even later acknowledged that you had a misunderstanding of that. Commendable. I almost credited you for that in one of my posts above, but I was trying to stay on point. Even Nick, who has a very good handle on the math, acknowledged that he initially misunderstood it. So for you to try and claim that "no one was saying that" is completely ridiculous.

[Joshua S.]

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

 From your very first post on this thread (page 7):

There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money

You absolutely thought mortgages were "front loaded" or stacked against the borrower compared to a HELOC. You even later acknowledged that you had a misunderstanding of that. Commendable. I almost credited you for that in one of my posts above, but I was trying to stay on point. Even Nick, who has a very good handle on the math, acknowledged that he initially misunderstood it. So for you to try and claim that "no one was saying that" is completely ridiculous.

That's fair, but for you to know that I acknowledged the misunderstanding and have clarified times over and still be policing it is also completely ridiculous. :)

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

 From your very first post on this thread (page 7):

There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money

You absolutely thought mortgages were "front loaded" or stacked against the borrower compared to a HELOC. You even later acknowledged that you had a misunderstanding of that. Commendable. I almost credited you for that in one of my posts above, but I was trying to stay on point. Even Nick, who has a very good handle on the math, acknowledged that he initially misunderstood it. So for you to try and claim that "no one was saying that" is completely ridiculous.

That's fair, but for you to know that I acknowledged the misunderstanding and have clarified times over and still be policing it is also completely ridiculous. :) 

I jumped in for the first time in a while on this thread because Gary made the following statement:

As you have repeatedly mentioned Joshua, the true "interest rate" in year one is much, much higher than the nominal APR; in this case it is 74%, not 4.5%. 

That is false. The true interest rate is not 74%. That's total interest, and what you guys always fail to mention is that the total interest doesn't change when you take out the HELOC, because you now have mortgage interest + HELOC interest. It only changes when you start throwing money at the debt (either the HELOC or the mortgage).

If you guys stop making false statements and stop having glaring omissions in your examples, I will stop replying. :)

[Joshua S.]

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

 From your very first post on this thread (page 7):

There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money

You absolutely thought mortgages were "front loaded" or stacked against the borrower compared to a HELOC. You even later acknowledged that you had a misunderstanding of that. Commendable. I almost credited you for that in one of my posts above, but I was trying to stay on point. Even Nick, who has a very good handle on the math, acknowledged that he initially misunderstood it. So for you to try and claim that "no one was saying that" is completely ridiculous.

That's fair, but for you to know that I acknowledged the misunderstanding and have clarified times over and still be policing it is also completely ridiculous. :) 

I jumped in for the first time in a while on this thread because Gary made the following statement:

As you have repeatedly mentioned Joshua, the true "interest rate" in year one is much, much higher than the nominal APR; in this case it is 74%, not 4.5%. 

That is false. The true interest rate is not 74%. That's total interest, and what you guys always fail to mention is that the total interest doesn't change when you take out the HELOC, because you now have mortgage interest + HELOC interest. It only changes when you start throwing money at the debt (either the HELOC or the mortgage).

If you guys stop making false statements and stop having glaring omissions in your examples, I will stop replying. :)

Well, what I don't get is you clearly understand what Gary MEANT, but are taking issue with the words used just like with the "front-loaded" thing. If everyone on here understands (including Gary and I) that he meant total interest, then your argument is purely semantic. I guess you're the word police on here, so that's cool, I just don't get it. Haven't you ever been around someone who corrected every little thing even though he/she understood what the person meant? I know what I'd call that person, but I suspect it would be censored on here, so we'll just go with word police. You don't have to stop replying, this is fun. Let's keep it going! :)

[Jeremy Z.]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

 From your very first post on this thread (page 7):

There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money

You absolutely thought mortgages were "front loaded" or stacked against the borrower compared to a HELOC. You even later acknowledged that you had a misunderstanding of that. Commendable. I almost credited you for that in one of my posts above, but I was trying to stay on point. Even Nick, who has a very good handle on the math, acknowledged that he initially misunderstood it. So for you to try and claim that "no one was saying that" is completely ridiculous.

That's fair, but for you to know that I acknowledged the misunderstanding and have clarified times over and still be policing it is also completely ridiculous. :) 

I jumped in for the first time in a while on this thread because Gary made the following statement:

As you have repeatedly mentioned Joshua, the true "interest rate" in year one is much, much higher than the nominal APR; in this case it is 74%, not 4.5%. 

That is false. The true interest rate is not 74%. That's total interest, and what you guys always fail to mention is that the total interest doesn't change when you take out the HELOC, because you now have mortgage interest + HELOC interest. It only changes when you start throwing money at the debt (either the HELOC or the mortgage).

If you guys stop making false statements and stop having glaring omissions in your examples, I will stop replying. :)

Well, what I don't get is you clearly understand what Gary MEANT, but are taking issue with the words used just like with the "front-loaded" thing. If everyone on here understands (including Gary and I) that he meant total interest, then your argument is purely semantic. I guess you're the word police on here, so that's cool, I just don't get it. Haven't you ever been around someone who corrected every little thing even though he/she understood what the person meant? I know what I'd call that person, but I suspect it would be censored on here, so we'll just go with word police. You don't have to stop replying, this is fun. Let's keep it going! :)

I'm just trying to make sure posts from you, Gary, and a few others don't give other readers misconceptions (especially new investors). Because they way you guys present it is exactly the same type of incomplete picture that gave you guys those misconceptions in the first place.

[Joshua S.]

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

 From your very first post on this thread (page 7):

There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money

You absolutely thought mortgages were "front loaded" or stacked against the borrower compared to a HELOC. You even later acknowledged that you had a misunderstanding of that. Commendable. I almost credited you for that in one of my posts above, but I was trying to stay on point. Even Nick, who has a very good handle on the math, acknowledged that he initially misunderstood it. So for you to try and claim that "no one was saying that" is completely ridiculous.

That's fair, but for you to know that I acknowledged the misunderstanding and have clarified times over and still be policing it is also completely ridiculous. :) 

I jumped in for the first time in a while on this thread because Gary made the following statement:

As you have repeatedly mentioned Joshua, the true "interest rate" in year one is much, much higher than the nominal APR; in this case it is 74%, not 4.5%. 

That is false. The true interest rate is not 74%. That's total interest, and what you guys always fail to mention is that the total interest doesn't change when you take out the HELOC, because you now have mortgage interest + HELOC interest. It only changes when you start throwing money at the debt (either the HELOC or the mortgage).

If you guys stop making false statements and stop having glaring omissions in your examples, I will stop replying. :)

Well, what I don't get is you clearly understand what Gary MEANT, but are taking issue with the words used just like with the "front-loaded" thing. If everyone on here understands (including Gary and I) that he meant total interest, then your argument is purely semantic. I guess you're the word police on here, so that's cool, I just don't get it. Haven't you ever been around someone who corrected every little thing even though he/she understood what the person meant? I know what I'd call that person, but I suspect it would be censored on here, so we'll just go with word police. You don't have to stop replying, this is fun. Let's keep it going! :)

I'm just trying to make sure posts from you, Gary, and a few others don't give other readers misconceptions (especially new investors). Because they way you guys present it is exactly the same type of incomplete picture that gave you guys those misconceptions in the first place.

That's fair to a point, but I think you're being nitpicky. When I said you borrow cheap money to pay off expensive money and all that I wasn't "wrong", I "explained it wrong". Having the $10,000 on your mortgage costs you $20,000 in interest when you pay via the normal schedule. You guys have countered that the interest due on $10,000 is only $10,000 x 4.5%, but the TRUE COST of paying via the normal schedule is $20,000 because you're paying interest from the entire loan. This is what I meant by "expensive". I thought it was an obvious point, so I didn't spell it out in as much detail, but that doesn't make it less true. Paying via the normal schedule is extremely expensive because you are paying interest from the entire loan. So, in other words, you are correct that the $10,000 CHARGES you around the same amount regardless of which loan vehicle it's on, but I'm also correct that the true cost is very different depending on how you pay it down - a point that seems to elude your side.

Then you guys countered that if a person just has the money lying around it would better to just accelerate the payment schedule on your own, which is valid, but most people don't have it or don't do that for various reasons. So, the HELOC in comparison is "charging" you roughly the same amount of interest (4-5%), but the TRUE COST is also 4-5%, which means it's a more efficient way of paying it down compared to regular payments where you have an astronomical true cost. Do you get what I'm saying? I had certain misconceptions about the explanation for what was happening, but I wasn't wrong. But instead of accepting the clarification and saying, "Wow, that actually makes a lot of sense. I was stuck on the rate between the two debt vehicles instead of considering the true cost of each way of paying..." you just spin the objection wheel and go on complaining about the way it's being explained. Maybe it's FOMO and the detractors feel like they don't want to understand because it would mean that they've paid a ton more than they had to or something, but to me it seems like willful ignorance to ignore that this strategy has advantages vs the typical way of paying. 

Now spin the wheel and tell me that you could just empty your checking account onto your mortgage every month and use a HELOC as backup or that you could earn a higher return with a rental property or any of the other brilliant comparisons that don't have anything to do with this strategy vs paying via the normal schedule. It's important to make sure new investors only follow the tried and true methods that keep people on the debt treadmill for their entire lives while they risk their savings in other investments. Very important battle you're fighting, so keep up the good work and try not to understand anyone else's point of view. That's key.

[Jeremy Z.]

@Joshua S.

It's important to make sure new investors only follow the tried and true methods that keep people on the debt treadmill for their entire lives while they risk their savings in other investments. Very important battle you're fighting, so keep up the good work and try not to understand anyone else's point of view. That's key.

I've never once said sticking to a 30-year payment schedule is a must, and in fact, quite the opposite. I've said within my last few posts that I recognize why people may want to pay down debt faster, and even stated that one of my properties has a 15-year mortgage. I'm not going keep discussing this with you, since you are making false claims and twisting basic facts.

[Joshua S.]

Originally posted by @Jeremy Z.:

@Joshua S.

It's important to make sure new investors only follow the tried and true methods that keep people on the debt treadmill for their entire lives while they risk their savings in other investments. Very important battle you're fighting, so keep up the good work and try not to understand anyone else's point of view. That's key.

I've never once said sticking to a 30-year payment schedule is a must, and in fact, quite the opposite. I've said within my last few posts that I recognize why people may want to pay down debt faster, and even stated that one of my properties has a 15-year mortgage. I've stated multiple times that I have zero problem with using a HELOC to accelerate debt payment. My problem with the way the strategy is falsely presented by far too many people. I'm not going keep discussing this with you, since you are making false claims and twisting basic facts.

And my problem is that I'm presenting it for exactly what it is - a way to save on interest and get out of debt faster vs the traditional way of paying (if those are goals of yours) - and having to defend it from a cyclical barrage of barely related objections from people who refuse to accept or concede simple, logical points. Have a good one.

[Nick Moriwaki]

Originally posted by @Justin H.:

Originally posted by @Nick Moriwaki:

Originally posted by @Justin H.:

@Nick Moriwaki I'll grant you that doing it your very specific way would maintain some advantage up to a slightly higher interest rate on a first position HELOC as compared to a conventional mortgage...But as the interest rates diverge between the two, as they most commonly do for the rest of us schmucks, every time I run any type of math on any of these scenarios it keeps going back to showing that the rates still quickly become the dominant factor.

Let's model out an example to see if we're on the same page. I'll stick to $200K remaining mortgage with $50K savings. Mortgage is 4% with a payment of $1K/month and income is $5K/mo and expenses are $2K/mo ($3K cash flow/mo without factoring in the mortgage/HELOC). And let's say property value is high enough to obtain a $200K HELOC to replace the mortgage balance.

My numbers run out like this. You zero out the HELOC in 55 months paying just over $14K in interest to the bank. Meanwhile in those 55 months the $35K of mortgage payments went to interest. In addition, if you continued to make your minimum monthly payments to the mortgage, you would end up paying just north of $130K in interest over the course of 330 months. Meanwhile, after month 55, the HELOC strategy pays no additional interest (since the balance is paid off). I don't see these numbers as insignificant and I don't see this scenario as unreasonable. For kicks, I also inflated the HELOC interest 1% a year until completion and came out with an additional $5K in interest over an additional 2 months.

See the numbers here.  Let me know if you have any issues with the calculations.  You can ignore the middle column - that is there to compare a standard mortgage acceleration model.  

That's not apples-to-apples. If somebody wants to pay down the mortgage ASAP, they'll be willing and able to put their entire excess monthly cash flow towards paying down additional principle rather than building their cash savings beyond the minimum necessary. So bump the monthly payment to the same $3k on the conventional mortgage. At that point there should only be 3 remaining variables. First is the interest rate, and the second is the average daily balance. I've already demonstrated that the former is much more powerful than the latter. Therefore the primary remaining risk/reward is keeping $50k in savings vs using it all to pay down the debt and maintaining access to it via a HELOC, but this can be applied to the mortgage situation with a $0 balance HELOC as well. The risk being that economic or employment conditions could cause the bank to lock up the liquidity of the HELOC, and thus losing access to the 'savings' being held there. Unlikely and uncommon, sure...But ultimately a possibility, and a risk that is not going to be for everybody. So if we further assume an equal personal risk tolerance between the options there, we're right back at the interest rate really being the real deciding factor as to which would be more advantageous.

It wasn't meant to be an apples to apples comparison. The purpose of my argument is explain the benefits of the strategy as opposed to others. Yes you can match the savings by putting all your money towards the loan and pull a HELOC as a buffer, but would require way more equity than you would with the strategy I'm suggesting so scratch a decent amount of people off the list as eligible to even employ that strategy.

Then for those that do have the equity to qualify, there is a significant opportunity cost associated with keeping the mortgage and using the HELOC as buffer. Say there is a great investment opportunity that arises or your car breaks down and you need a new one, you only have the balance in your HELOC as your buffer since you can't pull any of that extra money you put into the mortgage without refinancing. You don't sacrifice that by substituting the mortgage for a HELOC. I do agree that there is a risk factor out there that needs to be considered and these examples are on the extreme end of how you would structure your finances so I'm by no means suggesting people out there mimic what's on the spreadsheet. However I think people are too quick to gloss over any HELOC strategy and try to make it an apples-to-apples comparison when (at least for me) it's not intended to be.

[Brent Coombs]

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

Sorry Joshua, but it was you who did start "saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you", when you wrote 8 months ago on this very thread: "Homeowners every day go to sell their house and say, 'THAT'S all I have in equity after paying for 10 years?!?' - because of all the interest front loaded on the loan"! 

Whereas in truth, interest paid on the total principal that has been "fronted" to them is the same proportion of the balance - every year (eg. 4.5%)! The actual dollars paid in interest each year only decrease with time because the principal is also being paid off.

[But of course, if those same Homeowners bought wisely in the first place, their equity will be much more that just the amount of principal they've paid off].

You rightly said: ..."because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there". 

So, why go on to say: "73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded"? Correct. You're not allowed to say "front loaded", because, as you wisely wrote: you pay based on the loan balance! ie. In this example, 4.5% per year, whether in year one, or year thirty!

Admit it: The term "front loaded" is intended to be used as if the banks should only charge "$378/month" interest in your example instead of $618/month (meaning they would be only charging 2.75% in the first year)! Really?... 

[Joshua S.]

Originally posted by @Brent Coombs:

Originally posted by @Joshua S.:

Originally posted by @Jeremy Z.:

@Nick Moriwaki

I have always appreciated that you understand the math involved in these back-and-forth discussions, and are willing to work through the numbers. I agree with your example, that $50,000 used to offset a HELOC at 3% will net more savings than a savings account earning 2%. However, I think your scenario is rather unique, and not the same situation laid out by 95% of the people who advocate for this method.

To be clear, I don't have an issue with people paying a chunk of their mortgage with a HELOC and rapidly paying it down if they feel that suits them better than just paying down their mortgage. Whether they should pay their mortgage down early is a separate debate, and I acknowledge that there are people who might want to eliminate debt more aggressively. I myself have a 15-year mortgage because the interest rate was substantially better than the 30-year option at the time.

My only real issue is with the bogus "mortgages are font-loaded" claim that @Gary Floring, Joshua Smith, and others have made on this thread.

In the example Gary uses above, he compares the total interest in year one of a $165,000 mortgage and a $10,000 HELOC. The problem is, he completely ignores the interest he is still simultaneously paying on the remaining $155,000 mortgage balance! It's insanity! Madness I tell you!

A mortgage isn't a trick like these other HELOC Hucksters will have people believe. That's the primary thing I'm here to police.

Cheers!

Jeremy, no one is saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you. What we are saying is that it's front-loaded in the sense that most of your early payments go to interest. It's a fact-based observation - one that you know is true. So, basically, your complaint is semantic. When we say front-loaded with interest it SOUNDS to you like we're saying it's a trick or a scam or a plot against you and you have a problem with that idea. In other words, your interpretation is the problem. 

It's a fact that mortgage payments are front-loaded with interest due to amortization and the high balance initially. If you don't understand that, think about it like this. The $165,000 loan means $136,0000 in interest at 4.5%. If you took the interest and divided it evenly over 360 payments it comes out to $378/month. Keep in mind that the bank COULD even your interest out in this way if they wanted to. But because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there. In the first year of this loan you pay about $10,000 total in payments ($836 x 12) and about $7300 goes to interest. So, look, I understand the RATE is 4.5%, but if I paid this loan on their schedule 73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded?

AGAIN, it's not a nefarious plot or a trick or something, but I consider that front-loaded because you're paying way more interest early on. If you don't like the term front-loaded, then how else would you word it? Front-loaded with sugar on top? We're only saying front-loaded because it's the easiest way to describe it. I don't know, I can't think of another way, but let me know. What's sad is that you're "policing" something that isn't happening. You're policing a misinterpretation on your part. You're like a mortgage social justice warrior that wants to make sure we aren't being too hard on banks. So, ok, great. Here's your chance. Tell us your preferred wording if "front-loaded" is considered offensive by your people.

Sorry Joshua, but it was you who did start "saying the mortgage is front-loaded or a trick in the sense that it's a nefarious plot against you", when you wrote 8 months ago on this very thread: "Homeowners every day go to sell their house and say, 'THAT'S all I have in equity after paying for 10 years?!?' - because of all the interest front loaded on the loan"! 

Whereas in truth, interest paid on the total principal that has been "fronted" to them is the same proportion of the balance - every year (eg. 4.5%)! The actual dollars paid in interest each year only decrease with time because the principal is also being paid off.

[But of course, if those same Homeowners bought wisely in the first place, their equity will be much more that just the amount of principal they've paid off].

You rightly said: ..."because you pay based on the loan balance (not because The Joker is sitting behind the scenes selling you poison shaving cream) your first payment includes $618 worth of interest and slowly decreases from there". 

So, why go on to say: "73% OF MY MONEY is going to interest in the first year. I'm not allowed to call that front-loaded"? Correct. You're not allowed to say "front loaded", because, as you wisely wrote: you pay based on the loan balance! ie. In this example, 4.5% per year, whether in year one, or year thirty!

Admit it: The term "front loaded" is intended to be used as if the banks should only charge "$378/month" interest in your example instead of $618/month (meaning they would be only charging 2.75% in the first year)! Really?... 

This is getting comical. I can't believe someone can say something as factual as "mortgages are front-loaded with interest" and have so many people get butthurt for other people. Brent, I explained what I meant when I said front-loaded - an explanation that you agree with - and then asked Jeremy for his preferred term, which he couldn't come up with. So, here's some homework for you if you want me to stop using front-loaded to describe the situation in question: come up with a better one or two word phrase that describes it and makes it smell like roses. 

The term, in fact, isn't intended to say that banks are doing something wrong by charging more interest upfront than later in the loan. They are businesses that are trying to make money, everyone knows that (including me). The purpose of the term is 1) to help people realize that it's factually taking place. Imagine someone getting a mortgage and not realizing how much more is going to interest early on in the loan. The term "front-loaded" easily lets them understand that they are paying way more interest early on. And 2) to condense the idea that you are paying interest on the entire loan balance and paying more interest early on into a word/phrase instead of a sentence/paragraph. It's shorthand for the idea in question. 

How are you so convinced that I think banks should only charge $378/month? Just because I said it was a possibility? What about this? Banks could also charge $10/month interest until 63% of the balance is paid off and then charge you for the rest of the interest on the next payment. They could put that on the schedule and give you a real incentive to pay it off early, huh? Now, does the fact that I brought it up as a POSSIBILITY make you automatically believe that I think they SHOULD do it and that's it's WRONG that they're not doing it? I mean, I did bring it up as a possibility, so I must think it's the only proper way, right? NOPE.

The point of saying that they could charge you $378/month was just to point out that the interest you owe isn't evened out over the course of the loan, it's FRONT-LOADED to the beginning of the loan via the fact that you pay interest based on the balance. So, once again, if you don't like it then at least be constructive and give me another term that you prefer. I'm obviously a flexible person and I've learned and contorted my explanations and bent over backwards to try to help people understand, so if I need to change the term "front-loaded" to "humper-diddled" or something to protect your feelings, I will. But you need to supply the term.

It sort of reminds me of how people used to be crippled and then they became disabled and then they were special needs and now they're different-abled or something (I think). I think we should really be careful that people realize that they are paying more interest early, but don't think that it's "wrong". If it's so important to you that we don't suggest that it's wrong, let me know what term to use. It'll be cool, like when banks change "ATM surcharges" to "freedom fees" to make you feel better about paying for access to your own money. Don't get me wrong, obviously banks are infallible and righteous, so I'm not questioning anything they do. We can change "front-loaded" to some other term and make sure everyone realizes that paying a lot of interest upfront is righteous and pure.

[Brent Coombs]

@Joshua S., I wouldn't have any problem with the term "front-loaded", except that it's never used in the context "that paying a lot of interest upfront is righteous and pure"!

Which, it is. 

So, why isn't it used in that context?

ie. Why the irrelevant statistic that "73% OF MY MONEY is going to interest in the first year"?

ie. So what?

ie. If you paid your mortgage off in one year, it'd be 4.5% instead.

ie. That's why the "cheap" HELOC vs "expensive" mortgage argument is a crock!...

[Joshua S.]

Originally posted by @Brent Coombs:

@Joshua S., I wouldn't have any problem with the term "front-loaded", except that it's never used in the context "that paying a lot of interest upfront is righteous and pure"!

Which, it is. 

So, why isn't it used in that context?...

For the same reason the guy in traffic is a jerk for not letting you in and not just selfish or in a hurry. Banks COULD help us out, but they don't. They make sure they get paid first and their executives make millions instead of making sure people can make ends meet. Is it "wrong"? No, it's the natural course of business just like the guy who chose not to let you in when you needed it. But here's the thing you're missing. It's not righteous and pure, either, that was a joke. It's life and we all have to accept it, but it's definitely not righteous. Like when the lion catches the gazelle, we all know he has to eat, but in a perfect, righteous world the gazelle wouldn't have to die. Banks prey on us because they need to make money, but in a perfect world people wouldn't have to scrape by and pay extra for access to their own money and pay $35 when they accidentally overdraft. But in the same way that you wouldn't say the lion was "wrong" for eating the gazelle, banks are just doing what they are supposed to do. 

However, I would argue that banks take their advantage too far, which is why many people don't care for them and you usually hear the context you're talking about. They are a for-profit business, so they are trying to make money and aren't supposed to be pure or righteous, but where is the line between serving people and exercising your advantage to make a profit and ripping people off when you could charge less for the same service? It's a moral gray area, in my opinion, but when I say mortgage interest is front-loaded I just don't know how else to describe it. I know that making money isn't wrong or anything. Have a good one.

[Brent Coombs]

@Joshua S., I'm glad you got that off your chest. But, "moral gray area"? Hardly. Everyone who takes out a 30 year mortgage knows the interest they're being charged, and why.

Anyone who wants to pay off their home in less than 30 years has plenty of ways to go about it. But here's the thing: Many if not most current mortgage holders who took out a long long loan, have no reason or intention of paying it off early - even if they can easily do so!

Why? Because they are beating the bank at their own game. ie. Mortgage rates have been so low (historically), that any excess income can easily be put to better use than trying to erase a 3.5%/y mortgage. Meanwhile, their home values have been outpacing that interest rate by miles!

But back to wanting to get out of all debt quickly. I'm fairly sure that I've already mentioned to you specifically that it's (only) your extra income that can help you do that. 

ie. It's not your HELOC (2nd credit card) that does "velocity acceleration" (or other words gurus use)!

I hope you now fully understand the error of the logic that suggests $10k being paid off the principal supposedly allows one to "skip 23 payments", resuming the loan at the $155k mark (in the $165k mortgage example)? Because I'm fairly sure that attempts have been made to straighten you (and every other reader) out about that error.

Just in case you want to still believe that, I'll give it another go. What actually happens when you cough up $10k extra off the principal, is that the amount payable per month is decreased, but only by the difference that a $155k mortgage would be charged if payable over the same 30 years! And unless you keep paying (at least) the full amount that you were already paying, it wouldn't achieve your objective of paying it off quick! [And, if that $10k was also borrowed, it hasn't helped you! Get it, yet?]

ie. The bank does not just take it down to the $155k mark as if you'd already paid all the interest in between! And I'll say this: Neither should they! So, you won't have "saved" as much interest as you thought!

If you want the bank to treat your $155k remaining principal to be paid off 23 months earlier than originally due, you can ask them to shorten the term accordingly! [ie. Start a new 20 year, $155k mortgage]. Otherwise, you still have the liberty of taking the full thirty years on the original loan, even if you paid off $10k in advance.

[Notice how a HELOC need not even get a mention]...

[Jeremy Z.]

@Joshua S.

If you insist on calling mortgages "front-loaded", do you at least acknowledge that HELOCs and auto loans are "front-loaded" too?