All Forum Posts by: Eric Jones

@David Dachtera - Ok, now we're getting somewhere. Notice that the table you just pasted in matches my Scenario 2 exactly. Now checkout my Scenario 1 that I just attached the image of. This models BOTH the HELOC and the loan at the same time. We need to analyze both debts at the same time to really understand if/how this affects payoff.

@David Dachtera

@David Dachtera

David, I used the HELOC payoff scheme that you showed above and I can clearly see your mistake now. You're not accounting for the fact that you're paying more each month out of pocket. In fact, in the first 20 months, you'd be paying ~$6k more out of pocket than you would be making just the standard loan payments. THIS is why you are seeing such rapid payoffs. If you're paying more each month, you're going to pay it off quicker. This is a prepayment scenario that you've been describing, and we've been saying all along that we're NOT talking about a prepayment scenario. Of course it will payoff faster when you're throwing an extra $300+ per month at the total debt.

@David Dachtera - so you just provided what the HELOC looks like for the first ten months while you're paying it down. Can you now provide what you think amortized loan balance looks like for those exact same ten months? We need to account for both in this analysis.

@Timothy Hillyer - sorry, I explained it wrong... your total debt balance in Scenario 2 is $93,226.01. BUT, you've paid more in Scenario 2 because you've paid both your monthly payment AND your HELOC interest. In scenario 1 you only paid your monthly payment. So to do an apples to apples analysis, you have to add the $1650 back in, since you want to analyze the scenarios assuming the same out of pocket costs to you.

@Timothy Hillyer

Hi Tim, at the end of 3 yrs, your total debt balance is:

Scenario 1:  Your 100K loan is now paid down to $94,498.73

Scenario 2 (10K pmt w/ HELOC) 1: Your HELOC has 10K on it, and your loan has $83,226.01, but you've also incurred $1,650 in HELOC interest-only payments which need to be accounted for. So your net debt in Scenario 2 is: $83,226.01 loan + $10,000 Heloc + $1,650 HELOC interest payments = $94,876.01

So you've paid $377.28 more in interest charges because the HELOC is at 5.5% and the loan is at 4%

@David Dachtera 

David, I'm wondering if this is all a big communication issue or if it's a legitimate misunderstanding. 

Honest question - in your paydown scenario are you proposing that you're using your HELOC like a checking account? So you pay a chunk off your mortgage and then dump all of your income towards HELOC payments and also pay all of your bills using the HELOC? Then repeat once you work the HELOC down to zero? IF this is what you're suggesting, I agree that you can rapidly payoff a loan doing this. OR, are you suggesting that you just pay the interest only payment on the HELOC? I'm honestly trying to understand your perspective and I'm wondering if you're misunderstanding what we're all saying. We're NOT saying the strategy doesn't work if you're using your HELOC like a checking account. We ARE saying that it only works due to the fact that you're paying more than the minimum each month and has nothing to do with a difference in how interest accrues on a loan vs HELOC. Do you understand what we are saying and what we're not saying? 

Lastly, thanks for engaging with us despite a lot of the criticism flying your way right now. I think you're misguided on this particular topic, but you seem like a nice and intelligent guy, so thanks for the lively discussion. Hopefully others can benefit from the discussion and learn something along the way. 

@Joe Splitrock 

Great post Joe - the last four paragraphs are outstanding 

@Roy N. - the difference in compounding doesn't change the way that interest is calculated, it changes the way the Balance is calculated. 

Interest Paid per compounding period = Loan Balance * Interest Rate / compounding periods per year

For a HELOC:

Loan Balance = Average daily balance <== can lower this by making multiple payments over a month, and therefore accrue less interest

For a Loan:

Loan Balance = the ending balance from the previous month.

So you can save money with a HELOC, by making multiple payments over a month to lower the average daily balance. But it's important to understand that you're changing the Loan Balance portion of the equation, not the interest portion.

@Roy N. - I agree if we're talking about a HELOC paydown scenario, but we're not. I'm referring to a minimum payment scenario on the HELOC. At one point in this thread, David claimed that you transfer the balance to the HELOC and just make minimum payments on the HELOC balance. He claims that you still see a significantly quicker total debt payoff, because he believes that a HELOC balance accrues interest differently than a loan balance. This was the whole debate in the thread... he believes that an amortized loan accrues interest differently than a HELOC. I'm not analyzing the payoff scenario the way it's described in the video, but the way it was described by David.