All Forum Posts by: Gary Floring

Brian Carwell (above) says that he used this method to dramatically pay down his primary mortgage and avoided paying large amounts of interest.

David Dachtera of Illinois (earlier parts of this thread) said he also shaved approx. 20 years from his amortization schedule, and avoided paying over $130K in interest. Is this mathematically POSSIBLE using $15K chucks from a HELOC and applying them once per year to the primary mortgage???? According to David,

"The whole point of debt acceleration, "Sweep Strategy", "Velocity Banking", or whatever you want to call it is NOT to reduce the principal paid back. It's to reduce the amount of interest you pay over the life of the loan.

For example: $200K at 5% for 30 years ...

Initially, your payments are mostly interest.

Making only the scheduled payment, that doesn't turn around until roughly the 195th payment (16-1/4 years - past the half-way point in the life of the loan). By that point, the total of payments is already in excess of the original principal balance - roughly $202K. By the end of 30 years, the interest amounts to nearly $187K, meaning it's a 93.5% loan, not 5%. Amazing what compound interest can do, eh?

By accelerating that to the tune of an additional $15K of principal per year (if you can manage it), the payoff comes closer to the 10 year mark and the total interest paid is closer to $52K or 25% of the initial loan balance. Big improvement."

So his original amortization schedule indicated $187K in interest would be paid over 30 years, but instead, he ended up paying only $52K.  Where is he wrong on this calculation???

Joe Splitrock, regarding your statements above:

"Mortgages are not front end loaded with interest." Followed immediately by:

"The interest is larger on the front end of a loan..."

Don't those two sentences seem to contradict each other?

Joshua Smith wrote:

"I paid $10,000 (from his HELOC) and was able to save $21,000 on interest (on his primary mortgage in which he accelerated the amortization schedule by approx. 23 months). The fact that I pay $50/month to my HELOC (interest paid per month = $50 x 10 months = $500).

Does everyone accept the scenario above as arithmetically correct (or feasible)????

Bill F., please explain your statement

"You don't save any interest payment, you defer them to the HELOC."

If several months or years are knocked off the primary mortgage, that would equate to tens of thousands of dollars. How is that amount "deferred" to the HELOC?

Chris May, if you will bear with me as a newbie....

My understanding of what Joshua Smith is saying is this:

If he takes $10K from his heloc and applies it to his primary mortgage, he immediately skips past approx. 23 payments on his amortization schedule. You agree with this first point, correct?

Since the largest portion of those 23 payments are interest, Joshua says he skipped past  approx. $21K in interest that he would have paid had he not applied the $10K. You're OK with this second point, right?

Joshua says he can pay back the $10K borrowed from the HELOC by placing a monthly income of $3K into it (reducing its balance in the first cycle to $7K), and then taking out all monthly expenses of $2K (raising the balance to $9K) in the first cycle. As long as the income exceeds expenses by $1K, this leaves a "surplus" of $1K each cycle. In effect, this $1K each month represents the "principle" that pays back the HELOC in approx. ten months (10 mo. X $1K = $10K). If you have any problems with this HELOC pay-back arithmetic, please explain where the error is (from a calculation point of view). If not, then....

The last point Joshua makes is that the total cost in HELOC interest paid during these ten months of paydownaverages $35 per month, or $350 in ten months. Are you OK with that calculation?

Bottom line: Joshua says that he avoided over $21K in interests payments on his primary mortgage for the cost of $350 in interest paid on his HELOC over a period of ten months.

Chris, please show everyone where the above scenarios and/or simple arithmetic examples above are wrong. 

You MIGHT be able to get an anti-gun clause into your rental contract in say, Beserkeley California. But you could also get those people to sign a "Nuke Free Zone" agreement as well, based on the politics there. But in places like Idaho, Utah, Oklahoma, etc? You'd end up disqualifying most of your tenant applicants!  

If a tenant has passed a criminal and credit check with flying colors, then it shouldn't matter if they legally have a weapon or not. That said, make sure you have Umbrella insurance to cover potentially liability issues due to "accidents."

It could be that there are regional differences at work here. It also depends on whether you are in a buyers or sellers market. In the Seattle area, most realtors do not require a Proof of Funds statement or documentation to show properties to prospective buyers. What they DO insist on is a PreApproval Letter (PAL) from a lending institution before they show you a property. Quite a difference!

Of my acquaintances who are real estate agents, some of them insist on the PAL before viewing a property while others are willing to show me the property without one, especially if that property is not moving. 

I believe the answer to your question depends on how the lending institution issues your 1098 at the end of the year. It will identify which mortgage or loan the interest applies to. If it applies to your primary residence, it should be tax deductible using 1040 Schedule A. If it applies to a rental, then it should be tax deductible using Schedule E. 

But tax deductibility of any loan interest is going to be more difficult from now on. The reason is that the Standard Deduction amount just doubled, so your total itemized deductions must exceed that new, much higher threshold in order to benefit. Also note that personal exemptions, along with dependent exemptions, have been abolished, thus making your "effective" gross income higher in 2018 than 2017, even if your "ACTUAL" gross remains the same during those two years. 

There are several threads on using HELOCs to quickly pay down first mortgages. In this thread, Don Spafford of Idaho is the only one who discusses the primary reason WHY promoters of this strategy believe it works so well. He says:

"The value of the velocity strategy comes from making the larger lump payments which jumps your payment schedule farther ahead and therefore each subsequent payment also is now paying more toward principal than interest. By only paying extra toward principal each month, you do not get the same effect. Yes, it will still pay it off sooner, but not as quickly and you would still pay more in interest over the life of the loan. By using this method properly, it would pay off the loan much sooner and save thousands in interest, even calculating for the heloc interest. But that is only if it is used properly. It is not simply taking out a loan to pay on another loan."

And that gets to the heart of the matter. To wit, if $10K is taken out of a HELOC and applied as a lump sum to the primary mortgage, several YEARS of interest payments may be skipped ("saved" or "never paid"), due to the fact that in the initial years of a 30 year loan, 90% to 95% (depending on interest rate of course and how far into the loan schedule you are) of the payments are interest, and very little is principle reduction. Everyone here should agree on this point, correct?

Don Spafford further explains that the $10K taken from the HELOC will be paid back in less than one year, IF all monthly income is placed into the HELOC, with monthly expenses taken from that same account. It can only be paid off in less than one year IF income exceeds expenses by at least $1K (10 months X $1K = $10K)

Although it is true that $10K in principle payments was in effect transferred from the HELOC to the primary mortgage, that is not a fundamental point of the analysis. What IS fundamental is that the amount of interest payments skipped on the primary mortgage due to the lump sum is huge, equal to MANY times the amount of principle paid down. Another fundamental point is considering how much total interest was paid to the HELOC over a period of one year while its balance was steadily reduced from $10K to zero...

In other words, what is the RATIO of interest amount skipped ("saved") to the interest amount paid (not saved) to the HELOC? Who on this thread can answer that simple question???