All Forum Posts by: Jerome K.

You're right. You mentioned you are repaying the HELOC every year. Even still, this does not change the end result. In a sense, you are increasing your total payment from the original mortgage of $1073, to the mortgage amount plus the HELOC repayment (1073+1301) which is 2374. All your math shows is that if you pay more than the minimum payment, you will pay off your mortgage faster and pay less interest (which everyone here agrees). The HELOC adds no other benefit to this than it would for someone to directly pay this mortgage.

2 Votes

Originally posted by @David Dachtera:

@Jerome K.,

Here's where you went wrong ...

You're ***-u-me-ing that the HELOC is not being repaid. Go back and read again.

@Brian Shurtleff, of course, is way off base - not even close. I've proved my case so many times I've lost track.

... but some people just have to be "right" to feel good about themselves, and I've already made that concession.

The flaw in @John Nachtigall 's argument is he ***-u-me-s that this is for everyone. In a recent post, I explained why that it is not the case.

@Joe Kim is on the right track with his #2, but off target. The "sweep" strategy is part of basic financial education in some countries other than the U.S. My colleagues and I are working to change that.

So, keep tilting at the windmill, guys! Argue with me all you want. The numbers, however, ...

0 Votes

Originally posted by @David Dachtera:

Anyone who wants the spreadsheet(s) can PM me with your e-mail address. There will be two copies of the same spreadsheet: one with acceleration, one without. The formulas are all the same. Only the data differs.

Here's the summary...

Here's the example, without Loan Acceleration:

Loan Amount	$ 200,000.00	Total of Payments	$ 386,511.57
Interest Rate / yr	5.00%		Total Interest Paid	$ 186,511.57
Term (Years)	30		Payoff (years)	30.00
Monthly P&I	$ 1,073.64		Number of Payments	360

(Sorry - copy-and-paste from Excel doesn't work quite like it should in the forum software.)

Now, here it is WITH loan acceleration: an additional $15,000 once a year:

Loan Amount	$ 200,000.00	Total of Payments	$ 252,073.75
Interest Rate / yr	5.00%		Total Interest Paid	$ 52,073.75
Term (Years)	30		Payoff (years)	9.17
Monthly P&I	$ 1,073.64		Number of Payments	110

So, there's the savings in interest (numbers rounded):

Without debt acceleration, $186,512 over the life of the loan.

With debt acceleration, $52,074.

Total interest savings: $134,438.

"... b-b-but David, what about the interest on the HELOC?"

Ok, we're "borrowing" and repaying $15,000 a year on the HELOC. Let's say we get 7% on the HELOC. That comes to roughly $616 a year in interest to borrow that money from the house. We'll be doing that for about 10 years. So, that's $6,160. So, subtract $6,160 from that interest savings and we get $128,278 total interest savings.

Now, what was that about, "doesn't work"?

"... b-b-but David, why not just pay more principal in each payment?"

You can. The numbers work out a little different, but roughly similar. I'll leave that as an exercise for the reader. Excel is your friend as is your favorite 10B-II emulator app or even the 10B-II financial calculator itself!

In this example, your numbers are correct, and the outcome is you will have paid off the mortgage in 9.17 years and have saved on total interest payments. However, you are forgetting the back-half of the equation. Where did those extra $15,000 annual payments come from? The HELOC. So in this example, you would have 9 payments of $15,000, meaning you have a new liability of $135,000. This debt will now have to be serviced at the HELOC interest rate (your example 7%).

Also, your interest payments on the HELOC are not accurate. After the first $15K infusion, that year's accrued interest on $15,000 at 7% is $1050. At year two, you now have a balance of $30,000 on the HELOC, resulting in interest payments that year being 2100. Year 3, 3150...and so on. Those extra interest payments "chip away" at your savings (over $38,000 in interest only payments) and ALSO should be counted as "extra payment towards principal" in the counter/control example.
You are in actuality transferring debt from the fixed, low interest mortgage, into a higher interest HELOC. This is in no way beneficial.

3 Votes

If you wanted to get real specific and accurate, you could run an amortization schedule for each of those. Using the 4.750 as a baseline, you could analyze which package offers the highest return (added cash flow savings and additional principal paid down) on additional capital (additional cost of loan) over the time period that the baseline recoups it's value.

But I wouldn't over-analyze it too much. If it's a long term hold strategy, the lowest interest rate seems to be advantageous.

1 Vote

With your 72 month recoup time; is this calculated solely off the additional cash flow per month? Another thing to consider is the lower rate loan would have less total interest paid over that time period, and more of your payments towards principal. This isn't a whole lot of additional savings, but would probably make the recoup time about 4 years (cash + equity).

0 Votes

I experimented with a home warranty company. I thought it would be a good way to minimize exposure to repair costs and forecast expenses. They end up being more expensive and a waste of time and inconvenient for the tenants. I'm "self insuring" moving forward.

If you do purchase one, make sure you get your hands on the "full contract" and understand all the escape clauses.

0 Votes

All Forum Posts by: Jerome K.

Jerome K. has started 0 posts and replied 46 times.

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