All Forum Posts by: Joshua S.

No, you're right, Steve. I mispoke there. What I meant was that the following payments had $35 lower interest and therefore $35 higher principal portions in the payment, but the payment itself was the same amount. Thank you for catching that.

In other words, Mike, you're saying that for every $10,000 payment you save $445, which is an ROI of about 4.5% and that doesn't square with the savings from an actual, unbiased, fully informed, professional amortization calculator. I suspect it's because you can't accept that when you pay additional principal you cancel the associated interest payments and that's a mistake on your part. If you can't understand that, think about your total loan plus interest costs over 30 years. You have that number in mind? Now imagine you won the lotto and want to pay off your house tomorrow. Do you have to pay that full amount with interest? Absolutely not. Does your bank allow you to SKIP those interest payments because you're paying early? Definitely.

If this is true in the full payoff scenario, why would it not be true for $10,000 or $50,000 or $100,000? If you pay off that part of the balance, you skip the associated interest payments - THAT IS WHERE THE BULK OF THE SAVINGS COME FROM.

Yes, the calculations are correct and over the course of the year following that $10,000 payment you'd save about $445 going forward. But where do you account for the savings from the payments you skipped? When I made a $10,000 payment, I canceled $21,000 worth of scheduled interest that will never have a chance to accrue on my loan. And I just showed you on the Bankrate calculator that it's also the case using an unbiased source of info. Are you about to account for that somehow?

So, the point is - if anyone is man enough to admit they are wrong - the real opportunity cost is missing out on a 60-100% ROI by NOT paying down your mortgage early and piddling around with stocks or other investments. But you know, maybe you don't have an extra $10,000 per year to just plunk on the mortgage. As Nick said, maybe more succinctly than I put it, the benefit of the HELOC strategy is that you don't have to calculate how much you can afford to pay extra toward your principal. And as I've said a million times, you can pay the extra principal, but maintain liquidity instead of having it locked up in your primary mortgage.

Most people will say that they have stocks because they can earn money, but they are liquid. Great, in this strategy you pay your mortgage down early and remain liquid by using a HELOC and get a much higher ROI. That sounds a lot better to me.

So you're trying to avoid opportunity costs, got it. Work this out with me, then. I made a post about an amortization calculator where I talked about making extra $10,000 principal payments each year and on the loan in their assumptions ($165,000 / 4.5% / 30y Fixed) doing so would save you roughly $100,000 and 20 years off of your mortgage, ie. you are paid off after 10 years. Go and check out the post and step by step instructions if you want to work it out yourself, but this is an accurate summary.

So, you make 10 x $10,000 ($100,000, obviously) payments over ten years and your return is $100,000 that you no longer have to pay to the bank. Obviously, a penny saved is a penny earned, so that's 100% return. How does a 10-20% ROI investment beat that? You're saying that paying down your debt only earns you 5% because that's the rate they stamp on your loan, but that's obviously not the case. It's a bankrate amortization calculator, so I'm sure it's accurate, but check it against another one. If you pay $100,000 of extra principal over ten years your return is $100,000 in interest saved, which is 100%. There's no investment that can compete with that, actually.

PS - I changed the assumptions to $225,000 / 3.75% and some other rates and making an extra $10,000 principal payment each year still results in $100,000 savings - 100% ROI. How could this possibly be confused for 5% ROI?

PPS - I moved up to $315,000 and it took 15 years at $10,000 extra per year, so $150,000 to get the $100,000 savings - 67% ROI. Moved down to $125,000 and it takes 8 years at $10,000 extra per year, $80,000 to get $63,000 savings - 78% ROI. Clearly nothing as paltry as 10-20% and trying to say it's a 5% ROI is ridiculous (no offense, but that's the truth).

Um, clearly I meant, "Chumble spuzz avocado table tennis mortgage interest". You have a PhD in rocket science math, but can't determine words no good? That's toobad.  

Well, we're not really getting anywhere, obviously, but I had a question for those of you that are in the nay column. According to you, using most of your discretionary income to pay down your mortgage faster is the better solution, so is that your personal strategy?

In other words, assuming that you don't want to be on the mortgage treadmill and waste a hundred thousand dollars and 15-20 years (depending on your mortgage terms and level of discretionary income, of course), do you actually employ the strategy of paying extra principal using your own discretionary income? If not, why not?

Thank you for proving my point in another way, Chris. You could pay extra principal every month, which would leave most people without any savings or you could do the same thing with the bank's money and maintain liquidity. Glad we could eventually get on the same page, no hard feelings from this end. Have a good one.

Right, "finally fleshed out" what I've said a dozen times while everyone was busy saying no no no math math math, just swapping debt, etc. I can go back and get my first post for you if you want, but that was the whole point - the difference between putting all of your discretionary income against your mortgage vs using cheap money to do the same thing. Benefits - don't have to save up / can do it right away, still have access to funds since it's revolving, etc.

But, you know.... math math math. Can't be any benefit to something if you don't have a formula that proves it. LOL Glad this is settled. Have a good one.

Listen, you guys, this is getting legit stupid now. Please do this for me. Go to the link below. There are already assumptions in the calculator. Please note the total interest with their assumptions is $135,971.07. They have a very standard $165,000 loan at 4.5% fixed 30 year - average mom and pop loan. And btw, also notice you're paying 82% interest on this loan. Ouch.

Now click on where it says "Add Extra Payments" and put 10000 in the middle one where it says "as an extra yearly mortgage payment occurring every" and click "Apply Extra Payments". 

Now scroll up and you'll see the new "Total Interest Paid" is $38,876.13. You can see that you've paid about $100,000 less in interest, correct?

Now click on where it says, "Show Amortization Schedule" and you can see that you've paid off this 30 year loan in 10 years. 

So, here's the grand finale question. If this looks attractive to you - Do you want to put all of your discretionary income into your primary mortgage to save the $100,000 and 20 years? I mean, assuming that you have a surplus of funds at the end of the month, do you want to lock them away in your mortgage to make this happen? Or would you rather use the bank's money to do it and pay about $50/month to maintain access to your liquidity? That's the only question about this scenario. If you want to save time and money on your mortgage (and it's fine if you don't, that's cool) then would you like to tie up your funds to do it or pay a nominal amount of interest on a HELOC to maintain some liquidity? It's that simple.

https://www.bankrate.com/calculators/mortgages/amo...