All Forum Posts by: Joshua S.

I'm confused about your use of the term "rather". Taking a $10K chunk of one of my HELOCs or my PLOC and using it to pay down my primary residence faster doesn't stop me from buying rentals. If you can only do one or the other you got bigger problems to worry about. :-D 

Ok, I think I see the problem.

Scenario 1: "Man, I wish I could put more against my mortgage, but I usually only have a couple hundred or a thousand left over in checking at the end of the month and I don't want to tie that up where I can't get it back in case something comes up."

Scenario 2: "I'm so glad that I use this HELOC checking account strategy, because it allows me to put all of my income against my mortgage. Even though I only have a few hundred or a thousand left over at the end of each month (same as above), it all goes toward my mortgage and I can still take it out if something comes up, so it's the best of both worlds."

Can you see a difference between those two things? You're not "paying down" the HELOC, you're putting all of your money toward it every month and paying your bills out of it every month. Assuming that you make more than you spend, it naturally comes down over the course of the year. The so-called "EXTRA" money can be a very small amount, but still go toward the mortgage in this strategy whereas a person with a very small amount left over in their normal checking account isn't going to throw that at the mortgage. The strategy allows you the freedom of putting all of your income toward the mortgage without having to worry about leaving yourself short.

Yes, feel free to read about all the theories and ideas elsewhere and then when you want proof that it works you can come to this thread and see all my updates with statements and stuff. That's a good idea. I mean, I'm showing everyone my amortization schedule and my latest statement so they can see my current balance and how different it is from where I should be. You can beat the ideas all to death and talk in circles about what you "think" is wrong with the idea, but I'm actually doing it and I'm offering proof. How would you suggest that I paid an extra $58K toward my mortgage over the last three years, btw, if it's not the strategy working? Did I win the lottery and somehow not notice? Am I independently wealthy and very forgetful? Did my wife and I get $60K worth of raises and then get hit in the head with paint cans by Macaulay Culkin or something? Let me know how you think this could have happened, I'm super interested in your theory.

Go look at my amo table and my statement a couple pages back and you can see a $58K difference. That's all I'm trying to provide here - my experience with it and proof that it works. If you're not interested that's great, you're welcome to blindly criticize or kiss off or whatever you want to do. Other people might look at the proof I'm providing and realize that it holds more weight than what people "think" will happen, so I'm posting for anyone who might be into that. So, yeah, you could call it reinventing the wheel to offer proof that I'm doing it and how well it works instead of offering words and spreadsheets about what I think would happen. I like it. Reinventing the wheel, that's me. LOL 

Anyway, please, PLEASE let me know your theory on how I came up with an extra $58 grand, though, because if it wasn't through this strategy, I'm going to need your help to figure out how to do it again! Thanks.

Yes, I know I'm paying principal. I've been explaining that over and over. That's the whole point of a mortgage whether it's a fixed first or a HELOC. What I have been saying is that my "cost" is $1000/year worth of interest on the HELOC. Pretty funny that you're saying I'm the one who doesn't understand. LOL

Good luck to you, too!

Awesome, now we're getting somewhere. You have a fundamental misunderstanding of the strategy, so if you're willing to listen, I can clear it up for you.

You're not putting the money on the HELOC and letting it sit there, you're basically using the HELOC like a checking account. At the start of the month you have $90K on your mortgage and $10K on the HELOC. Then in a week or two you get paid and the HELOC goes down to $7000. A couple more weeks go by and you get paid again so you are at $4000, but you also get your regular bills - mortgage, car, electric, water, phone, etc. and your balance goes back up to $9000. For the full month, you paid off $1000 total, but your income also held down your average daily balance to $7000, let's say. So, instead of paying interest on the entire $10K, you pay interest based on $7000. Then as you repeat this every month, your HELOC balance dwindles (because you make more than you spend), but you are only paying interest based on the average daily balance each month, which is less than the $10K, because your income is holding it down temporarily. That's the strategy. I don't know where you got the idea that you just let the HELOC sit there, that's contrary to the entire point of what you're doing. The strategy is that you're essentially using the HELOC like an inverse checking account. Income goes in, bills come out. At the end of the month the balance should be less AND throughout the month the balance was being held down by your income while you were waiting for bills. When you're talking about 'just paying extra principal', most people don't have the money for that, as I said, AND doing that won't hold your mortgage balance down temporarily while you wait for bills.

People don't realize it, but you pay your mortgage based on the average daily balance. The problem is that you can't put all of your income toward your mortgage to hold your ADB down and then get it back out to pay your bills. That's why you use a HELOC to accomplish the same thing. You sort of "install" this small portion of your mortgage that you CAN put all your money toward and then get it back when you need it. And whatever is left over automatically stays on the mortgage every month, so it works both ways. If your car breaks down or whatever maybe your balance doesn't go down that month, but you'll always be in a better position than if your money was sitting in a checking account doing nothing. And remember, all of this is going on while you're still paying your regular mortgage payments, but because you paid early principal your principal / interest ratio next month goes from $172.03/$249.57 to $197.03/$224.57 and your regular payments are putting more toward principal, too. Every month you're able to keep $25 more dollars in your pocket instead of spending it to interest and you've shortened your mortgage by years just by changing the way you pay.

So, look. I'm the case study and I'm telling you flat out that even at 8% or whatever my crappy rate is, I STILL only pay $1000/year ($83/month) to do this whole thing and I'm not even great at it. But this is why I've been telling you to focus on the cost vs return - imagine someone wanted to give you $13K (lottery, gift, whatever), but you had to buy a $1000 plane ticket to go pick it up. Would you turn it down because there's a cost involved? No, any idiot can see that it's well worth the $1000 plane ticket to go get 13x that much. That's what I'm doing here. I'm paying about $1000 each year to put around an extra $20K/year on my mortgage, which saves me a ton on interest. In your example, it's the $13K savings, but my mortgage is over twice that large at this point, so my savings probably dwarf that and I'm also shortening my mortgage by years. The cost of the HELOC is more than covered by what I'm saving, that's why it's a non-issue. Of course if I was just taking a portion of my mortgage and putting it on a HELOC and letting it sit there, then you can assume I'm just paying more interest toward the HELOC than I would have toward the mortgage, but that's not what we're talking about. The bottom line is that I'm saving a ton of money by keeping all of my income focused on my mortgage and it costs me $83/month to do it. I know people that spend that on getting their cars detailed. It's nothing compared to what I'm saving. This makes more sense, right?

Sorry, Mike. I know all this, but you're not looking at the total cost, which is more important.

1. Just paying extra principal is not part of the discussion. Most people don't have a ton of extra money lying around - they are looking for other ways to go about things. This strategy works for someone who has very little disposable income. Simply paying additional principal does not. Most people don't even have $400 saved up for an emergency, so they aren't paying extra principal, but that CAN do this strategy without an extra outlay because they're simply shifting debt from one place to another and paying it differently.

2. Total interest charges paying off the $10K on the bank's schedule: $13K over 5 years.

3. Total interest charges paying off the $10K on the HELOC: $1K over 1 year.

That's it. Those are the real world facts in this scenario that matter, not what rate you're paying and so on. You're not talking apples to apples. Line up your mortgage numbers on an amortization calculator and put in an extra $10K payment and see how much interest it would save you. Then calculate how much it would cost you to pay off on a HELOC where all of your income goes toward it. Those are the only two numbers that matter - how much you save and how much it costs to do it. Unless you want to talk apples, you might as well tell me who your favorite girl bands are, because we're having two different discussions. I always liked The Breeders.

Good luck with that. At some point you'll find out that you can't live in a mutual fund which is a pretty funny thought, so I hope you do it. You and the wife still paying on the house in 25 years calling your broker to see if you can retire and move into the mutual fund. Ah, I slay me! Anyway, once again, it's not about where to invest your money for a 3% or an 11% return. You think that's the discussion, but it's not. As I illustrated to the other gentleman - using his example of a $100K loan at 3%, you actually pay $13K worth of interest as you pay down your initial $10K. That's 130% interest when you work out your ACTUAL cost. Not per year, obviously, but it takes just under 5 years and you pay 130% interest in total to pay down that $10K if you do it on the bank's schedule.

So, since you guys are all about investments and that's the only thing you are willing to compare this to, let's do it! When you put that $10K into your mutual fund you'll end up with $16,850 (your initial $10K + $6850) after 5 years at 11%. Not bad - a 68.5% total return over that time. Let's see how I did. 

When I put the $10K into my mortgage I end up with $23K (my initial $10K + $13K interest savings). So, I ended up with that 130% return I talked about. That's obviously almost double your return, but that's not all:

1. I leveraged debt in the HELOC to make this happen and you were using your paychecks, which is obviously less efficient. Notice I didn't TAKE ON MORE DEBT, I simply moved debt from one vehicle to another and leveraged a different payment method to get my savings.

2. You have to hope for 11% and my return is automatic and locked in, because it's savings on interest that's already scheduled. Obviously, the risk might be worth it if you were getting a better return, but I already showed that you didn't.

3. Your money had to work for 5 years to make that return happen and my money immediately saved me the $13K when I skipped over those payments on my mortgage. And over the next 5 years - because I'm making the same regular monthly payments either way, that $13K that I saved on interest is now going toward my principal earlier than it would have, which saves me even more money. 

4. The money I'm paying to my mortgage was going there, anyway, so I'm really not even making an investment, I'm just changing the timing of my payments. So, you took on risk to get your returns and I didn't but still had a greater return. In other words, my "returns" are really just $13K worth of free money for flipping a couple switches and paying in a different way. You can't beat that no matter what your return is, because you're using capital and taking on risk. PS - I'm totally liquid, btw. I have a HELOC, so when I want money out of my house I just take it out.

Anyway, sorry if I hurt your feelings or anything, but it's a bit annoying to try to help people and have them bash you and refuse to listen, so I get a little carried away sometimes. It's astounding, the closed-mindedness that people exhibit, especially on an "Innovative Strategies" forum, so it gets a little frustrating, but I'm sorry if I was rude or anything. You can just chalk it up to passion, I don't mean it personally against you. To answer your question, though, no my argument doesn't sound stupid at all. There are probably benefits or aspects of the strategy that I haven't even thought of yet and buying a mutual fund is so basic that it's hard to believe I'm comparing the two. I'm honestly only doing it, because people refuse to see this strategy for what it really is, but when you compare it to a typical investment it actually makes me feel guilty about how much better it is. I think that's why I speak out about it so much, I feel a kid with his hand in the cookie jar and I'm trying to share the wealth or whatever. You should take a look at the screen shots I posted if you haven't already - I've put an extra $58K on my mortgage over the last three years doing this and there's no way you could put that amount toward a mutual fund. According to the bankrate calculator I posted earlier that $58K extra toward my $315K loan, it's saving me around $100K in interest, which is hard to believe. Anyway, good luck with the mutual fund if you go that way. :)

Well, maybe you're done talking now, but hopefully you get it. I think the problem is that people think the $10K is just costing them "3%". The thing is, you're also paying interest on the entire loan balance, so it's costing you way more time and money that that. If you look at the amo table in your example you see that it takes 54 months (almost 5 years!) to pay the $10K down by the bank's schedule and that costs you an average of $238/month for a total of $13K.

In other words, you're paying off that $10K around Sept of 2025 after paying $13K worth of interest charges to get there, which is 130% interest when you look at your actual cost. I can pay off the $10K in between 6-10 months for less than $1000 on my HELOC. The difference is that I'm skipping over those amortized interest payments by giving the bank's money back sooner, so I'm annihilating. Every month I'm putting all my cash flow against that $10K to bring it down asap. Again, yeah, if you have $10K extra lying around every year then you could get similar results, but you might as well wish for a pony. Most people don't have the money lying around, which is why we're hacking and thinking outside the box in the first place.

Yes, I understand how the math works out, but this will make it even simpler. 

When I put in an additional principal payment of $10K into your example, it shows just under $13K in interest savings. That's if I do nothing else, but since I'm making the same payments either way, that's also $13K that will go toward my principal faster than before, which accelerates the pay down faster and so on. You can think of it like a snowball effect. 

You're saying that because I pay around $1000/year ($83/month) to run the strategy, that cancels out my $13K savings? 

Sorry, but I don't know how to make it any clearer, so maybe pictures will help. :) As you can see from my amortization schedule as of January I should be at a balance of $287K and as you can see from my corresponding statement I'm at a balance of $229K. That's a difference of about $58K (and I have more to put on there soon, but I have been waiting to see what will happen with my taxes). We bought the house in the summer of 2016, started the strategy in May of 2018. I guess you have to take me on my word that I haven't had $20K extra per year for these last 3 years lying around to put on the mortgage, but it's the truth and.... you know.... pretty believable. If you notice, I'm paying almost $200 less in interest per month ($700 vs $900) than I should be according to my amortization schedule. That's not magic. Since I'm paying them back early using the HELOC my principal / interest ratio is skewing in my favor. A couple more years and I'll be at the tipping point where I'm paying more to principal each month and then I'll REALLY take off. Normally it would take about 13 years to get to that point and I'm not skipping lattes or anything, it's just a more efficient way to pay.

The whole thing has nothing to do with arbitrage or rates. If someone handed you $50K tomorrow and you put it on your mortgage, you skip down to that point in your amortization table on your next payment. That means that all of the corresponding interest that you would have paid (ie. for all those months you skipped), you saved that amount on interest. Again, that's the same whether you use a HELOC to do it or lottery winnings or whatever. I'm giving my mortgage lender the money early, so I'm skipping the corresponding interest payments ($917.94 + $916.25 + $914.56, etc. in that middle column there), which saves me tens of thousands of dollars. The whole thing "costs" me about about $1000/year in interest on the HELOC and I actually have a crappy rate as you can see below. The "cost" of my $1K in HELOC interest is obviously covered by my savings, so net net I come out way ahead. If you find yourself struggling with this idea, just do it yourself. Go to this bankrate calculator and plug in your numbers and add in an extra $20K principal payment for your first year and see how much you'd save on interest. When I put the $20K in the interest jumps down about $40K. Now ask yourself if paying $1000 to get that savings would be worth it. You ever pay extra to insulate your house better so you can save on heating costs or anything? Same idea. Once again, NOT doing any scrimping and saving or doing any voodoo, it's just the effect of skipping over interest payments they can't charge you for, because you gave the money back early. Hope this helps.

https://www.bankrate.com/calcu...