All Forum Posts by: Joshua S.

It's very simple, you get a second position HELOC to pay down large chunks of your mortgage $5-$10,000 at a time and then put all of your paychecks and bills against the HELOC and treat it like a checking account. As long as you are making more than you are spending the HELOC balance will come down over time and then when you get to zero you pay another chunk to your mortgage. There are a lot of naysayers on this, but it doesn't make any sense. Everyone will tell you that paying down your principal faster will save you on interest - the whole bi-weekly payment scheme is built on that premise and it's a very mainstream / accepted idea now.

The only difference here is that you are using the bank's money to do it and then paying them a small amount of interest on the HELOC account to make the whole thing work. If the HELOC was a huge cost then the whole thing wouldn't make sense, but it's not. To carry a $10,000 balance on even an 8% HELOC is about $66/month and if you are putting your paychecks toward the keeping the balance down throughout the month the cost is even less. Who wouldn't spend $40-$60/month to save thousands and years off of their mortgage??? And if you try it and don't like it, pay it off and let the credit line sit at zero and pay nothing. It's a no-brainer and really unfortunate that people don't get it.

Chris, sorry, but the rate is less significant than the total cost of the borrowed money. The ten grand sitting in my mortgage balance costs me $21,000 at this particular time on my loan. I know that for a fact because I can look at my amortization schedule and add up all the payments between my balances before and after my lump sum payment. It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413. Again, there's nothing controversial about this - anyone will tell you that paying extra principal will save you interest. You already know that. I eliminated those payments so the interest will never accrue on my mortgage.

All I'm telling you is that I'm doing it without dipping into my savings / emergency funds and at a cost of about $35/month to carry a balance on my HELOC. If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't, but you might want to reevaluate some things yourself. I do find it interesting, though, that you're so dead sure the strategy is "poppycock" when you clearly haven't tried it. The fact of the matter is it works like a charm and you're missing out because you don't know any better. But that's cool, too. Only trying to help! :)

I'm sure everyone is over this thread now, but I just wanted to say I think it's unfortunate that so few people understand it. They get stuck on interest rates and trying to work out the math, which most people suck at, and then think they are debunking it when they are misunderstanding it.

When you pay extra principal on your mortgage, you skip ahead on the amortization schedule and save on interest. Everyone knows this, it's not controversial. I took some of my own savings and paid it toward my principal to "test" the idea at first and even on my mortgage website it states that I skipped X number of payments and moved my payoff date up by a couple years. Then I checked the amortization schedule and confirmed how many payments I skipped over. When I added up the interest portion of all those skipped payments it came out to $21,000 in savings. Again, nothing controversial here and it was about 100% ROI.

Ok, so to understand this, just compare the two scenarios. You could simply pay extra money toward your principal. The upside to doing it this way - there are no costs involved. Cool. Downsides - you are using your own funds, more than likely eating into your emergency / investing money, and taking time to save the money. That doesn't sound too bad. If you can do it this way, great, but most people barely have any savings / emergency funds, so asking them to save AND pay extra toward their mortgage is not realistic. Next downside - doing it this way means you can't get your money back (without selling or refinancing). The consequences are obvious. You want the benefits of paying your mortgage early, but have to put up with the risk of not having access to your funds when you need them.

Now look at the HELOC scenario. Upsides - you don't have to wait to save up the money. You take money out of the HELOC and put it on the mortgage. Done. Savings. Next upside - even though you put the money against your mortgage, you essentially still have access to it since it's a revolving credit line. If you need emergency funds they are there for you. Again, there is nothing controversial here, you're essentially doing when you did in the other scenario, you just borrowed against a credit line to do it. Now the one downside - cost. The monthly cost of the HELOC using worst case scenario numbers (your HELOC is 8% interest and you took out $10,000 and then had a brain fart and forgot to do the rest of the strategy) is $66.00/month. If you get a better interest rate and keep your average daily balance lower as the strategy suggests, it's actually more like $20.00-35.00/month. Either way, most people spend at least that much dining out each month, it's a nominal fee.

So, the question is, if someone told you the fee for an investment was $35/month and you could put in $10,000 and get $21,000 back, would you do it? Yes, obviously you would do it. The best part about this strategy is that you just change the way you are banking and don't even have to change the way you spend as long as you have more coming in than going out. You pay off the $10,000 over the course of the year and then you do it again, saving thousands and years on your mortgage. And on top of all this, the next regular mortgage payment (after you skip the 20 payments) is typically $35 lower, anyway, so the strategy literally pays for itself. The strategy works, I'm telling you from personal experience. There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not. The true cost (at least on my loan) is 67% over 30 years. It says the true cost on your mortgage, check it yourself. Or think about it this way. The interest portion of the first 15 years of your mortgage is twice as much as your principal. How on earth is that cheap money? No way I'm sticking to their schedule or using all my emergency funds to pay it off early, so the HELOC strategy is obviously the best way to go. The only possible way you wouldn't want to do this is if you misunderstand it. Thanks.