Originally posted by @Gary Floring:
his TOTAL Interest Rate over the life of the loan is 67%. If that is the case, then the interest rate during the first few years of the primary mortgage must actually be well above 67%, since the P&I monthly payment is overwhelmingly interest, not principle.
The total interest rate over the life of the loan is 67% assuming you stick to the standard fixed monthly payment each month, correct. Meanwhile, each year's interest payment is only on the remaining loan balance remains. If you start a fixed 30-year $200,000 loan balance at 5% interest that you owe the bank, you will pay 5% worth of interest every year whatever the loan balance is that year, so the first year would be $10,000 of interest (about $833 per month in interest). If you immediately pay off your $200,000 mortgage right away, according to what otherwise would have been the typical 30-year payment schedule, you will have saved $186,512 in interest - great job! Unfortunately, you just paid the $200,000 mortgage off with a 5.5% HELOC which typically only require interest payments (meaning technically you never have to pay off the balance); instead, you can just pay monthly interest payments of $916 in perpetuity. Of course, you wouldn't do that and you would want to pay off the actual balance since the interest rate is based on whatever the balance is.
I understand your mindset of jumping up the mortgage pay scale to have the fixed monthly payment go more toward principal. When you immediately pay off $10,000 toward principal of a 5% interest rate mortgage, every year you continue that mortgage - say the full 30 years assuming you made an initial extra payment of $10,000 the first month of the mortgage), you save 5% on that $10,000 ($500) each and every year because you no longer have to pay what would have been $500 interest on that $10,000 loan portion amount x 30 years. So everyone agrees that whatever extra you pay off toward the mortgage loan will save you that interest rate each and every year that you have left and continue to pay that mortgage down, just like if you paid off the entire $200k balance from the get go compared to the traditional 30-year amortization schedule. If you pay it all off and (transfer) it all to the HELOC, you still have the HELOC balance and whatever that HELOC interest payment is. When you pay just $10,000 of the mortgage loan off and (transfer) that $10,000 portion to the HELOC, you still have that HELOC balance and whatever that interest payment is. Yes, assuming you stay in the property and finish that 30-year mortgage all the way, you will have saved the interest on that $10,000 portion each and every year. If you keep it in the HELOC for 30-years, you'll still pay the interest on that portion each and every year anyways. But what you're saying you want to do is more quickly pay down the HELOC in ten months let's say - ok great, you'll save money because you won't be paying interest on that balance. But you could've just paid all of your extra money to the mortgage loan balance in the first place which is the same thing. But you want the benefit of being able to withdraw when you want which increases back the loan balance - ok fine - that will cost you not too much via a higher HELOC interest rate.
