It's a dumb idea that pops up from time to time from some BS guru types. The basic reality is.....instead of using your extra Monday each month to pay back a heloc loan you borrowed to pay down your mortgage.....simply use that extra money each month to directly pay down your mortgage. All the other hype about simple verses compounded interest gobbledygook is just total BS.
I gotta say, I've been scratching my head trying to figure out what to do with the $10k I HAVE to spend on my HELOC in order to get a deal on closing...
Putting it onto my 1st mortgage seems like a no brainer. 1st mortgage is 2.5% 5/1 ARM. HELOC is 1.99%.
So I'll just put $10k of HELOC towards principal on my 1st mortgage ($220k remaining). This should save me interest... I used this calculator that allows a prepayment option: http://www.hsh.com/mortgage-calculator.html
1) My figures with regular payments (I pay more, but to keep it simple I'll just figure it at minimum payments):
a) Total Interest Paid: $102,229.33
b) Total of 360 payments: $344,229.33
c) Payoff date: Aug 2046
2) My figures with regular payments PLUS HELOC prepayment of $10k on month #11:
a) Total Interest Paid: $91,944.58
b) Total of 360 payments: $333,944.58
c) Payoff date: Nov 2044
So it seems like a no brainer... By using $10k of my HELOC to pay off $10k of my mortgage, I'll save pretty big:
102,229.33 - 91,944.58 = $10,284.75 saved in total INTEREST paid.
344,229.33 - 333,944.58 = $10,284.75 saved in total PAYMENTS paid.
Paid off almost 2 years sooner. All from a one time prepayment of $10k from a HELOC.
Here's the downside: I now would owe $842/mo for 12 months to payoff my HELOC in a year. Interest paid on my HELOC for the next year to payoff the $10k = $104 (not including any fees). That's $842 * 12 = $10,104 I'm paying towards my HELOC each month, instead of my mortgage. BUT, this seems better to me than just slowly putting an extra $842 towards principal each month. The sooner it goes towards principal, the more interest I'll save each time it gets calculated, right?
So to recap: I spend some money getting a HELOC (closing fees) and interest to pay it off ($108). I save myself $10,284.75 in INTEREST, $10,284.75 in total PAYMENTS, and payoff my 1st mortgage 2 years sooner!
Now let me be clear, I'm a total rookie at all of this and am still trying to determine if I'm making any errors here in my logic. If I'm wrong, PLEASE tell me before I follow through on this.
I know it's an old thread, but the issue doesn't seem fully resolved. Everything @David Dachtera has said makes sense to me. Yet he has fewer votes than his counterparts in this thread. Let's get to the bottom of this instead of leaving it unresolved :)
Thanks,
Cliff
Actually.. Just reread what you wrote. You won't save 10k or whatever you're thinking. The reason this HELOC strategy "works" is because you're paying more on your initial loan, not because of some magic with switching debt to a HELOC.
Simple example: Mortgage payment is $1000. You then use a HELOC to pay down mortgage principal. Now you have a $100/mo HELOC payment. Now you're paying $1,100 per month. The result would be nearly the same if you just paid $1,100 to the mortgage and skipped the HELOC.
Only difference in amount paid at the end of the loans is the interest rate differential which won't be much on $10k.
I'm not going to reopen this discussion just because you don't understand simple arithmetic.
The FACT is it DOES work - it's even taught as part of financial education in many countries around the world, Australia and New Zealand not being the least of them.
Perhaps you'd like to approach the leaders of the educational systems in those countries and explain to them why what they teach - and what their people do as a matter of financial course - doesn't work.
What does that have to do with anything?
Where should I forward the spreadsheets proving it DOES work?
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!
What does that have to do with anything?
Where should I forward the spreadsheets proving it DOES work?
I posted several blowing holes in every new variant of this scheme you dreamed up.
I used to build depreciation amortization tables for billions of dollars of assets, was head of balance sheet policy (large chunk of which was amortization) at a Fortune 50 company, and am currently a data scientist doing math literally all day. You are wrong.
You only ever provided the first few months of an amortization schedule as your "proof". You completely ignore the additional interest and principal paid on the HELOC over the life of the loan.
What does that have to do with anything?
Where should I forward the spreadsheets proving it DOES work?
I posted several blowing holes in every new variant of this scheme you dreamed up.
I used to build depreciation amortization tables for billions of dollars of assets, was head of balance sheet policy (large chunk of which was amortization) at a Fortune 50 company, and am currently a data scientist doing math literally all day. You are wrong.
You only ever provided the first few months of an amortization schedule as your "proof". You completely ignore the additional interest and principal paid on the HELOC over the life of the loan.
Not even close. Review my post above and try again.
What does that have to do with anything?
Where should I forward the spreadsheets proving it DOES work?
I posted several blowing holes in every new variant of this scheme you dreamed up.
I used to build depreciation amortization tables for billions of dollars of assets, was head of balance sheet policy (large chunk of which was amortization) at a Fortune 50 company, and am currently a data scientist doing math literally all day. You are wrong.
You only ever provided the first few months of an amortization schedule as your "proof". You completely ignore the additional interest and principal paid on the HELOC over the life of the loan.
Not even close. Review my post above and try again.
The two examples you need to compare are:
1. Paying an extra $15k per year towards your mortgage and
2. Using a HELOC to pay down your mortgage $15k per year, then paying off your HELOC.
The two yield essentially identical results. Obviously plunking down an extra $15k pays down your mortgage faster. The debt vehicle you choose is irrelevant.
What does that have to do with anything?
Where should I forward the spreadsheets proving it DOES work?
I posted several blowing holes in every new variant of this scheme you dreamed up.
I used to build depreciation amortization tables for billions of dollars of assets, was head of balance sheet policy (large chunk of which was amortization) at a Fortune 50 company, and am currently a data scientist doing math literally all day. You are wrong.
You only ever provided the first few months of an amortization schedule as your "proof". You completely ignore the additional interest and principal paid on the HELOC over the life of the loan.
Not even close. Review my post above and try again.
The two examples you need to compare are:
1. Paying an extra $15k per year towards your mortgage and
2. Using a HELOC to pay down your mortgage $15k per year, then paying off your HELOC.
The two yield essentially identical results. Obviously plunking down an extra $15k pays down your mortgage faster. The debt vehicle you choose is irrelevant.
Not Entirely.
Remember: check with your tax accountant - HELOC interest may be deductible. Also, use of the HELOC and paying it down helps support your credit profile and your credit score. Again, consult your tax accountant.
I know about this method of rapid principal paydown using your HELOC. To make this work you have to be good at saving money. If you are not it will not work. I also recommend using it if you can pay the HELOC off relatively fast. Probably like within 6-12 months. Keep in mind, you are still making your mortgage and HELOC payment until HELOC payoff. Then you can do another chunk towards your mortgage. It does reduce interest for bigger, longer loans but you have to be super disciplined. Good Luck!!
The way around that is to arrange to have your paycheck direct deposited into your line of credit. You do need to have a surplus at the end of the month in order for this to work. Eventually, the LOC will pay down and you can draw from it and throw the money at your home loan. In the meantime, the paydown of the LOC every pay period helps you reduce the interest you pay on the LOC.
HELOC may be limited to a small number of transactions every month so some other LOC may be more useful. Check with your lender.
What does that have to do with anything?
Where should I forward the spreadsheets proving it DOES work?
I posted several blowing holes in every new variant of this scheme you dreamed up.
I used to build depreciation amortization tables for billions of dollars of assets, was head of balance sheet policy (large chunk of which was amortization) at a Fortune 50 company, and am currently a data scientist doing math literally all day. You are wrong.
You only ever provided the first few months of an amortization schedule as your "proof". You completely ignore the additional interest and principal paid on the HELOC over the life of the loan.
Not even close. Review my post above and try again.
The two examples you need to compare are:
1. Paying an extra $15k per year towards your mortgage and
2. Using a HELOC to pay down your mortgage $15k per year, then paying off your HELOC.
The two yield essentially identical results. Obviously plunking down an extra $15k pays down your mortgage faster. The debt vehicle you choose is irrelevant.
Not Entirely.
Remember: check with your tax accountant - HELOC interest may be deductible. Also, use of the HELOC and paying it down helps support your credit profile and your credit score. Again, consult your tax accountant.
Mortgage interest is also deductible. The original question in this thread was if there's some way to use a "HELOC to pay down your mortgage FAST." There is absolutely nothing about a HELOC as a debt vehicle that allows you to pay off your mortgage faster than just paying more towards your principal would accomplish.
Early in this thread you had a million cockamamie theories for why this idea worked that simply weren't true. Now you're just giving examples of how to pay extra towards your principal every month/year with your HELOC as a pass through vehicle. No reason to do that. It's mathematically pointless.
Mathematically? Maybe...
In human terms? Works much better than trying to force yourself to do something else. See my reply to Ben Dao.
... but, if you need to be right, I'll concede that much. A savings account would work just as well, without the tax benefit. You could just let the money build up in your checking account. You could take your pay in cash even and let the surplus build up in a wall safe or something. As long as you have the self discipline to not raid that reserve for fun and pleasure, go for it.
Mathematically? Maybe...
In human terms? Works much better than trying to force yourself to do something else. See my reply to Ben Dao.
... but, if you need to be right, I'll concede that much. A savings account would work just as well, without the tax benefit. You could just let the money build up in your checking account. You could take your pay in cash even and let the surplus build up in a wall safe or something. As long as you have the self discipline to not raid that reserve for fun and pleasure, go for it.
If someone has trouble managing their money, then a HELOC is not the solution. Giving someone a huge line of credit doesn't help them save money. It just gives them a larger reserve to raid. There are people promoting this HELOC method and it is a scam used to extort money from people who can't figure out the math.
HELOC is not a method to pay down your mortgage faster.
No one ever said a HELOC was a METHOD to pay down a mortgage faster. Everyone knows that it isn't.
A big balance in a checking or other deposit account is a MUCH greater temptation to "raid".
There is no "silver bullet" to solve financial problems - no one ever said there was.
... and no, it's not a scam - it's a proven method and it works. Some folks DO try make it a scam - it's not in and of itself. Shall I send you the spreadsheets which prove it? BP's forum won't let me attach them to a post.
No one ever said a HELOC was a METHOD to pay down a mortgage faster. Everyone knows that it isn't.
A big balance in a checking or other deposit account is a MUCH greater temptation to "raid".
There is no "silver bullet" to solve financial problems - no one ever said there was.
... and no, it's not a scam - it's a proven method and it works. Some folks DO try make it a scam - it's not in and of itself. Shall I send you the spreadsheets which prove it? BP's forum won't let me attach them to a post.
Last time we had this debate you sent me a Youtube link, which was a scam and I debunked. It is all in this thread. Mathematically it works out no different to use a HELOC than to just make similar extra payments. The point is you do not need a HELOC.
As far as having $5000 in a bank account being more risky than a $50K credit line on a HELOC, call the Dave Ramsey Show and ask him. He is more qualified than either of us to give advice on that.
I guess, like Chris May, you need to be right, too. So be it. Have it your way.
I know it works, I proved it works, and I can send the evidence to anyone who wants it. They don't even need to buy anything. It's free.
'Nuff said.
Being a Credit Literacy advocate among other things, I don't hold with much of what Dave Ramsey preaches. One good idea he does push is the Debt Snowball (not sure where it originated. In fact, it looks like a rehash of Primerica's debt stacking strategy). I even included that in my "Debt Strategies" presentation that I give at local events.
I guess, like Chris May, you need to be right, too. So be it. Have it your way.
I know it works, I proved it works, and I can send the evidence to anyone who wants it. They don't even need to buy anything. It's free.
'Nuff said.
Being a Credit Literacy advocate among other things, I don't hold with much of what Dave Ramsey preaches. One good idea he does push is the Debt Snowball (not sure where it originated. In fact, it looks like a rehash of Primerica's debt stacking strategy). I even included that in my "Debt Strategies" presentation that I give at local events.
Are you talking about evidence like this example you provided earlier in the thread:
...and you're still not doing the numbers right. Try this:
For this example, let's say you have a 1st mortgage at 3% for 30-years where the principal balance is $150,000.
Now, suppose you have a HELOC with a $35,000 limit, 3.75%, interest only. Take $3,000 off the HELOC and apply it to the 1st mortgage.
Look at your amortization schedule find the point where the principal balance is close to $147,000 plus the interest portion of the payment due that month. How many 1st mortgage payments did you just skip? How much interest will now not pay on the 1st mortgage?
Let's say you can afford to pay $300 plus that month's interest back to the HELOC every month. That means you're able to accumulate $3,000 every 10 months and "throw it" at the 1st mortgage.
A. How much interest will you not pay on the 1st mortgage after it's paid off?
B. How much interest will you pay on the HELOC while carrying and paying down that $3000 balance during this process?
What is the difference between A and B?
That difference is your total interest savings. (Hint: it's at least 5 figures, possibly six depending on the 1st mortgage balance and how long it's been open when you begin the process.)
*THAT* is what mortgage acceleration is all about: Reducing the total interest paid while reducing the number of payments.
See my post in this page from 29 days ago (as of August 9th, 2017).
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!
This has nothing to do with a HELOC, it is the extra principal payments that accelerate the load pay off. You would get the same affect by paying an extra $1250 per month directly to your primary loan. Actually it would cost you less because of the 5% rate versus 7%. Paying down a lower interest rate loan with a higher rate loan makes no sense. This example is totally different than the one you were arguing a year ago. The one I just posted for you.
Here is an example of acceleration. Take out a $200,000 loan and pay an extra $200,000 principal payment in the first month. You will save $186,000 in interest and pay it off immediately. I know it sounds ridiculous, but do you see my point? It is the principal payment that saves interest, not the HELOC. Interest in a HELOC and conventional mortgage are calculated identically.
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!
This has nothing to do with a HELOC, it is the extra principal payments that accelerate the load pay off. You would get the same affect by paying an extra $1250 per month directly to your primary loan. Actually it would cost you less because of the 5% rate versus 7%. Paying down a lower interest rate loan with a higher rate loan makes no sense. This example is totally different than the one you were arguing a year ago. The one I just posted for you.
Here is an example of acceleration. Take out a $200,000 loan and pay an extra $200,000 principal payment in the first month. You will save $186,000 in interest and pay it off immediately. I know it sounds ridiculous, but do you see my point? It is the principal payment that saves interest, not the HELOC. Interest in a HELOC and conventional mortgage are calculated identically.
Joe, I suspect David knows he's wrong and is just trying to save face. His claim as to why this works has changed so many times that he has to know. At least I HOPE that's the case after all the ridiculous twists this has taken.
Now he's claiming it isn't a "method" at all. It's no longer about using a HELOC to pay off your mortgage faster and save interest (even though that's what the title of the original post is). Now it's a method of financial discipline, the objective of which is still unclear to me cause we're still talking interest savings for some reason.
Hurts my brain.
Mathematically? Maybe...
In human terms? Works much better than trying to force yourself to do something else. See my reply to Ben Dao.
... but, if you need to be right, I'll concede that much. A savings account would work just as well, without the tax benefit. You could just let the money build up in your checking account. You could take your pay in cash even and let the surplus build up in a wall safe or something. As long as you have the self discipline to not raid that reserve for fun and pleasure, go for it.
Ahh. David. I just noticed something else you said that's patently false. In the example we were discussing here, using a savings account vs a HELOC are NOT the same despite the "tax benefits". This tells me you're still not getting it.
The HELOC is just substituting interest to one debt vehicle for another. There are no tax savings. You're either deducing mortgage interest or HELOC interest. And if you're using a savings account there's no interest at all and therefore nothing to deduct.
I mean this in all seriousness... respectfully, if this is a topic that interests you, I suggest getting an AA at a community college in finance/accounting. It sounds like you're regurgitating sound bites from books and YouTube without really understanding the underlying concepts.
@Joe Splitrock and @Chris May,
I know I'm right. I've proved it over and over and over and over. Anyone who wants the proof can have it - I'll send it to them. Just PM me your e-mail.
It NEVER was about the HELOC - that's only one option. I've said that over and over.
In fact, you've seen me mention in other threads Mark Kohler and @Mat Sorensen who are partners in KKOS Lawyers (and accountants - Mark is a JD and a CPA). If you don't believe me that it works, ask them. THEY will explain it to you.
No one is saying to substitute anything. You guys are reading what you want to read and not what I wrote. So be it. I give up.
It has ALWAYS been about reducing how much interest you pay by paying off principal in big chunks or small pieces.
... but, you guys need to be right for some reason.
So, here it is: you're right.
Happy now?
@Joe Splitrock and @Chris May,
If you look at nothing else (which I STRONGLY recommend), look at this post:
@Joe Splitrock and @Chris May,
If you look at nothing else (which I STRONGLY recommend), look at this post:
For the sake of clarity, assuming we haven't had any discussion so far and this is the first time we're talking about this... Give us a two paragraph elevator pitch for what you're advocating.