Use HELOC to paydown mortgage fast

415 Replies

Originally posted by @David Dachtera :

@Chris May,

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?

Originally posted by @David Dachtera :

@Joe Splitrock and @Chris May,

If you look at nothing else (which I STRONGLY recommend), look at this post:

https://www.biggerpockets.com/forums/49/topics/329076-use-heloc-to-paydown-mortgage-fast?page=11#p2872248

 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. 

Originally posted by @David Dachtera :

@Joe Splitrock and @Chris May ,

If you look at nothing else (which I STRONGLY recommend), look at this post:

https://www.biggerpockets.com/forums/49/topics/329076-use-heloc-to-paydown-mortgage-fast?page=11#p2872248

Are you just trying to say that making extra principal payments results in your loan being paid off faster and less interest being paid? That seems fairly obvious and you really don't need to use a spreadsheet to prove that.

Where I get hung up is your example of paying down a 5% load with a 7% HELOC. There is no financial benefit in paying off a lower interest loan with a higher interest one. You are just incurring more interest. If the HELOC had a lower interest rate there would be some benefit.

The interest savings comes from paying an extra $15,000 each year. Of course you will pay a $200k loan off in under ten years by making an extra $150k in payments over those ten years. It is the principal, not the HELOC.

Originally posted by @Joe Splitrock :
Originally posted by @David Dachtera:

@Joe Splitrock and @Chris May ,

If you look at nothing else (which I STRONGLY recommend), look at this post:

https://www.biggerpockets.com/forums/49/topics/329076-use-heloc-to-paydown-mortgage-fast?page=11#p2872248

Are you just trying to say that making extra principal payments results in your loan being paid off faster and less interest being paid? That seems fairly obvious and you really don't need to use a spreadsheet to prove that.

Where I get hung up is your example of paying down a 5% load with a 7% HELOC. There is no financial benefit in paying off a lower interest loan with a higher interest one. You are just incurring more interest. If the HELOC had a lower interest rate there would be some benefit.

The interest savings comes from paying an extra $15,000 each year. Of course you will pay a $200k loan off in under ten years by making an extra $150k in payments over those ten years. It is the principal, not the HELOC.

You're not going to understand until you see the spreadsheets, if that didn't convince you. 

You got the interest savings right. Your're still wrong on the interest rate difference. Read the post again, especially the statements about the total interest savings - ALL THE STATEMENTS!!!!! ... EXACTLY AS WRITTEN!!!!! If you don't understand them, read them again and again until you do.

Originally posted by @Chris May :
Originally posted by @David Dachtera:

@Joe Splitrock and @Chris May,

If you look at nothing else (which I STRONGLY recommend), look at this post:

https://www.biggerpockets.com/forums/49/topics/329076-use-heloc-to-paydown-mortgage-fast?page=11#p2872248

 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. 

Um, I have a presentation where debt acceleration is 1/3 of the slides. Not sure I can still that down to two all-encompassing paragraphs.

If you still don't understand after a year and 282 posts, I probably can't help you.

Dont know what your 1st mortgage terms are. But say they were 30 year fixed at sub 4%. With tax writeoff that becomes even lower.

Why would you ever pay that off, especially with a heloc that has a variable rate and the interest may not be fully deductible?

Clayton Morris preaches this method on his website and when he was on the bigger pockets blog. Personally I would not do that method because it stands to reason that any additional money you have can easily be applied to the mortgage without having a heloc. It would be interesting to see the math worked out and how much you actually save in interest payments when comparing a $10K heloc payment vs paying $500 extra per month. If I were in this situation the only time I would use a HELOC would be to purchase another cash-flow generating asset, not to pay down principle faster and avoid interest payments through the life of the loan. It seems to me that if you take a loan out on equity, which is not real, and the market takes a crap then suddenly you are now borrowing against equity that is not there and you have another liability....Double negative. Equity is only "real" if and when you sell your house and realize the gains.. in my opinion.

@Joe Au  

@Chris Armstrong ,

The trouble is that people get hung up on the HELOC thing. They think there's some hidden magic to it - there isn't.

As I've stated repeatedly, you could just as easily use a deposit account - savings, checking, money market, ... - provided you can resist the urge to spend it instead of using it as intended.

Yes, you can add to the principal payment amount every month if your budget supports that.

Here's the piece that folks tend to gloss over: 

This method of debt acceleration only works if you have money left over at the end of the month after all your debts and expenses are covered. 

If you're living paycheck-to-paycheck, debt acceleration is probably not an option for you. The Debt Snowball strategy to pay down your unsecured debts is much better. THAT will, at some future date - about four years or so, put you in position to employ the mortgage acceleration strategy.

If you have too much month left at the end of the money, well, there ARE debt reduction strategies available to help that at the expense of your credit rating - WITHOUT bankruptcy. Given the feedback I've been getting on this thread, though, I won't even attempt to explain that. People's brains will explode.

@David Dachtera  

Where would I learn more about these other methods you speak of? I didnt know that the HELOC thing was classified as debt acceleration, and I would like to understand that concept more. Its good to be exposed to those things at more depth because its like another tool in the tool box that could be used if need be.

@Chris Armstrong ,

Connect with me and let's discuss off-forum. I really don't want to open that can of worms here.

Anything you do where you're hastening the amortization of a loan can be thought of as debt acceleration, whether you use a HELOC, deposit account, your mattress, lottery winnings, passive income from other real estate, ...

That said, I do have a couple of presentations I've been giving locally: Credit Literacy and Debt Strategies. If you have a local group or even just a few friends over, I could give that presentation and have an interactive discussion. Just a suggestion ...

Originally posted by @David Dachtera :
Originally posted by @Joe Splitrock:
Originally posted by @David Dachtera:

@Joe Splitrock and @Chris May ,

If you look at nothing else (which I STRONGLY recommend), look at this post:

https://www.biggerpockets.com/forums/49/topics/329076-use-heloc-to-paydown-mortgage-fast?page=11#p2872248

Are you just trying to say that making extra principal payments results in your loan being paid off faster and less interest being paid? That seems fairly obvious and you really don't need to use a spreadsheet to prove that.

Where I get hung up is your example of paying down a 5% load with a 7% HELOC. There is no financial benefit in paying off a lower interest loan with a higher interest one. You are just incurring more interest. If the HELOC had a lower interest rate there would be some benefit.

The interest savings comes from paying an extra $15,000 each year. Of course you will pay a $200k loan off in under ten years by making an extra $150k in payments over those ten years. It is the principal, not the HELOC.

You're not going to understand until you see the spreadsheets, if that didn't convince you. 

You got the interest savings right. Your're still wrong on the interest rate difference. Read the post again, especially the statements about the total interest savings - ALL THE STATEMENTS!!!!! ... EXACTLY AS WRITTEN!!!!! If you don't understand them, read them again and again until you do.

What do you mean when you say I am wrong on interest rate difference? 

My point is that instead of making monthly payments on a HELOC, you are better to put the payments directly to your loan. The lump sum payment has no advantage over monthly payments, totaling the same throughout the year. In your example it is actually worse, because you are taking on the HELOC debt at 7% to pay off 5% debt. Do you disagree with this point?

I'm sorry but David you are simply robbing Peter to pay Paul and the math behind the HELOC payments (or whatever debt acceleration payment method you want to use) does not work out. Simple loan calculators show the difference in the post that you keep referring too:

While you say that paying 15k/year with a HELOC (or something else) will accelerate the payment. 15k/year is equal to 1250/month:

You are better off just paying down the mortgage payment, not to mention avoiding the credit hit from the HELOC and possibly high interest rate.

@Steven D. ,

Well, I'm not sorry. It works as documented. Shall I send you the spreadsheets to prove it?

It's ok if that doesn't work for you. Do what works best in your case. Any method will work - extra monthly principal, or chunks from a HELOC (or other line of credit), deposit account, mattress, lottery winnings, passive income, ... only the numbers differ - the result is effectively the same.

@David Dachtera

You don't have to be sorry but this whole run around could be summarized by yes paying extra toward your mortgage, despite the method you use, will reduce your term and the total interest that you pay. Basically common sense. I think that the title of this thread and "examples" is a bit misleading that there is some secret to paying way less interest and owning property faster. 

This discussion thread should be re-titled "Everything that's wrong with the Internet". I'm impressed by everyone's stamina, though. @Chris May , @Joe Splitrock

For the record, I read every post from start to finish.

I'll just add a couple "common sense" observations: 

1.) Banks aren't so dumb that they would create a product that could undermine one of their other products (i.e. a HELOC that could undercut a traditional mortgage). Maybe you get lucky and find a borrowing vehicle with a lower interest rate, but that's not generally the case.

2.) If it doesn't matter whether you use a HELOC or a checking account, etc., then who really cares how you do it. The arguable gains that you make doing it David's way vs just paying down your mortgage directly aren't really worth debating over. And any investor that is spending more time trying to figure out whether this "strategy" works or not as opposed to focusing on revenue-generating activities, really needs to look at their priorities.

Speaking of which, I just spent FAR too long reading this thing instead of working on my business....

Originally posted by @Robert C. :

This discussion thread should be re-titled "Everything that's wrong with the Internet". I'm impressed by everyone's stamina, though. @Chris May, @Joe Splitrock

For the record, I read every post from start to finish.

I'll just add a couple "common sense" observations: 

1.) Banks aren't so dumb that they would create a product that could undermine one of their other products (i.e. a HELOC that could undercut a traditional mortgage). Maybe you get lucky and find a borrowing vehicle with a lower interest rate, but that's not generally the case.

2.) If it doesn't matter whether you use a HELOC or a checking account, etc., then who really cares how you do it. The arguable gains that you make doing it David's way vs just paying down your mortgage directly aren't really worth debating over. And any investor that is spending more time trying to figure out whether this "strategy" works or not as opposed to focusing on revenue-generating activities, really needs to look at their priorities.

Speaking of which, I just spent FAR too long reading this thing instead of working on my business....

 Hahaha. I hear you. On the Internet everyone is an expert on every topic. If I had known what this would grow into when I first responded I never would've gotten involved. 

Now that I've seen this cockamamie theory pop up on multiple threads and videos from obvious snake oil salesmen pumping it on YouTube I feel like I have to keep dispelling the rumor.

On David's first reply on this thread he said that using a HELOC to throw down chunks at a mortgage is better than making cash payments directly to the mortgage. In the subsequent posts he claimed its because of the difference in the way interest is calculated. Now he claims he never said that and he's actually advocating something else. We blew holes in his calculations and then he would change the topic when we asked which part of our math he disagreed with.

And here we are, lol. Every so often a new person pops into this and one other thread to carpet bomb the post another version of this theory that also doesn't work. Just the sheer number of variations on this theory tells me it's the blind leading the blind and none of them really know the details except that they want it to be true.

Originally posted by @David Dachtera :

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!

In this example, your numbers are correct, and the outcome is you will have paid off the mortgage in 9.17 years and have saved on total interest payments. However, you are forgetting the back-half of the equation. Where did those extra $15,000 annual payments come from? The HELOC. So in this example, you would have 9 payments of $15,000, meaning you have a new liability of $135,000. This debt will now have to be serviced at the HELOC interest rate (your example 7%).

Also, your interest payments on the HELOC are not accurate. After the first $15K infusion, that year's accrued interest on $15,000 at 7% is $1050. At year two, you now have a balance of $30,000 on the HELOC, resulting in interest payments that year being 2100. Year 3, 3150...and so on. Those extra interest payments "chip away" at your savings (over $38,000 in interest only payments) and ALSO should be counted as "extra payment towards principal" in the counter/control example.
You are in actuality transferring debt from the fixed, low interest mortgage, into a higher interest HELOC.  This is in no way beneficial.

Just read entire thread. To summarize, David first tries to say that using a HELOC can save you a ton of money paying off your mortgage. His theory is debunked very quickly and efficiently by multiple BP members. David then continues to change his message over and over again, repeatedly getting disproved. By the end of the thread, David completely agrees with the people who have been proving him wrong, but still thinks they are idiots.

Originally posted by @Brian Shurtleff :

Just read entire thread. To summarize, David first tries to say that using a HELOC can save you a ton of money paying off your mortgage. His theory is debunked very quickly and efficiently by multiple BP members. David then continues to change his message over and over again, repeatedly getting disproved. By the end of the thread, David completely agrees with the people who have been proving him wrong, but still thinks they are idiots.

 I wish I could vote for a post more than once. You captured it perfectly.

I think people are overlooking one small benefit of the HELOC plan. Using a HELOC, you make the initial 15K payment first while the savings account user would be making smaller payments over a longer period of time to hit that 15K. If the interest rates are different enough and it takes you awhile to save 15K, then that could make the hassle of dealing with a HELOC worth it. But I expect you'd do better re-signing up for internet to get a cheaper rate or something else to reduce your real costs instead of playing with payment timing.

Despite my BS and MS in engineering, I can't get the math to work either when you go apples to apples.   Best as I can tell, the pitch on this is a combination of 2 things.

1.  Lump sum payment at the "beginning" .   Similar to the difference in returns if you put say $15,000 in your 401k Jan 1 vs Dec 31.   Technically both are funded the same year, but returns are better if you fund on Jan 1 vs Dec 26 which is why companies that put in the full match on Dec 31 are screwing you.   

Here the argument is that your lump sum pay the $15,000 at the beginning, and then you slowly "pay that back" over the course of the year so the total interest paid goes down.     The flaw in this argument is that it assumes that you have the mortgage payment + the principle and interest on the $15,000.   If you had that, you should have just moved it to a 10 or 15 year fixed and be done with it (with lower interest rate).   So no magic, just a complicated way to pay more than your payment every month.  

2. The real "trick" is behavior economics. Basically if people see a $-15,000 balance the theory is they will pay that to zero before they think you have "extra" money. That is why they tell you to deposit your check into the HELOC. It pre-assumes that people don't have the discipline to pay extra into their mortgage (with say a 15 year fixed), so they force it by putting you in debt (the initial $15,000 lump) and then assume the pressure of the debt will force you to pay it back over the year. then repeat. You never have "extra" money in a month because the negative balance always shows...so it forces you to pay more every month. Which is why the "it works" forces point to it working and the "its bunk" forces can show that it is not magic, it is just paying more each month.

It "works" because people don't realize they are actually causing a loss aversion reaction in themselves. It is well understood that humans care more about loss aversion (I don't want to lose my house because the loan is late) than then are to gain elation (I will pay off my mortgage in 10 years). combined with hiding your free cash in a negative HELOC balance it tricks people into paying more on their mortgage....behavior economics.

That is my take.

I'm totally sold on it.   

Check out these two similar but slightly different ways to do it

#1 lump sum payoffs but manual technique using helocs, debt weapons (Credit cards, etc)

https://www.youtube.com/watch?v=RvInyQggMXU&t=1000...

#2  "all in one" loan which promises to be seamless and efficient with HUGE bonus of being a GIANT line of credit and a checking account all rolled into one.

www.aiosim.com

I'm planning to do plan #2  in the next month.   It's common practice in Europe, Canada, Australia but almost unheard of here in the US.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here