Use HELOC to paydown mortgage fast

415 Replies

i do not disagree with your statement and when i pay my house off next, I will use that approach and keep the HELOC as a safety net in case I need to write a big check.

What I love about getting to the airport is that there are multiple ways to get there.  I prefer the train, others prefer to drive.  Does driving work...yep.  Does taking the train work...yep.  Just because I someone chooses to drive, doesn't mean that the train is a scam.  At the end of the day, you just have to get to the airport before your plane leaves.

Thanks for the input.

Only read through the first 3 pages of this thread, but wow people who don't have a basic grasp of finance trying to explain hocus pocus strategies.  @Eric Jones - Amazing job being patient, I'd have given up after 3 tries.  

I hope that people understand that the only 2 times this strategy will work are:

  1. Interest rates between HELOC and 1st are equal and excess cash is being put into mortgage - essentially prepayment.
  2. HELOC has lower interest rate, just simple arbitrage.

But if people want to pay me 199.95 so I show them how excel works, I'd be happy to take their money.

Great thread and some really good discussion in here..

I personally love the HELOC and I believe it is a great tool to have in everyone's toolbelt. It is like a giant credit card that you could do anything you want with. If you want to pay mortgage early and be debt free, sure you can, as long as the interest rate differential is working in your favor.

One way to really make this work very well is to ensure you are using HELOC as your checking account. All bills (monthly mortgage, utlities, credit cards etc) should come out of the HELOC and all income (rental, W-2, other) should go into the HELOC. That reduces the average daily balance and as long as you make more than you spend, it will work it's "magic"...

@David Dachtera . This post was some time ago. What is really missing are the numbers, or spreadsheets that can illustrate the savings. Have you used the strategy? Do you have an excel spreadsheet with actual numbers and projections? I want to see if I want to use this strategy until I am ready for another rental. Thanks, 

Brian

Originally posted by @Brian Christensen :

@David Dachtera. This post was some time ago. What is really missing are the numbers, or spreadsheets that can illustrate the savings. Have you used the strategy? Do you have an excel spreadsheet with actual numbers and projections? I want to see if I want to use this strategy until I am ready for another rental. Thanks, 

Brian

Look back through the thread. You should find the link(s) to the spreadsheets here on BP. If not, let me know and I can find a way to get it/them to you.

Originally posted by @Kon Zel :

Only read through the first 3 pages of this thread, but wow people who don't have a basic grasp of finance trying to explain hocus pocus strategies.  @Eric Jones - Amazing job being patient, I'd have given up after 3 tries.  

I hope that people understand that the only 2 times this strategy will work are:

  1. Interest rates between HELOC and 1st are equal and excess cash is being put into mortgage - essentially prepayment.
  2. HELOC has lower interest rate, just simple arbitrage.

But if people want to pay me 199.95 so I show them how excel works, I'd be happy to take their money.

No "hocus pocus" here. It's all in the numbers. I'd be happy to show you how it works - free of charge. 

My take on this discussion is this:

Anyone can take whatever time and effort they want to argue that it doesn't / can't work (it does / can), or you can just do it and enjoy the benefits.

It's not applicable to every situation - stop trying to force this square peg into a round hole.

There's no "secrets", no "magic" to it.

It's meant for situations where the way it works can help someone achieve their financial goals. 

That's it - nothing more.

Originally posted by @Brian Christensen :

@David Dachtera . This post was some time ago. What is really missing are the numbers, or spreadsheets that can illustrate the savings. Have you used the strategy? Do you have an excel spreadsheet with actual numbers and projections? I want to see if I want to use this strategy until I am ready for another rental. Thanks, 

Brian

Several years earlier in this discussion, I provided a set of spreadsheets illustrating that accelerated principal prepayment is the mortgage killer, not using a HELOC to pre-pay your mortgage.

Only in a very narrow set of situations - such as 'if' the spread between the interest rate on your HELoC and your mortgage financing was sufficiently  favourable to the HELoC - could the HELoC approach yield a better outcome than regular pre-payment of your mortgage.

Originally posted by @Roy N. :
Originally posted by @Brian Christensen:

@David Dachtera. This post was some time ago. What is really missing are the numbers, or spreadsheets that can illustrate the savings. Have you used the strategy? Do you have an excel spreadsheet with actual numbers and projections? I want to see if I want to use this strategy until I am ready for another rental. Thanks, 

Brian

Several years earlier in this discussion, I provided a set of spreadsheets illustrating that accelerated principal prepayment is the mortgage killer, not using a HELOC to pre-pay your mortgage. In a narrow set of situations - such as 'if' the spread between the interest rate on your HELoC and your mortgage financing was significantly favourable to the HELoC - could the HELoC approach yield a better outcome.

Again, the HELoC is one approach. There are others. For any one person's situation, one approach may work better than another.

For someone who has the cash flow, and has the equity but not the cash reserves, the HELoC can work, but is NOT the only choice.

Originally posted by @Brian Christensen :

@David Dachtera . This post was some time ago. What is really missing are the numbers, or spreadsheets that can illustrate the savings. Have you used the strategy? Do you have an excel spreadsheet with actual numbers and projections? I want to see if I want to use this strategy until I am ready for another rental. Thanks, 

Brian

Hi, Brian. The savings really boil down to prepaying on your mortgage, but the manor in which you do it isn't very important. For example, you can just take all of your extra income and make extra principal payments without the HELOC and your savings will be comparable.

Having said that, I use and like the HELOC method because the real world "cost" of paying down the next $10,000 on your mortgage is usually around $20,000 in interest and two years paying on the regular amortization schedule and when you move that same debt to the HELOC it "costs" less than $1000 and 6-10 months. Detractors will tell you that the $10,000 is generating roughly the same amount of interest (ex. 4% vs 5% ) regardless of what debt vehicle it is on, but that's not the only relevant factor. When you pay that $10,000 down on normal schedule you are paying interest from the entire balance, not just interest from the $10,000 itself. So, again, you could just make extra principal payments, but by moving that $10,000 over to the HELOC you able to sort of isolate it and pay it down with all of your income, yet you are still able to pay your bills.

The other goofy thing about the detractors is that they will roll out the spreadsheets to explain that the $10,000 generates the same amount of interest and say that a person could just put all of their extra income toward the mortgage and get the same results and then cap it off by saying that by putting your extra income against your mortgage you are incurring opportunity costs by not saving that money and investing it in the stock market or a rental. 

The counters are obvious:

  1. As I said, paying the $10,000 via your normal schedule means paying interest from the entire mortgage, NOT JUST interest generated by the $10,000 itself.
  2. A person COULD just put all of their extra income against the mortgage, but the detractors aren't because there are practical reasons not to do so. To me, this is classic armchair quarterback / lazy naysayer stuff.
  3. If you have money sitting in a checking account when I'm putting my equivalent funds on my mortgage, it means YOU are paying opportunity costs because your money could be working for you. How hypocritical, right?

Anyway, as for the savings, just look up a good amortization calculator such as Bankrate and plug in extra payments to see what your savings could be and then you can save up to do it or use the HELOC or rub your money on your dog and then put it on the mortgage. The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage and, in my opinion, a more efficient way of paying down the debt if you have the extra money and it's your main goal. Good luck if you end up trying it.

@Joshua Smith , you said it well: "The savings really boil down to prepaying on your mortgage, but the manner in which you do it isn't very important"!

And: "The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage"! [Read your own lips again: "your extra money"!]

Which is exactly what your "goofy detractors" have been saying all along. ie. Why the insults?...

[Please note: Many if not most mortgage holders do not have the luxury of extra money!]

Originally posted by @Brent Coombs :

@Joshua Smith, you said it well: "The savings really boil down to prepaying on your mortgage, but the manner in which you do it isn't very important"!

And: "The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage"! [Read your own lips again: "your extra money"!]

Which is exactly what your "goofy detractors" have been saying all along. ie. Why the insults?...

[Please note: Many if not most mortgage holders do not have the luxury of extra money!]

Well, first of all, I've been insulted since I joined the discussion, so I'm just responding in like kind. But secondly, the reason the argument has been circular and non-productive is because of the detractors. Proponents have conceded a bunch of points and tried to come to an understanding and instead of doing the same, opponents ignore perfectly good points and then go back to, "The HELOC method doesn't magically save you interest" as if that's what the argument is at this point.

Have you ever argued with someone, your wife for example, and she's mad at where you leave your socks as well as 2-3 other issues? You explain why you put your socks there and justify it and then she keeps bringing it up over and over and can't get over it. You ever argue with someone like that? That's been the majority of the argument from your side:

"I like the HELOC method, because my money isn't just sitting around in my checking account, it's working for me."

"Yeah, but it's not a magic way to save on interest."

"No, I realize that the $10,000 in question generates the same amount of interest whether it's on the HELOC or the mortgage, but this is a more efficient way to pay it down because you're not paying interest from the rest of the loan at the same time and you can use all of your income toward it."

"Yeah, but it's not a magic way to save on interest."

Refusing to acknowledge perfectly legitimate points ostensibly to save face means you are goofy at the very least. That's the most polite way I could put it, in fact. So, no, that isn't what the detractors have been saying all along. They have been saying the strategy is pointless / useless, a scam, you could do better putting your money in stocks, you could do the same thing just paying all of your extra income toward the mortgage and using a HELOC as a backup, you're paying opportunity costs and the time value of money, it's not a magic way to save on interest, etc. etc. in circles and mostly refusing to acknowledge very simple points:

  • You get guaranteed "returns" paying your mortgage early if you choose to look at it like you could be using the money elsewhere
  • You are actually getting free money, not "returns" because you are just changing the timing of your payments
  • If you have money sitting in your checking account, then you are the one who is paying opportunity costs
  • You might do better in a rental, but you have to save for a down payment, which means more opportunity costs while you save
  • Getting out of mortgage debt is invaluable - you can't live in stocks and bonds
  • The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance
  • It's more efficient to set up a situation where all of your income can go toward your mortgage and you can still afford to pay your bills

Etc. etc. etc. etc. etc. etc.

In other words, I've made a perfectly valid argument for the strategy on many fronts and instead of opponents saying something like, "Wow, I really can't see myself doing that, but I can definitely see some of the benefits you're describing.......", it's just, "Hey, I think I'd rather be deliberately obtuse and ignore perfectly valid points because I don't want it to seem like I could be wrong about something now that they've clarified. ROBOT VOICE: The HELOC method isn't a magic way to save on interest. The HELOC method isn't a magic way to save on interest."

So, that's why I think you're "goofy", because you're more or less incapable of updating your opinion or accepting new information and I'm the opposite. I've learned a ton about the math behind the decision and what the strategy is and what it isn't and updated my opinion accordingly. Or you can look at it this way - you've learned nothing and still have money sitting in your checking account wasting away and I just put another $3500 against my mortgage yesterday without breaking a sweat or taking anything out of savings. You'll be in debt for 30 years and have to hope your investments outpace what you are spending on interest. I'm on pace to be out of debt by 2024 and then I can invest all I want for the rest of my life. I think saying "goofy" is being polite. :)

Just to clarify, Brent, I realize it might seem contradictory to say that the HELOC strategy is "just a way to keep all of your extra money going toward the mortgage", but also say it has all these benefits and I think that's the argument in a nutshell. Like, for example, if somebody came on here and said that the doctor told him working out and losing weight saved his life and he was extoling the virtues of exercise and your response was that it's "just working out, it's not really a big deal" - YOU'RE BOTH RIGHT.

The HELOC method has all the benefits I've mentioned, but when you boil it down the end result is similar to taking your extra money and putting it against the mortgage. Both are true. But instead of the detractors acknowledging it, it's a tooth and nail fight to try to convince people that it's a worthless scam and all the other nonsense and you don't want to give an inch because "you're right, too".

It's about perspective and unless you can accept that and put yourself in the position of someone who really values being out of debt sooner than 30 years over having a bunch of stocks or whatever, you'll never understand. That's why the argument goes in circles. Both sides are right in some sense and yours doesn't want to acknowledge it. Have a good one.

I guess I'm one of those "goofy detractors", however I do not recall having levelled anything ad-hominem in nature on this thread (it would be quite out of character).

I am not even certain I would call myself a detractor - If someone wants to borrow money to pay-down another debt, that is their business.   However, unless the cost of the new borrowing is sufficiently lower than the debt against which the funds are being applied, there is little to be gained and ground could easily be lost.   

The premise proclaimed at the start of this thread is simply not supported by mathematics with the exception of the specific case where the interest rate on the HELoC/secure LoC is sufficiently lower than the rate being paid on the mortgage.

Originally posted by @Joshua Smith :
Originally posted by @Brent Coombs:

@Joshua Smith, you said it well: "The savings really boil down to prepaying on your mortgage, but the manner in which you do it isn't very important"!

And: "The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage"! [Read your own lips again: "your extra money"!]

Which is exactly what your "goofy detractors" have been saying all along. ie. Why the insults?...

[Please note: Many if not most mortgage holders do not have the luxury of extra money!]

Well, first of all, I've been insulted since I joined the discussion, so I'm just responding in like kind. But secondly, the reason the argument has been circular and non-productive is because of the detractors. Proponents have conceded a bunch of points and tried to come to an understanding and instead of doing the same, opponents ignore perfectly good points and then go back to, "The HELOC method doesn't magically save you interest" as if that's what the argument is at this point.

Have you ever argued with someone, your wife for example, and she's mad at where you leave your socks as well as 2-3 other issues? You explain why you put your socks there and justify it and then she keeps bringing it up over and over and can't get over it. You ever argue with someone like that? That's been the majority of the argument from your side:

"I like the HELOC method, because my money isn't just sitting around in my checking account, it's working for me."

"Yeah, but it's not a magic way to save on interest."

"No, I realize that the $10,000 in question generates the same amount of interest whether it's on the HELOC or the mortgage, but this is a more efficient way to pay it down because you're not paying interest from the rest of the loan at the same time and you can use all of your income toward it."

"Yeah, but it's not a magic way to save on interest."

Refusing to acknowledge perfectly legitimate points ostensibly to save face means you are goofy at the very least. That's the most polite way I could put it, in fact. So, no, that isn't what the detractors have been saying all along. They have been saying the strategy is pointless / useless, a scam, you could do better putting your money in stocks, you could do the same thing just paying all of your extra income toward the mortgage and using a HELOC as a backup, you're paying opportunity costs and the time value of money, it's not a magic way to save on interest, etc. etc. in circles and mostly refusing to acknowledge very simple points:

  • You get guaranteed "returns" paying your mortgage early if you choose to look at it like you could be using the money elsewhere
  • You are actually getting free money, not "returns" because you are just changing the timing of your payments
  • If you have money sitting in your checking account, then you are the one who is paying opportunity costs
  • You might do better in a rental, but you have to save for a down payment, which means more opportunity costs while you save
  • Getting out of mortgage debt is invaluable - you can't live in stocks and bonds
  • The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance
  • It's more efficient to set up a situation where all of your income can go toward your mortgage and you can still afford to pay your bills

Etc. etc. etc. etc. etc. etc.

In other words, I've made a perfectly valid argument for the strategy on many fronts and instead of opponents saying something like, "Wow, I really can't see myself doing that, but I can definitely see some of the benefits you're describing.......", it's just, "Hey, I think I'd rather be deliberately obtuse and ignore perfectly valid points because I don't want it to seem like I could be wrong about something now that they've clarified. ROBOT VOICE: The HELOC method isn't a magic way to save on interest. The HELOC method isn't a magic way to save on interest."

So, that's why I think you're "goofy", because you're more or less incapable of updating your opinion or accepting new information and I'm the opposite. I've learned a ton about the math behind the decision and what the strategy is and what it isn't and updated my opinion accordingly. Or you can look at it this way - you've learned nothing and still have money sitting in your checking account wasting away and I just put another $3500 against my mortgage yesterday without breaking a sweat or taking anything out of savings. You'll be in debt for 30 years and have to hope your investments outpace what you are spending on interest. I'm on pace to be out of debt by 2024 and then I can invest all I want for the rest of my life. I think saying "goofy" is being polite. :)

 "The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance"

Josh, I don't know how we're still doing this. The statement above simply doesn't make any sense. It's false. It "costs" the same in both places.

Originally posted by @Joshua Smith :
Originally posted by @Brent Coombs:

@Joshua Smith, you said it well: "The savings really boil down to prepaying on your mortgage, but the manner in which you do it isn't very important"!

And: "The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage"! [Read your own lips again: "your extra money"!]

Which is exactly what your "goofy detractors" have been saying all along. ie. Why the insults?...

[Please note: Many if not most mortgage holders do not have the luxury of extra money!]

Well, first of all, I've been insulted since I joined the discussion, so I'm just responding in like kind. But secondly, the reason the argument has been circular and non-productive is because of the detractors. Proponents have conceded a bunch of points and tried to come to an understanding and instead of doing the same, opponents ignore perfectly good points and then go back to, "The HELOC method doesn't magically save you interest" as if that's what the argument is at this point.

Have you ever argued with someone, your wife for example, and she's mad at where you leave your socks as well as 2-3 other issues? You explain why you put your socks there and justify it and then she keeps bringing it up over and over and can't get over it. You ever argue with someone like that? That's been the majority of the argument from your side:

"I like the HELOC method, because my money isn't just sitting around in my checking account, it's working for me."

"Yeah, but it's not a magic way to save on interest."

"No, I realize that the $10,000 in question generates the same amount of interest whether it's on the HELOC or the mortgage, but this is a more efficient way to pay it down because you're not paying interest from the rest of the loan at the same time and you can use all of your income toward it."

"Yeah, but it's not a magic way to save on interest."

Refusing to acknowledge perfectly legitimate points ostensibly to save face means you are goofy at the very least. That's the most polite way I could put it, in fact. So, no, that isn't what the detractors have been saying all along. They have been saying the strategy is pointless / useless, a scam, you could do better putting your money in stocks, you could do the same thing just paying all of your extra income toward the mortgage and using a HELOC as a backup, you're paying opportunity costs and the time value of money, it's not a magic way to save on interest, etc. etc. in circles and mostly refusing to acknowledge very simple points:

  • You get guaranteed "returns" paying your mortgage early if you choose to look at it like you could be using the money elsewhere
  • You are actually getting free money, not "returns" because you are just changing the timing of your payments
  • If you have money sitting in your checking account, then you are the one who is paying opportunity costs
  • You might do better in a rental, but you have to save for a down payment, which means more opportunity costs while you save
  • Getting out of mortgage debt is invaluable - you can't live in stocks and bonds
  • The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance
  • It's more efficient to set up a situation where all of your income can go toward your mortgage and you can still afford to pay your bills

Etc. etc. etc. etc. etc. etc.

In other words, I've made a perfectly valid argument for the strategy on many fronts and instead of opponents saying something like, "Wow, I really can't see myself doing that, but I can definitely see some of the benefits you're describing.......", it's just, "Hey, I think I'd rather be deliberately obtuse and ignore perfectly valid points because I don't want it to seem like I could be wrong about something now that they've clarified. ROBOT VOICE: The HELOC method isn't a magic way to save on interest. The HELOC method isn't a magic way to save on interest."

So, that's why I think you're "goofy", because you're more or less incapable of updating your opinion or accepting new information and I'm the opposite. I've learned a ton about the math behind the decision and what the strategy is and what it isn't and updated my opinion accordingly. Or you can look at it this way - you've learned nothing and still have money sitting in your checking account wasting away and I just put another $3500 against my mortgage yesterday without breaking a sweat or taking anything out of savings. You'll be in debt for 30 years and have to hope your investments outpace what you are spending on interest. I'm on pace to be out of debt by 2024 and then I can invest all I want for the rest of my life. I think saying "goofy" is being polite. :)

 "You are actually getting free money, not "returns" because you are just changing the timing of your payments" 

This is false too.

I used to use the method for years as a Florida Private Banker for wealthier clients that were susceptible to law suits and could relatively easily pay off the line. Florida homesteads have no cap on the asset protection (I don't know Utah's laws), so for folks like surgeons, I would set them up with an equity line rather than a first mortgage. By putting the money into the house, however, it would provide some asset protection. Regarding using it as an accelerated payoff method, the math does technically work. I've found that few clients are that disciplined. I would be apprehensive to use it, however, with people without strong, reliable incomes and wealth. Banks can shut down an equity line at a whim, so there is a strong risk there. You also have interest rate risk even at a "Prime Minus" equity line vs a longer-term fixed rate. 

Originally posted by @Chris May :
Originally posted by @Joshua Smith:
Originally posted by @Brent Coombs:

@Joshua Smith, you said it well: "The savings really boil down to prepaying on your mortgage, but the manner in which you do it isn't very important"!

And: "The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage"! [Read your own lips again: "your extra money"!]

Which is exactly what your "goofy detractors" have been saying all along. ie. Why the insults?...

[Please note: Many if not most mortgage holders do not have the luxury of extra money!]

Well, first of all, I've been insulted since I joined the discussion, so I'm just responding in like kind. But secondly, the reason the argument has been circular and non-productive is because of the detractors. Proponents have conceded a bunch of points and tried to come to an understanding and instead of doing the same, opponents ignore perfectly good points and then go back to, "The HELOC method doesn't magically save you interest" as if that's what the argument is at this point.

Have you ever argued with someone, your wife for example, and she's mad at where you leave your socks as well as 2-3 other issues? You explain why you put your socks there and justify it and then she keeps bringing it up over and over and can't get over it. You ever argue with someone like that? That's been the majority of the argument from your side:

"I like the HELOC method, because my money isn't just sitting around in my checking account, it's working for me."

"Yeah, but it's not a magic way to save on interest."

"No, I realize that the $10,000 in question generates the same amount of interest whether it's on the HELOC or the mortgage, but this is a more efficient way to pay it down because you're not paying interest from the rest of the loan at the same time and you can use all of your income toward it."

"Yeah, but it's not a magic way to save on interest."

Refusing to acknowledge perfectly legitimate points ostensibly to save face means you are goofy at the very least. That's the most polite way I could put it, in fact. So, no, that isn't what the detractors have been saying all along. They have been saying the strategy is pointless / useless, a scam, you could do better putting your money in stocks, you could do the same thing just paying all of your extra income toward the mortgage and using a HELOC as a backup, you're paying opportunity costs and the time value of money, it's not a magic way to save on interest, etc. etc. in circles and mostly refusing to acknowledge very simple points:

  • You get guaranteed "returns" paying your mortgage early if you choose to look at it like you could be using the money elsewhere
  • You are actually getting free money, not "returns" because you are just changing the timing of your payments
  • If you have money sitting in your checking account, then you are the one who is paying opportunity costs
  • You might do better in a rental, but you have to save for a down payment, which means more opportunity costs while you save
  • Getting out of mortgage debt is invaluable - you can't live in stocks and bonds
  • The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance
  • It's more efficient to set up a situation where all of your income can go toward your mortgage and you can still afford to pay your bills

Etc. etc. etc. etc. etc. etc.

In other words, I've made a perfectly valid argument for the strategy on many fronts and instead of opponents saying something like, "Wow, I really can't see myself doing that, but I can definitely see some of the benefits you're describing.......", it's just, "Hey, I think I'd rather be deliberately obtuse and ignore perfectly valid points because I don't want it to seem like I could be wrong about something now that they've clarified. ROBOT VOICE: The HELOC method isn't a magic way to save on interest. The HELOC method isn't a magic way to save on interest."

So, that's why I think you're "goofy", because you're more or less incapable of updating your opinion or accepting new information and I'm the opposite. I've learned a ton about the math behind the decision and what the strategy is and what it isn't and updated my opinion accordingly. Or you can look at it this way - you've learned nothing and still have money sitting in your checking account wasting away and I just put another $3500 against my mortgage yesterday without breaking a sweat or taking anything out of savings. You'll be in debt for 30 years and have to hope your investments outpace what you are spending on interest. I'm on pace to be out of debt by 2024 and then I can invest all I want for the rest of my life. I think saying "goofy" is being polite. :)

 "The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance"

Josh, I don't know how we're still doing this. The statement above simply doesn't make any sense. It's false. It "costs" the same in both places.

It doesn't make any sense because you're not listening. When the $10,000 is on the mortgage, your regular payments are bogged down with interest from the rest of the loan, which is why it "costs" you $20,000 or so in interest to pay it down via regular payments even though it "charges" you $400. We've covered this many times. I'm not saying that the $10,000 is charging you $20,000 in interest, but that to pay down the $10,000 via regular payments it "costs" you $20,000. I think of it like two companies charging me the same amount, but I can make online payments with one and have to drive a check 50 miles to pay the other. I'm "charged" the same amount, but the actual "cost" is greater to pay the second company.

All I'm saying is that when you move that same $10,000 portion of the balance over to the HELOC, the cost and the charges are now the same for that portion and you're no longer paying that $20,000 "cost" associated with the regular payments for that $10,000. You're paying the interest on the $10,000 while paying down the $10,000, not interest on $165,000 while paying down the $10,000. You honestly can't get that, huh? In the first year of this hypothetical $165,000 / 4.5% loan we've been talking about - when you're whittling away at that first $10,000 - around 74% of your money goes toward interest. When you're paying down the $10,000 on the HELOC about 4-5% of your money is going toward interest. The $10,000 itself is generating roughly the same interest either way, but that's not the true cost of paying it down. I can't believe we can't get on the same page with that, either. How a person could say that those two things are the same is beyond me.

Of course you'll say that you could just make additional principal payments without the HELOC to avoid the interest and then we'll go for another lap because you can't acknowledge that the point of this discussion is to compare this technique to what most people do with their mortgage - pay their regular payments. Your philosophy is let's compare this strategy to paying your mortgage off in another way or putting your extra money in stocks or saving up to buy rentals or buying a sports car or going to Disneyland or starting a secret family with your secretary, it'll be fun. Like when your wife asks which movie you want to go to tomorrow night and you remind her that you could go out to dinner or rock climbing or for drinks or to a play or to a game. You're such a good friend and husband that when someone asks you to compare A and B directly, you insist on comparing A through Z regardless of the discussion at hand because you know there must be a better choice out there. :)

Really, though, tell me how having 74% of your regular payments go toward interest is the same thing as having 4-5% of your HELOC payments go toward interest. To me, that's a vastly different true cost depending on where you pay down the $10,000, so I'd be interested to know how you could consider it the same.

@Chris Erik Roy and others that provided sound reasoning to why amortization and HELOCs are nothing special and paying extra on your mortgage is what makes it “special” Thanks for this thread. I’ve read every post and while I didn’t open the spreadsheets, I did learn something. Even on a great website like BP, you’ve got to be careful what you read. Always check, and double check anything that sounds too good to be true. It usually is. So thanks again for making sure others on BP don’t fall for the scam of these HELOC YouTube videos.
Originally posted by @Chris May :
Originally posted by @Joshua Smith:
Originally posted by @Brent Coombs:

@Joshua Smith, you said it well: "The savings really boil down to prepaying on your mortgage, but the manner in which you do it isn't very important"!

And: "The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage"! [Read your own lips again: "your extra money"!]

Which is exactly what your "goofy detractors" have been saying all along. ie. Why the insults?...

[Please note: Many if not most mortgage holders do not have the luxury of extra money!]

Well, first of all, I've been insulted since I joined the discussion, so I'm just responding in like kind. But secondly, the reason the argument has been circular and non-productive is because of the detractors. Proponents have conceded a bunch of points and tried to come to an understanding and instead of doing the same, opponents ignore perfectly good points and then go back to, "The HELOC method doesn't magically save you interest" as if that's what the argument is at this point.

Have you ever argued with someone, your wife for example, and she's mad at where you leave your socks as well as 2-3 other issues? You explain why you put your socks there and justify it and then she keeps bringing it up over and over and can't get over it. You ever argue with someone like that? That's been the majority of the argument from your side:

"I like the HELOC method, because my money isn't just sitting around in my checking account, it's working for me."

"Yeah, but it's not a magic way to save on interest."

"No, I realize that the $10,000 in question generates the same amount of interest whether it's on the HELOC or the mortgage, but this is a more efficient way to pay it down because you're not paying interest from the rest of the loan at the same time and you can use all of your income toward it."

"Yeah, but it's not a magic way to save on interest."

Refusing to acknowledge perfectly legitimate points ostensibly to save face means you are goofy at the very least. That's the most polite way I could put it, in fact. So, no, that isn't what the detractors have been saying all along. They have been saying the strategy is pointless / useless, a scam, you could do better putting your money in stocks, you could do the same thing just paying all of your extra income toward the mortgage and using a HELOC as a backup, you're paying opportunity costs and the time value of money, it's not a magic way to save on interest, etc. etc. in circles and mostly refusing to acknowledge very simple points:

  • You get guaranteed "returns" paying your mortgage early if you choose to look at it like you could be using the money elsewhere
  • You are actually getting free money, not "returns" because you are just changing the timing of your payments
  • If you have money sitting in your checking account, then you are the one who is paying opportunity costs
  • You might do better in a rental, but you have to save for a down payment, which means more opportunity costs while you save
  • Getting out of mortgage debt is invaluable - you can't live in stocks and bonds
  • The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance
  • It's more efficient to set up a situation where all of your income can go toward your mortgage and you can still afford to pay your bills

Etc. etc. etc. etc. etc. etc.

In other words, I've made a perfectly valid argument for the strategy on many fronts and instead of opponents saying something like, "Wow, I really can't see myself doing that, but I can definitely see some of the benefits you're describing.......", it's just, "Hey, I think I'd rather be deliberately obtuse and ignore perfectly valid points because I don't want it to seem like I could be wrong about something now that they've clarified. ROBOT VOICE: The HELOC method isn't a magic way to save on interest. The HELOC method isn't a magic way to save on interest."

So, that's why I think you're "goofy", because you're more or less incapable of updating your opinion or accepting new information and I'm the opposite. I've learned a ton about the math behind the decision and what the strategy is and what it isn't and updated my opinion accordingly. Or you can look at it this way - you've learned nothing and still have money sitting in your checking account wasting away and I just put another $3500 against my mortgage yesterday without breaking a sweat or taking anything out of savings. You'll be in debt for 30 years and have to hope your investments outpace what you are spending on interest. I'm on pace to be out of debt by 2024 and then I can invest all I want for the rest of my life. I think saying "goofy" is being polite. :)

 "The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance"

Josh, I don't know how we're still doing this. The statement above simply doesn't make any sense. It's false. It "costs" the same in both places.

I really hope you can explain what you mean here, Chris. In the first year of the mortgage, 74% of your money goes toward interest. By the time you have paid off the first $10,000 in year two 66% of your money is still going to interest. If you move that same portion of your mortgage to the HELOC 4-5% of your money is going to interest and it's paid off in less than a year. I really want to understand what you mean when you say these two ways of paying have the same cost, because I don't get it.

The HELOC and the mortgage are charging roughly the same "rate", but the cost of paying it down via the regular payments is $20,000 on the mortgage, because you're paying interest from the entire balance. The cost of paying it down via the HELOC is a few hundred dollars. This is the type of thing where I think your knowledge of math is actually working against you. I might have mentioned this before, but it makes me think of a story I heard awhile back where a semi was stuck underneath an overpass and a bunch of engineers were trying to figure out how to get it out without damaging the overpass. One of the engineers had his 4-5 year old kid there and he suggested to just deflate the tires and of course it worked. Maybe it's a fictional story, but you get what I'm saying. I realize I don't know all the math you do, but I know that when you're paying down your mortgage with regular payments you are paying a ton of interest from the entire balance, which keeps you at a very expensive crawl. Moving a portion of the balance to a place where you only have to pay interest on THAT PORTION while you pay it down is obviously quicker and more cost effective. It's not a question of math, it's common sense that you're trying to answer with equations, which is why you don't get it. So, like I said, I'm all ears if you can explain how paying $20,000 in interest via the regular payments is the same as paying a few hundred dollars in interest via the HELOC, because I don't get how those two things could be the same.

Originally posted by @Joshua Smith :
Originally posted by @Brent Coombs:

@Joshua Smith, you said it well: "The savings really boil down to prepaying on your mortgage, but the manner in which you do it isn't very important"!

And: "The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage"! [Read your own lips again: "your extra money"!]

Which is exactly what your "goofy detractors" have been saying all along. ie. Why the insults?...

[Please note: Many if not most mortgage holders do not have the luxury of extra money!]

Well, first of all, I've been insulted since I joined the discussion, so I'm just responding in like kind. But secondly, the reason the argument has been circular and non-productive is because of the detractors. Proponents have conceded a bunch of points and tried to come to an understanding and instead of doing the same, opponents ignore perfectly good points and then go back to, "The HELOC method doesn't magically save you interest" as if that's what the argument is at this point.

Have you ever argued with someone, your wife for example, and she's mad at where you leave your socks as well as 2-3 other issues? You explain why you put your socks there and justify it and then she keeps bringing it up over and over and can't get over it. You ever argue with someone like that? That's been the majority of the argument from your side:

"I like the HELOC method, because my money isn't just sitting around in my checking account, it's working for me."

"Yeah, but it's not a magic way to save on interest."

"No, I realize that the $10,000 in question generates the same amount of interest whether it's on the HELOC or the mortgage, but this is a more efficient way to pay it down because you're not paying interest from the rest of the loan at the same time and you can use all of your income toward it."

"Yeah, but it's not a magic way to save on interest."

Refusing to acknowledge perfectly legitimate points ostensibly to save face means you are goofy at the very least. That's the most polite way I could put it, in fact. So, no, that isn't what the detractors have been saying all along. They have been saying the strategy is pointless / useless, a scam, you could do better putting your money in stocks, you could do the same thing just paying all of your extra income toward the mortgage and using a HELOC as a backup, you're paying opportunity costs and the time value of money, it's not a magic way to save on interest, etc. etc. in circles and mostly refusing to acknowledge very simple points:

  • You get guaranteed "returns" paying your mortgage early if you choose to look at it like you could be using the money elsewhere
  • You are actually getting free money, not "returns" because you are just changing the timing of your payments
  • If you have money sitting in your checking account, then you are the one who is paying opportunity costs
  • You might do better in a rental, but you have to save for a down payment, which means more opportunity costs while you save
  • Getting out of mortgage debt is invaluable - you can't live in stocks and bonds
  • The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance
  • It's more efficient to set up a situation where all of your income can go toward your mortgage and you can still afford to pay your bills

Etc. etc. etc. etc. etc. etc.

In other words, I've made a perfectly valid argument for the strategy on many fronts and instead of opponents saying something like, "Wow, I really can't see myself doing that, but I can definitely see some of the benefits you're describing.......", it's just, "Hey, I think I'd rather be deliberately obtuse and ignore perfectly valid points because I don't want it to seem like I could be wrong about something now that they've clarified. ROBOT VOICE: The HELOC method isn't a magic way to save on interest. The HELOC method isn't a magic way to save on interest."

So, that's why I think you're "goofy", because you're more or less incapable of updating your opinion or accepting new information and I'm the opposite. I've learned a ton about the math behind the decision and what the strategy is and what it isn't and updated my opinion accordingly. Or you can look at it this way - you've learned nothing and still have money sitting in your checking account wasting away and I just put another $3500 against my mortgage yesterday without breaking a sweat or taking anything out of savings. You'll be in debt for 30 years and have to hope your investments outpace what you are spending on interest. I'm on pace to be out of debt by 2024 and then I can invest all I want for the rest of my life. I think saying "goofy" is being polite. :)

Joshua, had you even been on this discussion (in this thread) before? I say, save your insults for posters who actually make "goofy" comments, rather than ranting about "checking accounts wasting away" and "you've learned nothing"! [Stay tuned, I might try to get through to you (again)]...

@Joshua Smith , ok, I'll attempt to answer your "you don't get it" accusation to @Chris May , where you wrote "Moving a portion of the balance to a place where you only have to pay interest on THAT PORTION while you pay it down is obviously quicker and more cost effective. It's not a question of math, it's common sense that you're trying to answer with equations".

Firstly, it's not quicker, if you're borrowing that same portion under the same terms as the original loan! It's only quicker - if you pay it back quicker! ie. With your EXTRA money! [Which many do not have!]

ie. That same EXTRA money would have worked just as well against your original mortgage!

Why? Because your premise suggests that you are still paying back the original mortgage at the stipulated amortized amount, plus paying back that second portion that you borrowed additionally! ie. requiring significant EXTRA of your money!

But you already agreed to all this before, which is why I complimented you earlier!

So please, take the compliment; admit your "goofy detractors" do have valid points, and move on...

The only benefit I can see is if the interest is treated differently between the home mortgage and the HELOC. The gurus claim that the HELOC computes the interest as a daily rolling average and the mortgage is assessed every 6 months. I don't know if this is true, however it would make sense that when you routinely pay down the HELOC, your interest amount declines and is not based on 6 month ave. [Perhaps akin to making an extra monthly payment on your mortgage, but accelerated to a rolling daily average]. If that assumption is true (which I don't know if it is), then I can see how it could be helpful, even if you did this precept with cash. It would mean that at the beginning of the 6 months, if you paid ~20K and then replenished your savings over the next 6 months, you mort interest would be based on (mort minus 20K).

Of course I spurred the discussion and I am now realizing, Real Estate can give better returns, albeit with much more work. Perhaps 20K into an investment is more advantageous that into avoiding mort interest. 

Thanks for your replies. 

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