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 saw enough to know the strategy and how it works - like I said, I've seen this before. We are in agreement that the strategy works as described, but we differ as to WHY it works. I'm saying that it works because you're prepaying, and you're saying that it works due to something unique and intrinsic of the HELOC itself, but that is not the case. Perhaps I'm not explaining it well and some others can clarify it better.
We're on the same page with HELOCs being great tools. In fact, I think the HELOC is up there with reward earning credit cards as one of the best financial products ever created. I just don't use HELOCs for the purpose your describing. I use it to quickly, easily, and cheaply deploy cash for investments, repairs, etc. So at least we can both agree that HELOCs are awesome! But a tool for quicker debt payoff... I don't think so.
No, I'm NOT saying "that it works due to something unique and intrinsic of the HELOC itself". The ONLY difference is that between amortization and compound interest. Period - end of statement.
Please review the video in its entirety. Follow the host's suggestion to set aside what you think you already know - it just confuses you, as we have seen here.
It will be boring and you may fall asleep multiple times listening to him drone on in mostly monotone, but bear with it. It will be worth it in the end.
@Eric Jones @David Dachtera I can tell you from personal experience it does work fantastically on your primary home, But the argument to buy other property with higher return is valid. This kind of changed my thinking David thank you. I may need to be paying off rentals in high market times such as these when it is tough to find a cash flowing property as more and more rental income will in turn be going towards principal and not the bank. Thanks David
@David Dachtera @Account Closed
I agree that it works - I'm just saying that it works because you're paying extra beyond the minimum payment. It has nothing to do with amortization vs simple/compound interest. People say this sometimes and it's just plain wrong. The people I see proposing this are correct in saying that it works, but they get the WHY wrong. This applies to this video as well - the speaker doesn't fully understand how the math works.
Here's a very simple illustration using the same $100k loan @ 5% over 360 months. Since the goal is rapid paydown, we will assume a monthly payment of $1000 for the example. So we are paying more than the minimum...
AMortized Loan:
Beginning balance = $100,000
Interest accrued over 1 month = $100,000 * 0.05/12 = $416.67
Monthly (amortized) payment = $536.82
Additional prepayment = $436.18
So the total monthly payment = $536.82 + $436.18 = $1000
At the end of the month your balance will be = Loan balance + Interest accrued - Monthly Payment - Prepayments so: $100,000 + $416.67 interest - $536.82 monthly pmt - $436.18 prepayment = $99,416.67 <== this is your balance at the end of the month.
HELOC:
Average daily balance over month, assuming you make a single payment at month end = $100,000
Interest accrues over one month on a daily basis = $100,000 * 0.05 * (365/12) / 365 = $416.67
Make a lump sum payment of $1000
At the end of the month your ending balance will be = $100,000 + $416.67 interest - $1000 payment = $99,416.67 <== notice it is exactly the same as the ending balance for the amortized loan.
So if the ending balances are exactly the same, there is absolutely no benefit to paying it off with a HELOC since the end result is the same. Notice that interest is calculated on the loan balance - doesn't have anything to do with amortization. Where amortization comes into play is in the calculation of the "Monthly (amortized) payment" of $536.82 above. So the fact that it's amortized means that if you JUST pay the minimum, it will payoff in 30 years. Same thing applies to ARMs, except you recast the loan at each rate adjustment interval, to calculate a new amortized payment.
Don't trust everything you read or see online/Youtube. Do the math for yourself and you can see that a prepayment on an amortized loan is identical to making an equivalent lump sum payment on a HELOC. Hope this clarifies it - if not, I'll leave it to others to attempt an explanation!
Again, believe what you will.
...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.
... and no, this isn't just "something I found on YouTube". That video was one of many that came up when I searched, and not even the one I was looking for (that one is private, and I can't give out the link without charging for it). But, it covers enough of the basics.
Again, believe what you will. The rest of us will reap the benefits of mortgage acceleration while you're going around telling people why (you believe) it can't work.
@Eric Jones You are not including the fact that your payment has not changed and now more of the payment is going to principal not interest or the bank. Here is my exact example with the amortization schedule below on my home current home starting the mortgage off today and immediately placing 10k against it using the HELOC. I currently owe $239,669.34 after my first payment 1,180.66 on my home aug 2016. $330.66 going to principal $850.00 going to the bank or interest. I take 10,000 out of my HELOC and place it against the primary note now jumping down to january 2019's payment owing 229,669.34 on the 1st and 10,000 on the HELOC and not knocking off over 2 years of payments and almost 25k in interest payments. Now my payment is the same $1,180.66 which would come out of my new " Checking/HELOC" account as normal and on time but 366.36 now going to principal and 815.59 going to the bank as interest a difference of 34.41 in interest savings, $35.7 more monthly going to principal if it is a rental do you see how this can leverage rent further? Also I have a fixed rate 1st with a lump sum for mortgage 1 and a HELOC adjustable rate and daily account balances. now calculate the payment on the HELOC with worse case scenario of 10k against it. should be less as this is now your checking account. interest rate I have is 3.99 so the formula is ( .0399/365 days in a year) X (ammount owed) x 30 days in a month ( interest is acquired daily including on your primary note if you understand this concept then you understand how larger sums of money can save big.) So the longer you hold onto your income from work and the longer you wait to pay your bills you use your money to leverage your daily interest rate balance. Bigger Checks/Bigger bills = Bigger buy down of interest and bigger savings/leverage. The more you make the more your savings should be just like a checking you need a separate savings you try and place 30% monthly income into. For the average Joe this is idiotic Idea as it is just as easy for 20 bucks a year to save the money and place it against his note at the end of the year. The breaking point rises quickly. The real savings is in the 25k I don't have to pay in interest for spending the large sum against the note originally. For someone making large amounts of money if they execute this properly they can fully leverage their net worth. This is not for your average JOE. The average JOE looking pay off their house can do so in better ways with less risk. HELOC should be used for repairs on the primary home or to buy cash flowing high demand area rental income real estate. The book fails to mention yes you use this HELOC as a checking but you also need savings account, and you never want to pay off your primary.
Disclaimer: I haven't watched the video or actually used this strategy.
I modeled this out, and it does look like there a marginal benefit to the strategy compared to just paying extra principal each month. It seems to come down to the value of lowering the average daily balance of the HELOC with the timing of income and expenses.
Basically assuming you dump your paycheck (paid monthly) onto the HELOC at the beginning of the month, you have reduced the total principal balance by a significant amount. As you pay expenses for the month, the HELOC balance gradually increases until you effectively have the same principal balance on this HELOC combined with the Mortgage as you would have with the mortgage with an accelerated payment.
The picture attached shows the comparison and how the HELOC method averages out a lower average debt level resulting in lower interest.
That said, the total savings and ability to pay off the mortgage faster is minor compared to potential HELOC fees and risks, so I don't see it being worth it.
I am also new to this, and would love for a critique to show me where this might be wrong.
I would share the excel model, but I am not sure how to do that.
Thanks!
I don't really get your math because by my calculations, a HELOC does indeed work out better.
On a amortization schedule, you are paying much more interest at the beginning than you are on a HELOC. On a HELOC, more of the same payment goes to pay down principle.
Glad to see some others chiming in too. When I get a chance, I'll try to model the scenarios that @David Dachtera and @Account Closed described. Be back in a bit...
Again, please review the video linked in the earlier message. I know - it's long boring and almost impossible to listen to, but it should answer everyone's questions - including Eric's and show him where he goes off-track and gets the wrong answer.
Okay, so I modeled the example that @David Dachtera used where you pay down $3k on a $150K mortgage using a HELOC and then just make minimum payments (interest only) on the HELOC. The results confirmed what I thought:
| Mortgage | |
| PV | $ 150,000 |
| r | 3% |
| n | 360 |
| pmt | ($632.41) |
| Scenario 1: | Standard Mortgage Payments | |||
| n | pv | int | pmt | fv |
| 1 | $ 150,000.00 | $ 375.00 | $ (632.41) | $ 149,742.59 |
| 2 | $ 149,742.59 | $ 374.36 | $ (632.41) | $ 149,484.54 |
| 3 | $ 149,484.54 | $ 373.71 | $ (632.41) | $ 149,225.85 |
| 4 | $ 149,225.85 | $ 373.06 | $ (632.41) | $ 148,966.51 |
| 5 | $ 148,966.51 | $ 372.42 | $ (632.41) | $ 148,706.52 |
| 6 | $ 148,706.52 | $ 371.77 | $ (632.41) | $ 148,445.88 |
| 7 | $ 148,445.88 | $ 371.11 | $ (632.41) | $ 148,184.59 |
| 8 | $ 148,184.59 | $ 370.46 | $ (632.41) | $ 147,922.64 |
| 9 | $ 147,922.64 | $ 369.81 | $ (632.41) | $ 147,660.04 |
| 10 | $ 147,660.04 | $ 369.15 | $ (632.41) | $ 147,396.79 |
| 11 | $ 147,396.79 | $ 368.49 | $ (632.41) | $ 147,132.87 |
| 12 | $ 147,132.87 | $ 367.83 | $ (632.41) | $ 146,868.30 |
| 1-Yr Totals: | $ 4,457.17 | $ (7,588.87) |
| r (HELOC) | 3.00% | |||
| Scenario 2: | Paydown Mortgage $3K with HELOC | |||
| n | pv | int | pmt | fv |
| 1 | $ 147,000.00 | $ 367.50 | $ (632.41) | $ 146,735.09 |
| 2 | $ 146,735.09 | $ 366.84 | $ (632.41) | $ 146,469.53 |
| 3 | $ 146,469.53 | $ 366.17 | $ (632.41) | $ 146,203.29 |
| 4 | $ 146,203.29 | $ 365.51 | $ (632.41) | $ 145,936.40 |
| 5 | $ 145,936.40 | $ 364.84 | $ (632.41) | $ 145,668.83 |
| 6 | $ 145,668.83 | $ 364.17 | $ (632.41) | $ 145,400.60 |
| 7 | $ 145,400.60 | $ 363.50 | $ (632.41) | $ 145,131.69 |
| 8 | $ 145,131.69 | $ 362.83 | $ (632.41) | $ 144,862.12 |
| 9 | $ 144,862.12 | $ 362.16 | $ (632.41) | $ 144,591.86 |
| 10 | $ 144,591.86 | $ 361.48 | $ (632.41) | $ 144,320.94 |
| 11 | $ 144,320.94 | $ 360.80 | $ (632.41) | $ 144,049.33 |
| 12 | $ 144,049.33 | $ 360.12 | $ (632.41) | $ 143,777.05 |
| 1-Yr Totals: | $ 4,365.92 | $ (7,588.87) |
| HELOC Balance | |||||
| n | pv | int | pmt | fv | Net fv (HELOC + Mortgage) |
| $ 1.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 149,735.09 |
| $ 2.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 149,469.53 |
| $ 3.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 149,203.29 |
| $ 4.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 148,936.40 |
| $ 5.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 148,668.83 |
| $ 6.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 148,400.60 |
| $ 7.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 148,131.69 |
| $ 8.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 147,862.12 |
| $ 9.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 147,591.86 |
| $ 10.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 147,320.94 |
| $ 11.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 147,049.33 |
| $ 12.00 | $ 3,000.00 | $ 7.50 | $ (7.50) | $ 3,000.00 | $ 146,777.05 |
| 1-Yr Totals: | $ 90.00 | $ (90.00) |
| Ending Balance - Scenario 1 | $ 146,868.30 | |
| Ending Balance - Scenario 2 | $ 146,777.05 | |
| savings using HELOC | $ 91.25 | <== but remember, you paid $90 in interest towards the HELOC over the year so you have to subtract that out |
| HELOC interest | $ (90.00) | |
| net savings using HELOC | $ 1.25 |
This proves that you can't just swap debt and expect to save money overall. The reason is simple - 3% interest on a dollar is the same whether it's a loan or HELOC. You can get some slight savings with a HELOC by knocking down the average daily balance over the course of a month, but that's about it.
*THAT* is what mortgage acceleration is all about: Reducing the total interest paid while reducing the number of payments.
Actually isn't it mostly that you are paying your principal over a shorter period of time? If I owe $150,000 principal I would choose to pay it over 30 years versus 5 years! Sure there is some interest expense involved but you are getting the time value of money pretty cheap at today's sub 4% mortgages.
And this scheme is trapping your hard earned after tax money into an illiquid asset. AND now if you want to use that (YOUR) equity you have to beg and pay the bank to get your money out!
Sorry, the formatting came out weird on that. The totals rows are the yearly totals for interest and payments. I can send the excel file if anyone wants it.
Does anyone include the risk of your bank lowering your heloc and in essence taking away your savings?
Hey All! I am knew to the site and have yet to introduce myself to everyone but have been following this conversation all day and am fascinated. I have never heard of such a method before and honestly know very little about the risks of HELOC's but after watching the video and ignoring the constant sales pitches I did find it to be a pretty powerful strategy... (clearly it only would only work for people with positive cash-flow and discipline!)
Soo.. I decided to do a quick google search on mortgage acceleration programs and found this
http://www.wikihow.com/Follow-the-Mortgage-Accelerator-Plus-Program
The above link is an extremely quick read and it seems to be a variation of the method talked about in the video (or at least the portion I got through) but this seems like a great way to maintain flexibility in your budget while still chunking down your principle. As well as benefitting from cash rewards and or air miles on credit cards.
Thanks for the discussion!
Glad it provided some useful insights into alternative methods.
Eric is still off track - I still don't know what he's doing. If he would just do what the video tells him to do, he would see that 1st mortgage interest savings from the first "chunk" is many times more than $90 and change. It's probably closer $3,500, rough guess time assuming the 1st mortgage is in the 1st month of its second year out of 30 when the first $3,000 chunk goes toward it.
@Rich Vogel, would you care to elucidate? Under what circumstances would a lender "cut your HELOC"? ...and if you're only using $3,000 out of a $35,000 limit, for example, why would that matter?
@Account Closed,
Look at it this way:
$150,000 @ 3% for 360 months, Monthly payment: $632.41, times 360 payments = $227,666
That is, over 30 years your 3% amortized loan costs you $77, 666 in interest. That 3% is really more like 52%.
David J Dachtera
If your only doing 3k at a time and your heloc is 35k you’re not at risk for a bank lowering your limit that low but if you are doing large sums like some of the readers mentioned above then you can be at risk. When the economy was going down the bank actually came to me and told me that they were lowering my line from 150k to 122k. So for instance if I was using my heloc as my savings account just to keep my interest low then I would have lost access to that money. When I asked them why they lowered it they stated cause they wanted to lower their exposure to the market. My partner’s bank just got bought by another bank and his bank manager told him that be prepared that they might be lowing there HELCO outstanding amounts.
This concept is new to me so I read the comments objectively and watched the YouTube video in its entirety. I have to hand it to @Eric Jones, you have the patience of a saint dude, and I agree with your analysis. @Account Closed I share your view also. Using debt to pay debt is a dangerous game, especially when there is no part of this strategy that actually "puts your money to work" as the video states, they are just timing the HELOC payments using ALL of your income to save a few bucks a month, no thanks. Crazy risky and I would much rather buy a rental using that HELOC for the down payment and actually see a return + build equity than throw it at another debt. My 2c and thanks for the enlightening conversation everyone!
@Account Closed,
Look at it this way:
$150,000 @ 3% for 360 months, Monthly payment: $632.41, times 360 payments = $227,666
That is, over 30 years your 3% amortized loan costs you $77, 666 in interest. That 3% is really more like 52%.
David J Dachtera
Exactly! 52% over THIRTY YEARS! Or only $417 a month towards principal vs. $2500!!! a month on a 5 year plan.. Alex, I'll take 30 year plan for $416.
The proof that I provided with the two scenarios really settles this whole debate. I suggest carefully reviewing that particular example and understand the math I did.
If you claim that my math is wrong, go ahead and point out where. But I assure you it's correct.
Lastly, I don't need to hear the explanation provided in the video by spending an hour and a half listening. Like I've said, I learned about this technique a while ago, after listening to similar videos, and I made up my mind to determine if it was legitimate. At one point, I too was convinced it was some magical payoff strategy that counteracted the amortization, but I wasn't accounting for the fact that I now have principal and interest on a HELOC to account for as well. You can't look at the mortgage in isolation, you have to analyze the starting and ending values of the mortgage, HELOC, as well as total interest and payments made on both. Only when you do this will it make sense. If someone told you to spend an hour and a half watching a video where they are trying to prove that 2 + 2 = 5, I doubt you'd waste your time with it. I provided a proof - please explain how the math in that proof is wrong.
Isn't using debt to reduce your interest expense "putting your money to work" in a way ("reverse-arbitrage", sort of)?
@Eric Jones , et al...
Go to this URL and download the Amortization Schedule spreadsheet.
Enter the parameters discussed:
Principal: $150,000
Interest: 3%
Term 30 years
Look at the schedule. Go to payment 13. Of the $632.41 payment, $367.17 is applied as interest, $265.24 is applied as principal to a principal balance of $146,603.01.
Now, subtract the interest amount from $3,000. You should get $2632.83.
Subtract THAT amount from the principal balance. You should get $143,970.18.
Look down the schedule to find where the principal balance is approximately $143,970.18.
You should find it at payment 22, principal balance $144,185.73.
That means (more than) 9 payments were skipped saving (more than) $3,274.50 in interest. The interest to repay the HELOC will be MUCH less than $3,274.50.
...and every time you throw a $3,000 chunk at the HELOC, you'll skip more and more payments as the interest portion of the 1st mortgage payment gets less and less the further you go down the amortization schedule.
Got it now Eric?
You can even do this: in cell D73, enter this formula: =3000-F73
You will see the numbers change. Now copy that formula into row 74, then row 75, and so on and watch the "Additional Payment" amount increase. I did that three times (4 total) and knocked 37 payments off of a 360 month term.
Do that until the principal balance is less than $3,000. The remaining principle balance is just short of your final payment.
Are there any questions?
No, it doesn't make sense, and the numbers prove it.
I'll again invite you to review the video.
An interest savings in excess of five figures for a 30-year loan is HARDLY miniscule!
Again at the expense of PAYING 30 years of principal in a shortened time period.
The proof that I provided with the two scenarios really settles this whole debate. I suggest carefully reviewing that particular example and understand the math I did.
If you claim that my math is wrong, go ahead and point out where. But I assure you it's correct.
Lastly, I don't need to hear the explanation provided in the video by spending an hour and a half listening. Like I've said, I learned about this technique a while ago, after listening to similar videos, and I made up my mind to determine if it was legitimate. At one point, I too was convinced it was some magical payoff strategy that counteracted the amortization, but I wasn't accounting for the fact that I now have principal and interest on a HELOC to account for as well. You can't look at the mortgage in isolation, you have to analyze the starting and ending values of the mortgage, HELOC, as well as total interest and payments made on both. Only when you do this will it make sense. If someone told you to spend an hour and a half watching a video where they are trying to prove that 2 + 2 = 5, I doubt you'd waste your time with it. I provided a proof - please explain how the math in that proof is wrong.
I've been reading this conversation with fascination. I remember an exercise in my financial management class in college that was very similar to what's being discussed here.
The takeaway was that you're benefiting from prepayment (paying at the beginning of the period instead of the end). It has (almost) nothing to do with the interest calculation methodology. Simply throwing some cash at the mortgage on day one would have the same effect.
It's also possible that I'm missing some nuance in the point being debated between Eric and David.
Did you do the amortization Schedule Spreadsheet exercise?