Use HELOC to paydown mortgage fast

415 Replies

@David Dachtera

Your interest only HELOC would look like this:

PV Int PMT FV
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
$ 3,000.00 $ 7.50 $ (7.50) $ 3,000.00
Total $ 75.00  

@Eric Jones ,

...and as I have PROVEN to you, amortization has EVERYTHING to do with how the interest is calculated, both per-payment and over the life of the loan. The amortization formula initially SETS the payment, but it does NOTHING to prohibit or prevent pre-payment of the principal - a.k.a., "accelerating" the loan to shorten the total term and lower the total interest paid over the life of the loan.

If you think the Amortization Schedule Spreadsheet is wrong, contact Vertex32 and explain to them your findings. They will likely be interested in discussing it. That's where I got it (mouse over the link - your browser's status bar area should show the actual URL behind the text). All I know is that it works.

The key to accelerating a mortgage is to understand the relationship between the interest and principal portions of the payment and how to manipulate that in your favor.

Going back and looking over your post, however, it looks like you used the wrong formulas in the wrong places.

From my earlier post:

For the interest-only HELOC calculations, build a spreadsheet like this:

The results should look a little like this:

3000 3.75% 9.38 300 309.38 2700
2700 3.75% 8.44 300 308.44 2400
2400 3.75% 7.50 300 307.50 2100
2100 3.75% 6.56 300 306.56 1800
1800 3.75% 5.63 300 305.63 1500
1500 3.75% 4.69 300 304.69 1200
1200 3.75% 3.75 300 303.75 900
900 3.75% 2.81 300 302.81 600
600 3.75% 1.88 300 301.88 300
300 3.75% 0.94 300 300.94 0
 
51.56     

We'll see how bad the forum software scrambles that. I copied from Excel and pasted here. I had to move the 51.56 value so it appears in the same columns as it does in Excel.

Your post looks like you somehow mixed the two spreadsheet layouts and got the wrong answer (still off the tracks).

Try this:

For a moment, just forget everything know about this topic and simply follow directions.

If you still end up in the weeds, well, you probably need more than either BP or I can do for you.

@David Dachtera - and you still haven't done the exercise that I asked you to do. I've done your exercise and proved that it's wrong. Now do mine. 

Ending balance after month 1 for a 150K loan, a 147K loan, and a 3K HELOC. If you won't even make an effort to understand I'm going to have to wrap up this conversation. I do this on a daily basis for my job - you'd be wise to at least entertain me and do the exercise instead of arguing with words. Show me the math.

@Eric Jones ,

They don't seem to have that in a downloadable format. So, it's not usable for the acceleration exercise.

Case not yet closed.

Find one which matches your expectations and is downloadable ... if I have time, I will look for others.

... or, re-download the Vertex32 file since you may have inadvertently hosed it up (even though it's locked up pretty well).

... or, build your own. Then, we can continue.

For now, I've proven my case so many times over even Hillary's opponents would approve.

Originally posted by @David Dachtera :

@Eric Jones ,

...and as I have PROVEN to you, amortization has EVERYTHING to do with how the interest is calculated, both per-payment and over the life of the loan. The amortization formula initially SETS the payment, but it does NOTHING to prohibit or prevent pre-payment of the principal - a.k.a., "accelerating" the loan to shorten the total term and lower the total interest paid over the life of the loan.

If you think the Amortization Schedule Spreadsheet is wrong, contact Vertex32 and explain to them your findings. They will likely be interested in discussing it. That's where I got it (mouse over the link - your browser's status bar area should show the actual URL behind the text). All I know is that it works.

The key to accelerating a mortgage is to understand the relationship between the interest and principal portions of the payment and how to manipulate that in your favor.

Going back and looking over your post, however, it looks like you used the wrong formulas in the wrong places.

From my earlier post:

For the interest-only HELOC calculations, build a spreadsheet like this:

The results should look a little like this:

3000 3.75% 9.38 300 309.38 2700
2700 3.75% 8.44 300 308.44 2400
2400 3.75% 7.50 300 307.50 2100
2100 3.75% 6.56 300 306.56 1800
1800 3.75% 5.63 300 305.63 1500
1500 3.75% 4.69 300 304.69 1200
1200 3.75% 3.75 300 303.75 900
900 3.75% 2.81 300 302.81 600
600 3.75% 1.88 300 301.88 300
300 3.75% 0.94 300 300.94 0
 
51.56     

We'll see how bad the forum software scrambles that. I copied from Excel and pasted here. I had to move the 51.56 value so it appears in the same columns as it does in Excel.

Your post looks like you somehow mixed the two spreadsheet layouts and got the wrong answer (still off the tracks).

Try this:

For a moment, just forget everything know about this topic and simply follow directions.

If you still end up in the weeds, well, you probably need more than either BP or I can do for you.

I just want to throw out there that Eric and I are probably about as qualified as anyone to comment on this issue. He has a masters degree in finance and I develop accounting policies for billions of dollars of amortizing liabilities.

Just something to think about when disputing what we're saying. I can assure you that if I tried to pitch your theory to my boss as a way to save on interest expense I would be shown the exit.

This might be the end of my involvement. You can lead a horse to water but you can't make him drink.

@David Dachtera - we're not talking about acceleration yet. We're talking about buiilding a basic amortization table, which you haven't even been able to do yet. I'm trying to walk you through the process, but you're jumping the gun to acceleration and not recognizing your error with the basics. First learn how to build a correct amortization table, then we can move on. 

Also, please try the exercise that I asked or I'm done here. I'm willing to explain and teach you how the math REALLY works, but you have to give a little. This is a two way conversation and I've entertained your exercises - and showed that they were wrong. At least show me the same respect in return. 

@Eric Jones ,

I'm going to have to keep dodging your red herrings. We're not here to re-invent the amortization schedule spreadsheet. We're here to figure out what you're doing wrong since everything works exactly as expected when I do it.

Here's another spreadsheet you can download. Right click on it and select "Save as". (No, I didn't develop this one, either).

Guess what? When I plug in the parameters for our test case:

$150,000 at 3% for 30 years

... it exactly matches the Vertex32 results for monthly payment and the principal and interest portions of the first 24 payments (turn off rounding on the Vertex32 spreadsheet). For more payments, you'll have to manually extend the Excel-Easy spreadsheet.

Internet: 2

Eric: 0

NOW - case closed.

@Chris May ,

What can I say? This is recognized by financial planners, bankers and other experts from coast-to-coast as a valid strategy where it meets the consumer's need.

I don't take ANYONE at their word because of their age, sheep skins or experience. If you can't prove it, I keep my OWN counsel.

Originally posted by @David Dachtera :

@Chris May,

What can I say? This is recognized by financial planners, bankers and other experts from coast-to-coast as a valid strategy where it meets the consumer's need.

I don't take ANYONE at their word because of their age, sheep skins or experience. If you can't prove it, I keep my OWN counsel.

Question for you:

We're using the example of 150k mortgage at 3% with a 360 month payoff period.

We're in agreement that the monthly payments would be $632.41 (I think we agree on that much).

Now, imagine you had a 150k HELOC at 3% and decided to pay off your entire mortgage with it. Let's further assume you decided to pay $632.41 per month on this HELOC balance.

Is it your belief that the HELOC would be paid off in less than 360 months?

I'm trying to figure out if we're talking about two different things here. Based on everything you've said, it seems that you would expect the HELOC to be paid off earlier than 360 months because the interest calculation is different. Is that what you're saying?

This is brutal. @David Dachtera you are losing credability here.  @Chris May and @Eric Jones have been professional and kind trying to explain this to you. I'm not sure where you are getting hung up. Bottom line is 3% interest on $XXX is the same weather its in a HELOC or a 30 yr fixed. The only way this COULD work would be using a credit card that did not accumulate interest for a grace period...30 days or so and paid it off monthly. HELOCs acrue interest the day you use them. I also think you have a misunderstanding of amortization when you question why you pay so much interest initially. You are paying the interest on the remaining balance at the time. On 150,000 you pay 1 months interest on 150,000. When its paid down to say 100,000, you will pay interest on 100,000. The principle payment will always be what your original monthly payment was minus the current months accumulated interest....

You are very stuck on this working. It doesn't. You won't even try to understand it.   

@David Dachtera -

Checked out the new spreadsheet you attached - what's comical is it actually matches perfectly what I showed in my post (and contradicts what YOU previously showed for your amortization table), and you act as if that discredits what I've said! Haha... well, on a more serious note, if you're having trouble with basic amortization tables you shouldn't be advising "your people" to use this strategy. What happens if/when rates rise, and the fixed rate mortgage debt that they swapped for variable rate HELOC debt is now accruing interest at a higher rate?

When multiple people on this site are telling you that you're understanding it wrong, a wise person would take a step back and analyze their way of thinking, before just assuming that others are wrong. I think I'm done here because I don't think there is anything to be gained by going on...not sure if it's an honest misunderstanding, or just pride, but this doesn't seem to be going anywhere. 

All,

I'm trying to walk through this thread and I am apparently missing something ... wouldn't be the first time nor likely the last.

   

Base case:

In the thread's example we have a loan of $150,000.00 at an interest rate of 3%, interest is compounded monthly, and repayment is amortized over 30-years.   This results in a monthly payment of $632.41 {as others have pointed out}.  Over the period of 360 payments a total of $77,665.33 in interest will be paid to the lender along with the return of principal.

   

Periodic lump-sum prepayments:

I believe it was Mr. Dachtera who introduced prepaying the loan with a series of $3000 lump sums every ten months in addition to the regular monthly payment of $632.41.   The addition of these pre-payments - 21 full and one partial of $225.79 for a total of $63,225.79 reduces the effective amortization of the loan to 17.5 years (210 months).  Total interest paid drops to $43,031.89 a savings of $34,633.44 in interest paid to the lender.

If the lump-sum payments come out of our savings, then we are smiling foolishly as we have saved 44.6% of the originally scheduled interest.

Things are a little different if the initial lump-sum payment is borrowed from a secured LoC - which, for the sake of simplicity we will assume to also be at 3% compounded monthly.  We will also make the assumption that the $3000.00 will be repaid to the LoC in 10-payments before the next "lump-sum" is withdrawn.     The "lump-sum" will now cost us an additional $41.45 in interest every 10-months and we will need to make a monthly payment of $304.16 into the LoC to ensure the 3000.00 is paid-back.

Our interest paid would then become:  $43,031.89 + (41.45 * 21) = $43,902.34.  Now we are only saving $33,762.99 in interest (43.5%) and we have combined monthly payments of $632.41 + $304.16 = $936.57

   

Note:  I must presuming there is some assumption about the characteristics of the LoC or  how/when/if it gets repaid which I missed earlier in the thread ... otherwise .... 

    

Playing with payments:

Instead of borrowing a $3000.00 amount from our LoC to make a lump-sum payment on our original, amortized loan and then repaying our LoC just in-time to do it all over again, why wouldn't we simply make an additional payment of $304.16 directly onto the original loan?

Doing this results in a reduction of the effective amortization to 17.08 years (205 months).  Total interest paid drops to $41,857.25 which is a savings of $35,808.08 (46.10%).

We could improve upon this a little more by making bi-weekly payments of $291.88 + 140.38 = $432.26.  This would result in total interest paid of $41,689.19.  A savings of $35,976.14 (46.3%).

So ... we could save almost 3% more in total interest paid, by simply prepaying the original loan using the funds which would otherwise be required to service repaying the LoC.

If your mortgage is such that you can only pre-pay once per year, then the lump sum approach would be necessary.  However, if your mortgage allows open prepayment to an annual limit and/or an annual payment increase (as do most fixed mortgages in Canada), then borrowing from the LoC to prepay the mortgage serves little purpose unless your LoC was on better terms than the mortgage.  {Here in Canada, unless rates are dropping, a HELoC will command a rate 0.5 - 1.0% greater than a fixed-rate mortgage}

So other than the visceral, what have I missed in the above discussion?

@Roy N. - good post. I definitely appreciate your analytical approach.

I haven't checked your numbers, but they all seem to make sense at a high level. All I'd say is that in your analysis, the $3,000 HELOC payment was really just a $3,000 prepayment, since you are simultaneously making your standard monthly payment to the loan, while also paying additional money towards the HELOC balance. So clearly, you're talking about a prepayment scenario. It makes perfect sense that the debt would be paid off much quicker - you're paying extra each month.

I think the main source of disagreement and confusion in this thread is the notion that you can pay off debt quicker if it's in a HELOC vs. an amortized loan, assuming you're not making any prepayments. Or in other words, a 100K HELOC @ 3% would payoff quicker than a 100K amortized loan at 3%, assuming you're making the same monthly payment. The claim is that by swapping amortized debt onto a HELOC you'll save money, since the interest accrues differently on a HELOC. What I, and others, have been trying to explain is that both HELOCs and amortized loans accrue interest the same way. Or, in other words, interest accumulation is in no way related to amortization vs simple interest, but is instead wholly dependent on rate, balance, and compounding periods. Interest rate determines the rate at which interest accumulates on each dollar of debt, and there's nothing magical about HELOC debt or amortized debt for that matter.

Lastly, you're 100% right that it's pointless to transfer a balance to a HELOC when you could make payments directly to the loan itself. Not only do you not save anything in interest (assuming the rates are the same), but you're also eating up your valuable credit line, which is typically a variable rate and is subject to changes in the underlying index. It's better to save your credit line for profitable investments that earn much higher rates of return.

Originally posted by @Eric Jones :

@Roy N. - good post. I definitely appreciate your analytical approach.

...

I think the main source of disagreement and confusion in this thread is the notion that you can pay off debt quicker if it's in a HELOC vs. an amortized loan, assuming you're not making any prepayments. Or in other words, a 100K HELOC @ 3% would payoff quicker than a 100K amortized loan at 3%, assuming you're making the same monthly payment. The claim is that by swapping amortized debt onto a HELOC you'll save money, since the interest accrues differently on a HELOC. What I, and others, have been trying to explain is that both HELOCs and amortized loans accrue interest the same way. Or, in other words, interest accumulation is in no way related to amortization vs simple interest, but is instead wholly dependent on rate, balance, and compounding periods. Interest rate determines the rate at which interest accumulates on each dollar of debt, and there's nothing magical about HELOC debt or amortized debt for that matter.

 I could see where one, theoretically, may achieve some gain based upon differences in how interest in compounded between the amortized loan (presumably for a mortgage) and an LoC.  

In Canada, notes for fixed-rate mortgages are compounded semi-annually, not in advance while an LoC will be compounded monthly (at best) or daily (at worst) with reality being something in the middle (i.e. compounded monthly based upon daily average, highest amount, etc). 

Interest rate on both vehicles would have to be {near} identical or the amortized, fixed rate note would need to be at a higher rate than the LoC.

In my above post I mentioned the "borrowed lump-sum" approach being necessary if the terms of your mortgage note were such that it could only be prepaid on its anniversary {don't know if such notes still exist}.   I may also be a "necessary" approach if one had an erratic income and no savings.

@Chris May ,

Ok. Having had some time away from all this to think about it (my weekly investing group meeting), I believe I've figured out what @Eric Jones is doing wrong: he's using a paintbrush where he should be using screwdriver.

Yeah - that's a wierd analogy. The point is that the tool he's using is 100% suitable for his everyday bread-and-butter work. For the mortgage acceleration scenario, however, well, not so much. 

The tool takes in the parameters and provides information in the display. For example, using our example parameters, it does indeed show the monthly payment amount we expect, $632.41. It even provides a pie chart showing that at the end of the 30 year term roughly 5/8 of the total of payments goes toward principal while the balance goes to interest. About what we expect.

Then, click where it says to get the amortization schedule, it's again a "hard" display - we cannot plug in extra payments where we want them. There is only a limited provision to make additional fixed-amount payments once a year. 

Less than ideal, but let's work within those limits.

An extra $3,000 every 10 months (the example we've been using) is about the same as an extra $3,600 a year which fits the limitations of the tool. Doing that, then, we find that instead of the loan being paid off in January of 2046 it's now paid off in June of 2033. That is, we took 12-1/2 years off the 30 year loan. So, now it's paid off in 17.5 years which matches @Roy N. 's results.

Using the downloaded spreadsheets and a $3,000 payment every 10 months produces a comparable result, but not an exact match: 19.5 years instead of 17.5. Close enough for this example - it's late and I've grown quite weary of this discussion. I probably didn't do the spreadsheets quite right - that probably accounts for the deviation, though we did see earlier on in this thread that smaller "chunk" amounts produce less reduction in both the number of payments and the total interest paid. So, this meets expectations, as well.

Still, using Eric's tool, we still see that the acceleration technique works as predicted: The total number of payments is reduced - to 208, a 43% reduction - and the total interest paid is reduced, now $42,024.35, a 45% reduction.

The total interest paid to the HELOC over 20 "chunks" is $1,031.25 (there's probably some rounding error in that number, but close enough for this discussion), making the total interest savings $40,993.10.

 @Mike Landry ,

As I'm sure you can now see, mortgage acceleration unequivocally and inarguably DOES work, as demonstrated using the major correspondent's own financial tool. 

Even you got hung up on the HELOC red herring. Again, the HELOC is used solely as an accumulator for the lump sums periodically paid against the 1st mortgage. Other than that, it plays no role and has no relevance to the mortgage acceleration scenario.

I'm going to bed. 

G'night, gents. Thank you for a lively debate.

Originally posted by @David Dachtera :

@Chris May ,

.....

Then, click where it says to get the amortization schedule, it's again a "hard" display - we cannot plug in extra payments where we want them. There is only a limited provision to make additional fixed-amount payments once a year. 

...

This is one of the pieces I was missing when I read through the thread earlier.  I didn't think mortgages notes with "anniversary only" lump-sum payments still existed.  In Canada you can typically prepay whenever you wish and, provided you do not exceed the annual "prepayment limit" under the conditions of the note, you will suffer no penalty.

@Eric M. - Checked out the link you posted. That strategy does indeed work, because it's applying excess cashflow in your budget to your HELOC/loan balance since you are using the HELOC like a checking account. Say your monthly income is $5k and your monthly expenses are $4k - it then applies the $1k surplus to the HELOC (so you're effectivey prepaying by $1k per month). You could accomplish exactly the same thing by prepaying the loan directly for $1k, but that takes more discipline and effort since it's intentional, while using the HELOC is automatic. The claim being made in this thread is that you can payoff a HELOC balance faster than a loan, assuming the same interest rate and monthly payments. This is what I'm in contention with. 

@David Dachtera

David, please let's keep it simple for now. No talk of tools or prepayments. I asked a very direct question. Can you please respond to that?

Updated over 3 years ago

Adding for clarification: If you pay the entire balance of your mortgage using a HELOC on day one, and make the same monthly payments, do you think you would pay off the HELOC balance in more than 360 months, less than 360 months, or 360 months? This is an important question. Answer this with no talk of tools or other calculations. I want to make sure we're all clear on the basics.

Big kudos to @Eric Jones  for sticking with this.  Also, @Chris May and @Gregory Dunton .  I couldn't even read the whole thread, let alone do the analyses and posts like you guys have. 

The upshot folks, is definitely do not use a HELOC to pay down your primary mortgage is the HELOC interest rate is higher! If it is the same, there may be a tiny, marginal benefit* that is not worth the extra confusion. Just make extra payments on your primary mortgage (it will automatically go toward principal). If the interest of the HELOC is lower, it may be worth your while to use it to pay down your primary mortgage.

*The tiny, marginal benefit would come from how interest is calculated--average monthly balance vs balance on a particular day.

Originally posted by @David Dachtera :

As I'm sure you can now see, mortgage acceleration unequivocally and inarguably DOES work, as demonstrated using the major correspondent's own financial tool. 

Even you got hung up on the HELOC red herring. Again, the HELOC is used solely as an accumulator for the lump sums periodically paid against the 1st mortgage. Other than that, it plays no role and has no relevance to the mortgage acceleration scenario.

I'm going to bed. 

G'night, gents. Thank you for a lively debate.

Correct: No one's arguing about accelerating your mortgage. We all agree it can be done and saves interest over the life of the loan.  Why do you need a heloc? You don't. Just pay extra if you want. If you do use a heloc,  you are directly negating any benefit. 

Well, I've failed miserably. I did everything I could to keep everyone on track, but some are just bound and determined to run off into the weeds. I guess that's their comfort zone.

As I mentioned last night, experience in this thread has shown that more smaller payments produces less benefit than fewer larger payments. Download the spreadsheets and argue with them. I'm done.

Don't think a HELOC is the right account to use? Fine - use what ever suits you.

Mortgage acceleration is a choice, not a requirement. If your chosen strategies would benefit from it - use it!

G'Day, Gents!

Create Lasting Wealth Through Real Estate

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

Start here