Use HELOC to paydown mortgage fast

415 Replies

Originally posted by @David Dachtera :

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!Thi

The point that everyone here is making is that you don't need a HELOC, credit card, or any other revolving credit line to pay down your mortgage faster. Instead of making payments on a mortgage AND a HELOC, simply apply the would-be HELOC payment to your mortgage. The effect is the same and your loan will be paid off in the same amount of time.

You've claimed multiple times that the reason this method works is due to the formula for interest calculation between different types of loans/credit lines. That is blatantly FALSE. As Eric and others have repeatedly said, the reason the mortgage is paid off early is due to prepayments, not interest calculation differences. Again, simply cutting your mortgage holder an extra check every so often has the exact same effect. There is no need for a second credit facility.

Your clear ignorance of what amortization even is, let alone how it works, is shocking. You've made numerous false statements about how financing works. Everyone needs to learn sometimes, but your unwillingness to listen to folks who can explain how you're mistaken is, quite frankly, embarrassing and a disservice to the community here.

This scam pops up every 4 years. The person who promotes it is selling you a 4k piece of software to help you move money on your HELOC and pay down your mortgage in 8 or 9 years. The math doesn't work especially when 30 year mortgage rates are 3.7%. Common sense alone tells you that floating money cannot eliminate that much interest. An hour plus video explaining how this works doesn't pass the smell test.

One last comment from me about a personal experience that is different but kind of similar to what we're talking about here. 

Ever get those 0% APR convenience checks from your credit card companies in the mail? Well I took advantage of one of those to payoff a $6000 chunk of a student loan that I have @ about 7.5%. My thought was if I can borrow money at 1.32% (I paid a 2% of the balance fee up front, but then get 18 months of no interest, so that works out to an effective rate of 1.32%) to payoff a loan at 7.5% I'm saving 6.18%. But the problem was, I still had a balance on the loan, so my minimum monthly payment was still there (about $150/month), but then I had to pay the minimum credit card payment which is 1% of the balance, so $6000*1% = $60. So before I was paying $150 per month, and now, with the credit card I'm paying $210 a month. So that idea backfired - although I was paying down the balance faster, it was at the expense of paying more out of pocket each month.

Same thing applies to the loan and HELOC example we've been describing here. You continue having to pay the $632.41 per month, but now you also have to pay at least the interest on your HELOC of $7.50 per month. So your net monthly payment is going up (from $632.41 to $639.91). This contributes to a slightly faster payoff since it's mathematically equivalent to making an additional $7.50 prepayment each month to the loan. Just another factor to consider - if you want to keep your monthly payments the same, do not under any circumstance swap the debt over to some other debt instrument. Because the new debt instrument will require monthly payments that will have to come out of your pocket.

Originally posted by @David Dachtera :

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!

 David,

I actually demonstrated the opposite - using a mortgage amortization spreadsheet from Vertex 42.

When applying lump-sum payments of $3000 every 10 months, the effect of the pre-payments (21 full and one partial of $225.79 for a total of $63,225.79)  was to reduce the effective amortization of the loan to 17.5 years (210 months). Total interest paid drops from $77,665.33 to $43,031.89 a savings of $34,633.44.

If we leave the LoC out of the picture and assume the $3000 lump-sum payments are coming from savings, you would still be further ahead to increase your monthly payment by $300 - so from $632.41 to $932.41 in lieu of the lump sum every month.

By doing this, you would shorten the effective amortization by an additional three months to 17.25 years (207 months).   Total interest paid would be $42,119.19 for a total savings of $35,546.14 - an additional $912.70 interest saved over the lump-sum approach.

@Chris May ,

"You've claimed multiple times that the reason this method works is due to the formula for interest calculation between different types of loans/credit lines." 

Show me where I said that.

"Your clear ignorance of what amortization even is, let alone how it works, is shocking. You've made numerous false statements about how financing works. Everyone needs to learn sometimes, but your unwillingness to listen to folks who can explain how you're mistaken is, quite frankly, embarrassing and a disservice to the community here."

You're entitled to your opinion. I proved many times over that my points are valid and the calculations work. Want to argue the calculation logic? Contact Microsoft - they develop and distribute Excel. Want to argue the implement of the spreadsheet built-in functions? Contact Vertex32 and/or Easy-Excel. They develop their respective products.

I just use these products. I do not develop them.

Originally posted by @Eric Jones :

.....

Same thing applies to the loan and HELOC example we've been describing here. You continue having to pay the $632.41 per month, but now you also have to pay at least the interest on your HELOC of $7.50 per month. So your net monthly payment is going up (from $632.41 to $639.91). This contributes to a slightly faster payoff since it's mathematically equivalent to making an additional $7.50 prepayment each month to the loan. Just another factor to consider - if you want to keep your monthly payments the same, do not under any circumstance swap the debt over to some other debt instrument. Because the new debt instrument will require monthly payments that will have to come out of your pocket.

You still have to pay down the principal on the HELoC before your next lump-sum payment or your additional interest payment will go from $7.50/mth to $15.00/mth ... and then to 22.50, then 30.00 ... so your monthly payment will not be $7.50, but $304.16.

@David Dachtera You said:

"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."

This is false. They are unrelated concepts. You can have an amortizing loan with compounding interest. 

You also said:

"If you think that's true, then perhaps you can explain why the interest and principal portions of the payment on an amortized loan decrease and increase respectively in INVERSE proportion over the life of the loan while they both decrease in DIRECT proportion in a revolving (non-amortized) line if no further portion of the credit line is used."

This statement represents a base level lack of understanding as to what amortization is. The relationship between interest and principal is EXACTLY the same for any loan whether it is an amortized payment loan and a revolving credit line is the same. Your statement is wildly incorrect. There is no inverse vs direct correlation of interest between loan types.

That's why I asked you that very specific question last night... which you still have yet to answer. 

If you answer my question from earlier about HELOC vs mortgage payments I may try to resume this conversation again.

@Roy N. - I agree if we're talking about a HELOC paydown scenario, but we're not. I'm referring to a minimum payment scenario on the HELOC. At one point in this thread, David claimed that you transfer the balance to the HELOC and just make minimum payments on the HELOC balance. He claims that you still see a significantly quicker total debt payoff, because he believes that a HELOC balance accrues interest differently than a loan balance. This was the whole debate in the thread... he believes that an amortized loan accrues interest differently than a HELOC. I'm not analyzing the payoff scenario the way it's described in the video, but the way it was described by David.

Originally posted by @Eric Jones :

@Roy N. - I agree if we're talking about a HELOC paydown scenario, but we're not. I'm referring to a minimum payment scenario on the HELOC. At one point in this thread, David claimed that you transfer the balance to the HELOC and just make minimum payments on the HELOC balance. He claims that you still see a significantly quicker total debt payoff, because he believes that a HELOC balance accrues interest differently than a loan balance. This was the whole debate in the thread... he believes that an amortized loan accrues interest differently than a HELOC. I'm not analyzing the payoff scenario the way it's described in the video, but the way it was described by David.

 So, it is possible that interest accrues differently between the mortgage note and the LoC as the compounding may be calculated differently (I made reference above to how mortgage notes in Canada compound every six-months, not in advance and an LoC will compound monthly).  If all else were the same (initial principal, interest rate, payments) the difference would be marginal ... and, in Canada, would favour the mortgage note.

@Roy N. - the difference in compounding doesn't change the way that interest is calculated, it changes the way the Balance is calculated. 

Interest Paid per compounding period = Loan Balance * Interest Rate / compounding periods per year

For a HELOC:

Loan Balance = Average daily balance <== can lower this by making multiple payments over a month, and therefore accrue less interest

For a Loan:

Loan Balance = the ending balance from the previous month.

So you can save money with a HELOC, by making multiple payments over a month to lower the average daily balance. But it's important to understand that you're changing the Loan Balance portion of the equation, not the interest portion.

I just spent two hours reading this thread in detail. One observation is that @David Dachtera changed his argument. He originally supported the idea of a HELOC to make lump sum payments as a way to save money paying off the loan. Later the argument states that larger lump sums are better than smaller monthly payments. These are two different arguments.

- Fact: Setting aside where the money comes from, making $3000 payments every 10 months will reduce the payoff term on the loan in the earlier example to a little over 17 years. 

- Fact: Paying $3000 in month one and every ten months thereafter versus paying $300 per month will result in a faster pay down period. This is because earlier pay down of principal reduces interest more over time. 

I think everyone agrees on the first two points. The debate is whether it would be better to use a HELOC for lump sums rather than just paying smaller amounts of cash monthly. This means you need to calculate total cost of the HELOC payments and compare that to just paying cash monthly. The difference is you are just adding interest back in. All you have done is financed prepayment at the same or likely higher interest rate than your original mortgage.

Assuming the HELOC has the same interest rate, it will accrue interest at a similar rate as your first mortgage. A HELOC may have higher interest or additional fees that could make it even worse.

If you want proof that a HELOC offers no interest payment advantage, look no further than the amortization tables that @Chris May provided comparing a 30 year fixed versus paying a HELOC off in 30 years. Even before I read his post, I had done the same comparison myself. You are effectively paying the same amount of money assuming the interest is the same. Financing your loan prepayment with another loan gains you nothing.

It is the prepayment itself that reduces the term on the primary mortgage.

There seems to be a misconception that 30 year fixed mortgages are front end loaded with interest. This is not the right way to look at it. The interest is higher on the front end because the principal owed is higher. As you pay down principal, the interest portion reduces because there is less principal. It is not your interest that is fixed, it is your total payment that is fixed.

The reason the payment term reduces when you prepay principal is because your payment never changes, but the amount going to principal accelerates. That is because it is a fixed monthly payment so less interest means more principal.

It may appear that a HELOC is better because it is not a fixed payment. That means if you take out a lump sum on your HELOC and pay interest plus a fixed principal amount each month, your payment will decrease each month. If you pay a fixed sum each month, your HELOC will look similar to your fixed rate mortgage as shown in the comparison that Chris did.

@Eric Jones and @Roy N. and Chris thanks for taking time to explain this. David I encourage you to look closely at what you are arguing. Your argument almost had me convinced until I read more and started crunching examples. The numbers do not deceive, it is how they are presented. 

@Eric Jones

Perhaps a poor choice of words ... it's a consequence of being illiterate in two languages ;-)

Through changing (hopefully lowering) the principal balance several times over the course of a period, you are changing the amount of interest accrued (or balance of interest owned/due if you prefer).

We are on the same page here ... just some language differences.

Originally posted by @Joe Splitrock :

- Fact: Paying $3000 in month one and every ten months thereafter versus paying $300 per month will result in a faster pay down period. This is because earlier pay down of principal reduces interest more over time. 

 Joe ... but only if you make your first lump-sum payment at the time of origin (in advance if you will ... which is the same as borrowing 147,000.00), otherwise increasing your payment by $300/month will come out ahead.

Now, if you take that monthly payment of 932.41 (632.41 + 300) and make semi-monthly payments of 466.20, you come out further ahead.

Then there is may favourite payment frequency - {Accelerated} bi-weekly:  take your semi-monthly payment, but make a payment every two weeks.   Applying this to the thread's running example, you would end-up with an effective amortization of 15.5 years (403 months) and total interest paid would be $37,557.29  ... a savings of $40,108.04 (51.6%).

     

When trying to avoid paying interest, best to hit early, hit hard (as big as you can) and hit often.

* Heartfelt Sigh *

You guys are STILL hung up on the HELOC red herring.

How many times have I said this now ...

"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 in and has no relevance to the mortgage acceleration scenario."

What part of that statement is in ANY way ambiguous?

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

Someone earlier said, "try to keep it simple" I AM trying to keep it simple. Every keeps wanting to over-complicate it! ... with irrelevant stuff!

Understand: you're not going to convince me - or anyone else - that something which has been proven over and over again - and the proof has been shown here - is not true. Argue all you want - it's not happening.

As I told Eric, believe what you will.

Think of me what you will.

I've proven my case, and I'm comfortable with that.

Have a Great Day!

Originally posted by @Joe Splitrock :

I just spent two hours reading this thread in detail. One observation is that @David Dachtera changed his argument. He originally supported the idea of a HELOC to make lump sum payments as a way to save money paying off the loan. Later the argument states that larger lump sums are better than smaller monthly payments. These are two different arguments.

- Fact: Setting aside where the money comes from, making $3000 payments every 10 months will reduce the payoff term on the loan in the earlier example to a little over 17 years. 

- Fact: Paying $3000 in month one and every ten months thereafter versus paying $300 per month will result in a faster pay down period. This is because earlier pay down of principal reduces interest more over time. 

I think everyone agrees on the first two points. The debate is whether it would be better to use a HELOC for lump sums rather than just paying smaller amounts of cash monthly. This means you need to calculate total cost of the HELOC payments and compare that to just paying cash monthly. The difference is you are just adding interest back in. All you have done is financed prepayment at the same or likely higher interest rate than your original mortgage.

Assuming the HELOC has the same interest rate, it will accrue interest at a similar rate as your first mortgage. A HELOC may have higher interest or additional fees that could make it even worse.

If you want proof that a HELOC offers no interest payment advantage, look no further than the amortization tables that @Chris May provided comparing a 30 year fixed versus paying a HELOC off in 30 years. Even before I read his post, I had done the same comparison myself. You are effectively paying the same amount of money assuming the interest is the same. Financing your loan prepayment with another loan gains you nothing.

It is the prepayment itself that reduces the term on the primary mortgage.

There seems to be a misconception that 30 year fixed mortgages are front end loaded with interest. This is not the right way to look at it. The interest is higher on the front end because the principal owed is higher. As you pay down principal, the interest portion reduces because there is less principal. It is not your interest that is fixed, it is your total payment that is fixed.

The reason the payment term reduces when you prepay principal is because your payment never changes, but the amount going to principal accelerates. That is because it is a fixed monthly payment so less interest means more principal.

It may appear that a HELOC is better because it is not a fixed payment. That means if you take out a lump sum on your HELOC and pay interest plus a fixed principal amount each month, your payment will decrease each month. If you pay a fixed sum each month, your HELOC will look similar to your fixed rate mortgage as shown in the comparison that Chris did.

@Eric Jones and @Roy N. and Chris thanks for taking time to explain this. David I encourage you to look closely at what you are arguing. Your argument almost had me convinced until I read more and started crunching examples. The numbers do not deceive, it is how they are presented. 

Great post. Sums up the conversation well and I agree with everything you said.

David either realized he was wrong and changed his argument halfway through, or doesn't know what point he's trying to make.

Thank you.

@David Dachtera I watched the video link you provided to see where the slight of hand occurs. 

His example in the video uses a $300K loan at 6% and his suggestion is to take out a HELOC for $15K for 7%.

He says to apply the $15K in month one to the principal on your 30 year home loan. He then shows that it would take 45 payments to pay off $15K in principal and goes on to say that by month 45 you would have paid $66.022.63 of interest. That is the total interest paid on a $300K loan over 45 months at 6%, 30 years. He states the $66K is equivalent to paying 440% interest on the $15k.

This was at the 28:52 time marker in the video. This is where I called BS and turned off the video. This and several other statements were incorrect, so either he is financially illiterate or is lying. Either way you should have turned off the video too and you should do the BP community a favor by removing the link.

The loan amount is for $300,000, so the $66,022.63 is the interest paid for $300,000 over 45 months, NOT interest paid for $15,000. Run the numbers on $285,000 financed over 30 years and the interest paid in the first 45 months would be $62,721. Funny thing about numbers is they don't lie... Subtract the $62,721 from $66,022 and you get $3301 paid on $15,000 over 45 months. Divide that by 45 months and multiply by 12 to get the annual interest paid. That gives you $880 paid annually on the $15,000, which works out to 6%, the loan interest rate amount. BAM! The presenter is recommending you transfer $15,000 of debt at 6% over to another loan that is 7%, so now you will pay $3937 over those 45 months. That means you are paying a total of $66,658 worth of interest in the first 45 months which is more money.

I refuse to watch the rest of the video, but I suspect the advantage comes from how quickly you are paying off the revolving account. I am sure he advises paying it off much faster than 45 months, so you never see the full interest charge. The same advantage would come from just prepaying the original loan with cash. Due to the interest rate difference, it would actually be better.

Any thoughts to add @Eric Jones or @Chris May or @Roy N. ?

Originally posted by @David Dachtera :

How many times have I said this now ...

"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 in and has no relevance to the mortgage acceleration scenario."

The HELOC is completely relevant because that was the core question in the original post titled, "Use HELOC to paydown mortgage fast". The point is NO, you should not use a HELOC to finance a lump sum payment. It is just trading one debt for another and most likely will increase pay down amount through higher interest rate and fees. It is better to make smaller monthly payments directly to the mortgage.

As others have stated, it is actually best to reinvest your money towards income producing properties rather than pay down your mortgage, but that is out-of-scope from the original post. 

Originally posted by @Joe Splitrock :

@David Dachtera I watched the video link you provided to see where the slight of hand occurs. 

His example in the video uses a $300K loan at 6% and his suggestion is to take out a HELOC for $15K for 7%.

He says to apply the $15K in month one to the principal on your 30 year home loan. He then shows that it would take 45 payments to pay off $15K in principal and goes on to say that by month 45 you would have paid $66.022.63 of interest. That is the total interest paid on a $300K loan over 45 months at 6%, 30 years. He states the $66K is equivalent to paying 440% interest on the $15k.

This was at the 28:52 time marker in the video. This is where I called BS and turned off the video. This and several other statements were incorrect, so either he is financially illiterate or is lying. Either way you should have turned off the video too and you should do the BP community a favor by removing the link.

The loan amount is for $300,000, so the $66,022.63 is the interest paid for $300,000 over 45 months, NOT interest paid for $15,000. Run the numbers on $285,000 financed over 30 years and the interest paid in the first 45 months would be $62,721. Funny thing about numbers is they don't lie... Subtract the $62,721 from $66,022 and you get $3301 paid on $15,000 over 45 months. Divide that by 45 months and multiply by 12 to get the annual interest paid. That gives you $880 paid annually on the $15,000, which works out to 6%, the loan interest rate amount. BAM! The presenter is recommending you transfer $15,000 of debt at 6% over to another loan that is 7%, so now you will pay $3937 over those 45 months. That means you are paying a total of $66,658 worth of interest in the first 45 months which is more money.

I refuse to watch the rest of the video, but I suspect the advantage comes from how quickly you are paying off the revolving account. I am sure he advises paying it off much faster than 45 months, so you never see the full interest charge. The same advantage would come from just prepaying the original loan with cash. Due to the interest rate difference, it would actually be better.

Any thoughts to add @Eric Jones or @Chris May or @Roy N. ?

I watched the video to the one hour mark and had the same takeaway. It only got worse after you stopped watching.

The guy in the video is either a scam artist or just plain stupid. I suspect he's a scammer because the numbers he was throwing around were astonishingly misleading and reflect some pretty elaborate sleight of hand. To someone with less financial background, the argument he's making could potentially be very convincing. It was all smoke and mirrors though.

J F C...

I suggested the video to illustrate the mechanics of it, not for people to nit-pick it to death!

* NEWS FLASH *: None of us is perfect - GET OVER IT!

@Chris May , so now you're telling me it's wrong to learn something in the process of exploring it, yet you presume to chide me for not living up to exactly that expectation you hold of me. There's a word for that - I'll let you figure it out.

@david

Palm meet head.. Ugh

Can you summarise in one sentence what you are trying to tell us?

You kerp saying it didn't matter where the money comes from. Ok, CASH. I agree as long as it's not borrowed. but when you BORROW from anything that accrues interest there is no benefit. 

Originally posted by @David Dachtera :

J F C...

I suggested the video to illustrate the mechanics of it, not for people to nit-pick it to death!

* NEWS FLASH *: None of us is perfect - GET OVER IT!

@Chris May, so now you're telling me it's wrong to learn something in the process of exploring it, yet you presume to chide me for not living up to exactly that expectation you hold of me. There's a word for that - I'll let you figure it out.

 Almost everything you've said in this conversation is just plain false. I asked you a simple question multiple times and you avoided answering it at every turn. You've done the same to others. That's hardly showing a willingness to learn and explore. I demonstrated in a subsequent post that two of the many claims you stated as fact simply aren't true.

There's absolutely nothing to learn from that video. It's financial hocus pocus. Using debt to pay debt does not get you anywhere. A chorus of people on here are telling you that you're wrong.

On page 3, @David Dachtera , you presented formulas for an amortization schedule for a fixed rate term loan.  @Eric Jones created the spreadsheet seemingly the way you directed.  The problem with that set of formulas is that a fixed rate loan will NEVER have different monthly payments due (your example starts at $675, then $674.25, etc.).  Monthly payments are fixed.  The error seems to be that the principal payment is fixed in your example.  In real life, the portion that goes to principal increases by the same amount that the interest due decreases.

Credentials don't seem to matter in this thread, so I won't mention the MBA I have with a specialization in finance, or my time spent as a commercial real estate loan servicer.  Can I ask where you got the link for the am. schedule you use?  Was it one you found on your own or were you directed to it?  I ask because the first result on the vertex42 website for "amortization schedule" is an accurate one:  http://www.vertex42.com/ExcelTemplates/loan-amortization-schedule.html

In case we needed more evidence just what a nonsensical concept this is, just googled mortgage accelerator scam, and there are a zillion articles from reputable sources pointing out all the ways that it's a scam.

From Mortgage Insider:

"As with most scams, a little bit of truth is necessary to sell the mark… Yes, a HELOC charges interest a different way. However, can one really conclude an actionable difference exists that is so powerful the average home owner can pay off their mortgage in seven years?

Absolutely not…it’s ridiculous to even suggest it."

Dave Ramsey, Trulia, Zillow, etc all have similar things to say about this concept. 

David will now inevitably say he's talking about something else, while never explaining what point he's actually trying to make. 

The original question was about using a revolving credit line to pay off your mortgage in chunks. The answer: it's nonsense.

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