Use HELOC to paydown mortgage fast

415 Replies

This is all indicative of a low interest rate environment. 

Interest on a HELOC is adjustable, if interest rates rise you are screwed.

For you folks that weren't in real estate in 2003-2006 and when the market started collapsing in 2007. Find someone that was so they can smack you. 

125 replies to define simple interest, on an investing site none-the-less.

This post has proven one certainty...mortgage acceleration scams are successful in getting victims.

Google "<insert any word here> scam". You'll likely get hits - maybe a lot.

I Googled "real estate investing scam". Google found "About 552,000 results (0.61 seconds)".

Not the strongest argument.  If you have to fish like that, maybe it's time to just let it go and move on.

Everyone is entitled to their opinion. How many people said putting a man on the moon and returning him safely was impossible back when JFK made is a national mission? How many believe to this day that the Apollo lunar missions were faked? Opinions are opinions. Proven facts are proven facts. Period - end of statement.

The original question was about using a revolving credit line to pay off your mortgage in chunks. The answer: it works - I proved it. See the results I posted last night using the tool Eric pointed me to. Guess that's wrong, also, according to you. Poor Eric! His job may be in jeopardy now!

If you have a problem with ANY of the numbers I've posted, talk Microsoft about Excel, talk to Vertex32 and BankRate.com about their calculations.

Coming after me about them? You're barking up the wrong tree.

Next, I suppose you'll tell me my slide rule is inaccurate, also. (Yes, I have one! Yes, I know how to use it!)

@Chris May ,

"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."

Gee - Guess that means every amortization schedule ever issued by a lender or anyone else is wrong! Better get that off to CNN right away! This could not only the shatter the world economy it could eclipse the news of the Dallas massacre!

Originally posted by @David Dachtera :

@Chris May,

"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."

Gee - Guess that means every amortization schedule ever issued by a lender or anyone else is wrong! Better get that off to CNN right away! This could not only the shatter the world economy it could eclipse the news of the Dallas massacre!

And this proves my point exactly. You don't understand the mechanics of how loan repayment works.

The amortization tables aren't wrong, it's your interpretation of them that is. As I've now pointed out countless times, if you have two loans, mortgage and revolving credit line, with the same interest rate and make the same payment every month, you will pay both off at the same time. They both work the same.

In effect, you're amortizing the payoff of the credit line. Again, amortization has nothing to do with interest.

...and you continue to contradict yourself.

Do yourself a favor and follow instructions here: pull up an amortization schedule in your favorite tool. 

Now, look down the rows at the portion of the payment applied to interest.

Then, look down those same rows at the portion of the payment applied to principal.

What do you observe? That's right! The interest values go DOWN over time while the principal values go UP over time.

How is that NOT an inverse relationship? ...and tell me how that "has nothing to do with "amortization"?

I'll even give you a hint: go back thru the thread and find the link to the math.info page which shows the amortization formula. Look at the one which determines the payment. How many times does the interest rate appear in that formula? ...and where does it appear?

Now tell me again how that "has nothing to do with interest"...

Then, consider a formula which might be used to calculate the minimum payment on a credit card...

(avg daily balance) x (daily periodic rate x days in billing period) + (principal balance / 120)

...and tell me under what circumstances would the interest portion of the payment AND the principal portion of the payment NOT BOTH go down over time? (I.e., a "DIRECT" relationship)

"There is none so blind as those who will not see".

Originally posted by @David Dachtera :

...and you continue to contradict yourself.

Do yourself a favor and follow instructions here: pull up an amortization schedule in your favorite tool. 

Now, look down the rows at the portion of the payment applied to interest

Then, look down those same rows at the portion of the payment applied to principal.

What do you observe? That's right! The interest values go DOWN over time while the principal values go UP over time.

How is that NOT an inverse relationship? ...and tell me how that "has nothing to do with "amortization"?

I'll even give you a hint: go back thru the thread and find the link to the math.info page which shows the amortization formula. Look at the one which determines the payment. How many times does the interest rate appear in that formula? ...and where does it appear?

Now tell me again how that "has nothing to do with interest"...

"There is none so blind as those who will not see".

You're right, interest accrued goes down over the course of time and there portion of your payment that goes towards principal goes up. 

However, that's not what everyone is calling you out on... it's that the exact same principle applies to all loans... that includes revolving credit lines. So using another type of credit to pay off a mortgage doesn't get your loan paid off any faster. That was the claim advanced by the original post.

You've been asked this a few times now: what point are you trying to make? Your argument has morphed over time.

Thank you all for the informative post. We are currently looking at refinancing to get out of the PMI on our first and primary residence, and I saw a "scam" on replacing your mortgage with a HELOC and you'll pay down your mortgage in 5-7 years without doing anything! So I looked into it. Essentially he's (Michael Lush) peddling using a HELOC to completely refinance your mortgage and then using it as a checking/savings account. Thought I smelled fish, and not just cause I'm from the PNW. Turns out the guru wants me to pay him $$$ to be my "adviser", and get access to these "special" HELOC's banks that could do this. As I suspected and found here on BP, it's the same as just applying additional payment to your loan, despite what he was saying about your money working while you sleep because your checking account interest rate is zero, blah, blah, blah. The only way to pay down a loan, is to pay down a loan. Thanks for all the information, glad BP is here to fact check!!!

@Chris May ,

"... it's that the exact same principle applies to all loans... that includes revolving credit lines."

Ok. Time for you to prove YOUR case. "Show me the money!" You can even start from the credit card minimum payment example I just gave you, if that saves you anything. 

"So using another type of credit to pay off a mortgage doesn't get your loan paid off any faster. That was the claim advanced by the original post."

...and that's the part I have consistently DISproven time and time and time and ... again.

Again, look at my post from late last night. Not only is the term reduced by 12-1/2 years the total interest paid is reduced from $77,667.60 to $40,993.10, even taking the HELOC interest into account.

...but, you guys are right and I'm wrong - those are "minuscule" values, as Eric so deftly pointed out and not worth going thru the exercise. (I'm sure both the average consumer AND the average entrepreneur would disagree, of course, but hey - y'all're the guys with the fancy, big money jobs and the college degrees - what do I know ...)

@David Dachtera  

David, I'm wondering if this is all a big communication issue or if it's a legitimate misunderstanding. 

Honest question - in your paydown scenario are you proposing that you're using your HELOC like a checking account? So you pay a chunk off your mortgage and then dump all of your income towards HELOC payments and also pay all of your bills using the HELOC? Then repeat once you work the HELOC down to zero? IF this is what you're suggesting, I agree that you can rapidly payoff a loan doing this. OR, are you suggesting that you just pay the interest only payment on the HELOC? I'm honestly trying to understand your perspective and I'm wondering if you're misunderstanding what we're all saying. We're NOT saying the strategy doesn't work if you're using your HELOC like a checking account. We ARE saying that it only works due to the fact that you're paying more than the minimum each month and has nothing to do with a difference in how interest accrues on a loan vs HELOC. Do you understand what we are saying and what we're not saying? 

Lastly, thanks for engaging with us despite a lot of the criticism flying your way right now. I think you're misguided on this particular topic, but you seem like a nice and intelligent guy, so thanks for the lively discussion. Hopefully others can benefit from the discussion and learn something along the way. 

I actually didn't believe it when I first heard it, but I just did the math on my loan calculator and it worked. I will use my situation and interest rates as I do have a home loan and a HELOC

Loan AMT $100k

mortage ir = 4%

HELOC ir = 5.5%

Duration 3 years

First Scenario:

$100k mortgage 4% interest. No use of HELOC.

You make minimum payments.  After 3 years you would have paid 11,685 in interest and 5,501 in principal. For total payments of 17,187.

Second Scenario:

$100k mortgage 4% interest. Use HELOC @ 5.5% interest. You make 1 large extra principal payment of $10k from the HELOC on your first mortgage payment. For the next 3 years you make interest only payments on the HELOC. 3 years of interest only on $10k is $550 per year and $1650 total.

For the mortgage after 3 years. $10,450 in interest and 16,736 in principal ($10k is from Heloc) You also paid 1650 in interest on the heloc. So after 3 years total interest paid is 12,100 w/ the heloc and 11,685 w/o the heloc so you paid $414 more in interest payments using the HELOC, but.... You made $1235 more in principal payments during the same period. So I come up with a next benefit of $1235-$414 = $821 over 3 years. Try the math yourself.

@Timothy Hillyer you seem to be ignoring the principal balance still remaining in the HELOC. Since the HELOC has no amortization, you'd still have the principal to pay back.

I'm ignoring this thread now. You can lead a horse to water but you can't make the horse learn math.

Yes if you make additional payments to principal the mortgage will be paid off a lot sooner saving a considerable amount of interest. Then the arguement is of cash allocation can you make a higher return on capital by paying off your mortgage sooner than investing in _________. Since this is a real estate investor oriented website no surprise on the consensus.

@Timothy Hillyer

Hi Tim, at the end of 3 yrs, your total debt balance is:

Scenario 1:  Your 100K loan is now paid down to $94,498.73

Scenario 2 (10K pmt w/ HELOC) 1: Your HELOC has 10K on it, and your loan has $83,226.01, but you've also incurred $1,650 in HELOC interest-only payments which need to be accounted for. So your net debt in Scenario 2 is: $83,226.01 loan + $10,000 Heloc + $1,650 HELOC interest payments = $94,876.01

So you've paid $377.28 more in interest charges because the HELOC is at 5.5% and the loan is at 4%

@Timothy Hillyer - sorry, I explained it wrong... your total debt balance in Scenario 2 is $93,226.01. BUT, you've paid more in Scenario 2 because you've paid both your monthly payment AND your HELOC interest. In scenario 1 you only paid your monthly payment. So to do an apples to apples analysis, you have to add the $1650 back in, since you want to analyze the scenarios assuming the same out of pocket costs to you.

@Eric Jones  , 

Again and again and again and ..., 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.

@Sean Cole ,

No, we're NOT ignoring the principal on the HELOC. To save you having to read back thru the thread, here it is yet again:

Open a HELOC (or some other credit line, or begin accumulating income from one or more sources). Draw out $3000 and apply it to the 1st mortgage in place of the scheduled payment. Now, take 10 months to repay the principal.

Here's what THAT looks like (copied and pasted from Excel)...

Old Balance Interest Rate / yr Interest Payment Principal Payment Total Payment New Balance
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

Total
51.56     

(Remember, for purposes of this discussion, the HELOC is interest only. So, we arbitrate the $300 ($3000 / 10 months to repay).)

Then, take another $3000 and apply it to the 1st mortgage in place of the scheduled payment.

Do that 20 times total. The total interest paid back to the HELOC is 20 x $51.56 or $1,031.20.

Ok?

If there's any existing balance on the HELOC when you start, just remember that those interest payments and principal payments (if any) are NOT part of his scenario.

Now, tell me how wrong I am, but be prepared to explain why.

Originally posted by @David Dachtera :

@Eric Jones  , 

Again and again and again and ..., 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.

@Sean Cole ,

No, we're NOT ignoring the principal on the HELOC. To save you having to read back thru the thread, here it is yet again:

Open a HELOC (or some other credit line, or begin accumulating income from one or more sources). Draw out $3000 and apply it to the 1st mortgage in place of the scheduled payment. Now, take 10 months to repay the principal.

Here's what THAT looks like (copied and pasted from Excel)...

Old Balance Interest Rate / yr Interest Payment Principal Payment Total Payment New Balance
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

Total
51.56     

(Remember, for purposes of this discussion, the HELOC is interest only. So, we arbitrate the $300 ($3000 / 10 months to repay).)

Then, take another $3000 and apply it to the 1st mortgage in place of the scheduled payment.

Do that 20 times total. The total interest paid back to the HELOC is 20 x $51.56 or $1,031.20.

Ok?

If there's any existing balance on the HELOC when you start, just remember that those interest payments and principal payments (if any) are NOT part of his scenario.

Now, tell me how wrong I am, but be prepared to explain why.

David:

The HELoC is a bit of a strawman in this example.

Back to my earlier question, why not simply increase the payment on the mortgage note by $300/month and dispense with the accumulator and lump-sum payment of $3000 every 10-months?   You would come out further ahead.

Originally posted by @David Dachtera :

@Roy N. ,

We discovered over the course of this discussion that more smaller extra payments produces less benefit than fewer, larger "chunks".

 I'm going to do this on a computer when I get home, but Ron's point is what the rest of us are saying. Effectively you're not paying a "chunk" because that "chunk" paid the mortgage is still accruing interest at the same rate. 

I will prove that in a bit.

The chunk theory is only true when paying with cash.

Originally posted by @David Dachtera :

@Roy N.,

We discovered over the course of this discussion that more smaller extra payments produces less benefit than fewer, larger "chunks".

 If you go back and read my posts and figures, you will see that is not true as a generalisation.

The scenario where you could come out ahead of the monthly payment increased by $300 with your approach would be if you made the first lump-sum payment at the beginning of month 0 (or month 1 depending on how you count). 

Even then, if you simply switched your mortgage payment from a monthly payment increased by $300 to a bi-weekly or accelerated bi-weekly payment increased by $150, you would always come out ahead of your lump-sum approach even if you paid your first lump-sum at the beginning of the mortgage.

@David Dachtera - so you just provided what the HELOC looks like for the first ten months while you're paying it down. Can you now provide what you think amortized loan balance looks like for those exact same ten months? We need to account for both in this analysis.

Originally posted by @Sean Cole :

Timothy Hillyer you seem to be ignoring the principal balance still remaining in the HELOC. Since the HELOC has no amortization, you'd still have the principal to pay back.

 

Ding! Ding! Ding!

Now where is that EXTRA dollar?

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