Use HELOC to paydown mortgage fast

415 Replies

The graph on the left is the "debt transfer", you pull $3000 from it and do nothing. The right side have 2 bi weekly paychecks deposited to it and then paid expense on the 25th. I am just wondering if this is how interest calculate in HELOC.

Originally posted by @Gregory Dunton :

I am impressed this conversation is still going.  I don't know if the main participants in this discussion deserve medals or need better hobbies...

 I can only speak for myself but I probably need a better hobby. My house is finally closing after flipping it and suddenly I have a lot of time on my hands haha. 

What was life like before I spent every weekend doing reno?

Originally posted by @Joe Au :

The graph on the left is the "debt transfer", you pull $3000 from it and do nothing. The right side have 2 bi weekly paychecks deposited to it and then paid expense on the 25th. I am just wondering if this is how interest calculate in HELOC.

Well, yes, you have the calculation ok.

That's probably not the best way to do this: create a new debt and let the interest "fester". You need to be able to pay back the chunks you take out so you can apply them to the mortgage. Otherwise, as some have erroneously concluded, you're "just moving money around".

I actually used this method for awhile, problem is that the HELOC is pretty tempting to use when you have. As soon as you start carrying a balance it negates any benefits very quickly.

Originally posted by @Joe Au :

This is my first post on BP ever, and I would never imagine it will get more than 100 replies. I came across a book on amazon called "How to own your home years sooner & retire debt free" by Harj Gill. It got great reviews and everyone said it's working for them. The method came from other countries(Australia, UK. Canada, etc...). That's why I brought this topic here to ask a bigger community.

My personal take on is this method rely on the cash management between accounts to minimize the daily average balance so that the interest will be reduced. Another must have requirement is to have positive cash flow. The extra cash flow will act as prepayment as everyone is talking about. And because it's a LOC, cash can move in and out from it "freely". That's why it sort of replace the need for a checking account.

Every tool has it's function. You can say a knife is dangerous because it can cut yourself with it. But if you give it to a chef, he can create wonderful culinary dishes. whether you chose to use it or not, it's totally up to you. But always get educated, numbers don't lie.

Thanks again for everyone's input.  

I think part of the confusion is that the HELOC pay down mortgage plan is promoted by gurus who charge fees to help you implement. The way you can pay your mortgage off faster is by making additional principal payments.

I think you are correct that the advantage of a HELOC is using it as a checking account, then all your available cash immediately goes to debt pay down. In that way it can minimize your interest. When people say you can pay your mortgage off years sooner, it is the extra principal payments that are crucial, not the HELOC. Now if you add a guru in to consult for you at a monthly fee, you just made the situation much worse.

So yes, making extra principal payments will reduce the term and interest paid. A HELOC is not required to make extra principal payments and interest for a HELOC will likely be the same or higher than your primary mortgage.

I really would not advise a HELOC for anyone. The marginal advantage you get from putting your paycheck towards debt a few days sooner, is offset by the risk of getting further in debt.

So if you want to use the HELOC, just understand any balance on that HELOC is no different than having that balance on your mortgage. Ultimately controlling your spending and making extra principal payments is the way pay your mortgage off early.

Also one final warning, you must state on the extra payment that it is "Principal Only" or the mortgage company will apply it towards interest and principal. So many people get burned by this and have no idea it is happening.

Originally posted by @Bob Bowling:
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?

I definitely calculated in the $10k balance outstanding on the HELOC. The mortgage at the end of three years you would have paid of $16,736 in principal. I removed the $10k payment so I showed $6736 in principal paid using the HELOC method, where you would have only paid off $5501 in principal by just paying the minimum payment on the mortgage without using a heloc.

W/ HELOC

Total mrtg interest = $10,450

Heloc interest @ 5.5% for 3 yr = $1650

Total interest paid for 3 yr = $12,100

W/O Heloc

Total Interest paid was $11685. The difference between $11685 and $12,100 is $415.  So you paid $415 more in interest. But you paid off $1235 more in principal on the mortage. So you are left with a net $820 benefit by taking on $415 more in interest payments to gain a $1234 reduction in principal balance.

Originally posted by @Joe Splitrock :
Originally posted by @Joe Au:

This is my first post on BP ever, and I would never imagine it will get more than 100 replies. I came across a book on amazon called "How to own your home years sooner & retire debt free" by Harj Gill. It got great reviews and everyone said it's working for them. The method came from other countries(Australia, UK. Canada, etc...). That's why I brought this topic here to ask a bigger community.

My personal take on is this method rely on the cash management between accounts to minimize the daily average balance so that the interest will be reduced. Another must have requirement is to have positive cash flow. The extra cash flow will act as prepayment as everyone is talking about. And because it's a LOC, cash can move in and out from it "freely". That's why it sort of replace the need for a checking account.

Every tool has it's function. You can say a knife is dangerous because it can cut yourself with it. But if you give it to a chef, he can create wonderful culinary dishes. whether you chose to use it or not, it's totally up to you. But always get educated, numbers don't lie.

Thanks again for everyone's input.  

I think part of the confusion is that the HELOC pay down mortgage plan is promoted by gurus who charge fees to help you implement. The way you can pay your mortgage off faster is by making additional principal payments.

I think you are correct that the advantage of a HELOC is using it as a checking account, then all your available cash immediately goes to debt pay down. In that way it can minimize your interest. When people say you can pay your mortgage off years sooner, it is the extra principal payments that are crucial, not the HELOC. Now if you add a guru in to consult for you at a monthly fee, you just made the situation much worse.

So yes, making extra principal payments will reduce the term and interest paid. A HELOC is not required to make extra principal payments and interest for a HELOC will likely be the same or higher than your primary mortgage.

I really would not advise a HELOC for anyone. The marginal advantage you get from putting your paycheck towards debt a few days sooner, is offset by the risk of getting further in debt.

So if you want to use the HELOC, just understand any balance on that HELOC is no different than having that balance on your mortgage. Ultimately controlling your spending and making extra principal payments is the way pay your mortgage off early.

Also one final warning, you must state on the extra payment that it is "Principal Only" or the mortgage company will apply it towards interest and principal. So many people get burned by this and have no idea it is happening.

My calculations show that there is a benefit from Utilizing the Heloc. I have an excel based mortgage calculator that shows interest, principal, total balance for every payment over the loan. I found that in my scenario. $100k mortage 4% interest making minimum payments for 3 years, versus a $100k mortgage with a 4% interest combined with taking on a HELOC @5.5% interest and making a one time principal payment of $10k on mortgage payment 1 paying interest only on the HELOC lead to a $820 net benefit.

Maybe I need to figure out how to include my spreadsheet so everyone can see the math.

Another benefit that I believe there is to a HELOC is the ability to keep a smaller emergency fund. My wife and I in general would keep a $20k emergency fund in cash to cover our living expenses for 3 to 6 months. I got a $35k heloc from equity I had in a rental property. I initially used $20k from the heloc to paydown my primary mortgage that I had had for less than one year below the 20% mark to drop the PMI which I was paying $177 per month. There was absolutely a net benefit of that.

Updated over 3 years ago

https://drive.google.com/file/d/0BxJp7U5ESXCBVy1sZ3dVRXZuckU/view?usp=sharing

Updated over 3 years ago

I was able to add my spreadsheet to a google doc

Originally posted by @Mike Landry :
Originally posted by @David Dachtera:

@Chris May

* Heart-felt Sigh *

I understand very well, thank you.

Nay-say if you will. Believe what you will. Think what you will.

I proved my point many times over. Mortgage acceleration using a HELOC DOES work. Period - end of statement.

Case - closed.

David, we keep thinking the case is closed then you come back and say " Mortgage acceleration using a HELOC DOES work." This is the what we are getting at. Sure you can pay off your loan all you want with your HELOC but it doesn't benefit you one bit. IT DOES NOT WORK at improving your financial balance at all.

Deleted Post

I will take back what I said. The HELOC does not result in any net benefit. Thank you all for stressing your point. I had a miscalculation error in my spreadsheet. If the Mortgage Interest rate and the heloc rate were the same, you would end up paying almost the exact same amount in interest. In the two scenarios one utilizing a heloc, and the other simply paying the mortgage minimum P&I, there is no magical benefit. With the HELOC you have more cash flow paid out equal to the amount of interest on the HELOC. The amount of extra principal paid is almost exactly equal to the amount of interest paid on the HELOC. So in the 4% $100k mortgage utilizing a $10k 1st payment from a HELOC. You would pay $1200 interest over 3 years at 4% on a HELOC. Mean you paid $1200 more out of your pocket then if you just made minimum mortgage payments without a HELOC. At the end of 3 years you find you have also paid about $1200 more in principal.

Originally posted by @Timothy Hillyer :

I will take back what I said. The HELOC does not result in any net benefit. Thank you all for stressing your point. I had a miscalculation error in my spreadsheet. If the Mortgage Interest rate and the heloc rate were the same, you would end up paying almost the exact same amount in interest. In the two scenarios one utilizing a heloc, and the other simply paying the mortgage minimum P&I, there is no magical benefit. With the HELOC you have more cash flow paid out equal to the amount of interest on the HELOC. The amount of extra principal paid is almost exactly equal to the amount of interest paid on the HELOC. So in the 4% $100k mortgage utilizing a $10k 1st payment from a HELOC. You would pay $1200 interest over 3 years at 4% on a HELOC. Mean you paid $1200 more out of your pocket then if you just made minimum mortgage payments without a HELOC. At the end of 3 years you find you have also paid about $1200 more in principal.

Bingo. Was just about to point that out but you beat me to it.

The reason I can say with certainty that this doesn't work is that it violates the Distributive Property of Multiplication.

To use your example (assuming HELOC and mortgage interest rates are the same):

.04 x (100,000) = .04 x (90,000 + 10,000) = .04 x (90,000) + .04 x (10,000)

The interest will be the same no matter how you split up the principal. The only way to pay your mortgage faster is to pay it down with cash, not debt.

@Chris May , @Timothy Hillyer , et al,

I posted this 3 days ago...

"Thru 20 chunk payoff cycles, you'll pay $1,031 and change in interest to the HELOC (20 x $51.56).

Applying that to the total interest paid on the 1st mortgage produces a total interest savings of $34,612.05. (Note: That's a correction to last night's number which I re-used in error today. I was tired and my patience was wearing thin. I f-ed it up)."

Earlier than that, I posted that the process also reduces the payoff of a 30 year fixed-rate mortgage by 12-1/2 years to 17-1/2 years. Over the course of the tread, I've provided all the evidence to support those results.

So, go ahead and keep trying to prove that it doesn't work. The evidence will still stand, and there's enough info in this thread that ANYone can prove for themselves that it does.

Originally posted by @David Dachtera :

@Chris May, @Timothy Hillyer , et al,

I posted this 3 days ago...

"Thru 20 chunk payoff cycles, you'll pay $1,031 and change in interest to the HELOC (20 x $51.56).

Applying that to the total interest paid on the 1st mortgage produces a total interest savings of $34,612.05. (Note: That's a correction to last ight's number which I re-used in error today. I was tired and my patience was wearing thin. I f-ed it up)."

Earlier than that, I posted that the process also reduces the payoff of a 30 year fixed-rate mortgage by 12-1/2 years to 17-1/2 years. Over the course of the tread, I've provided all the evidence to support those results.

So, go ahead and keep trying to prove that it doesn't work. The evidence will still stand, and there's enough info in this thread that ANYone can prove for themselves that it does.

I've asked you three times if you've bothered to look at the Excel file with full amortization tables that I posted. You've never answered. They show the full life cycle of both scenarios below. If you still insist it's wrong, please tell me where my formulas are incorrect.

Yes, using a line of credit to pay "chunks" on your mortgage, and then paying back each "chunk" monthly over 10 months plus your regular mortgage payments will result in a shorter payback time for your total debt. So yes, in that sense, this "accumulator" and "chunks" theory "works". You will have your debt paid off in less than 30 years.

However, the "chunks" and "accumulator" effects you're talking aren't what's actually bringing down the payoff time... it's the monthly payments against your HELOC that are bringing down the payoff time. You're effectively making monthly prepayments at ~$300 at a time via a second debt vehicle.

If you never made a "chunk" payment against the mortgage using a line of credit ("accumulator" as you call it), but instead made those same ~$300 payments every month directly to your mortgage, the effect is the same. I'll say it again: don't make any "chunk" payments using debt instruments and instead pay ~$300 per month extra to your mortgage. You will pay off the loan in the same amount of time as the method you're promoting.

Like I've said, I advise people all day long how to do calculations like this on literally billions of dollars. I'd lose my job in a heartbeat if I didn't know what I was talking about. There's a fundamental mathematical principle at play here as I noted in my previous post.

All that said, if you continue doing what you're, your loans will be paid off quicker--so have at it. It just seems that you're misunderstanding the mechanism for why... which is what me, Eric, etc have been saying since our first posts. Timothy just did the math to and discovered the same. There are plenty of reasons to have and use a HELOC (or other line of credit), but a faster payoff time isn't one of the reasons.

Please, please, please, review my spreadsheet. You asked me multiple times to prove you wrong and I actually spent some time putting amortization tables together for the purpose of this discussion. Take a look and tell me what exactly you think is wrong. Who knows, maybe we'll find we've been talking about different things this whole time.

@David Dachtera

The only evidence given on behalf of your point is that additional mortgage payments in chunks reduce the actual loan duration and therefore the total paid interest. Nobody disputes that. If the additional mortgage payments are the result of cash flow coming from the property, this is a great way to pay less interest over the loan duration. But if the additional mortgage payments come from a different  loan (Heloc) with similar interest rate as the mortgage, there is no financial benefit, which has been shown repeatedly in this discussion.

Originally posted by @David Dachtera :

@Chris May , @Timothy Hillyer , et al,

I posted this 3 days ago...

"Thru 20 chunk payoff cycles, you'll pay $1,031 and change in interest to the HELOC (20 x $51.56).

Applying that to the total interest paid on the 1st mortgage produces a total interest savings of $34,612.05. (Note: That's a correction to last night's number which I re-used in error today. I was tired and my patience was wearing thin. I f-ed it up)."

Earlier than that, I posted that the process also reduces the payoff of a 30 year fixed-rate mortgage by 12-1/2 years to 17-1/2 years. Over the course of the tread, I've provided all the evidence to support those results.

So, go ahead and keep trying to prove that it doesn't work. The evidence will still stand, and there's enough info in this thread that ANYone can prove for themselves that it does.

Using a HELOC or cash to pay down your mortgage will reduce the total interest and total term of your loan. Everyone agrees with that. Do you agree that using a HELOC to make period lump payments versus using cash to make added monthly payments as no benefit?

I am trying to get you to agree that if you made the extra monthly payments directly to your mortgage you would pay equal or less total interest. 

Originally posted by @David Dachtera :

@Chris May , @Timothy Hillyer , et al,

I posted this 3 days ago...

"Thru 20 chunk payoff cycles, you'll pay $1,031 and change in interest to the HELOC (20 x $51.56).

Applying that to the total interest paid on the 1st mortgage produces a total interest savings of $34,612.05. (Note: That's a correction to last night's number which I re-used in error today. I was tired and my patience was wearing thin. I f-ed it up)."

Earlier than that, I posted that the process also reduces the payoff of a 30 year fixed-rate mortgage by 12-1/2 years to 17-1/2 years. Over the course of the tread, I've provided all the evidence to support those results.

So, go ahead and keep trying to prove that it doesn't work. The evidence will still stand, and there's enough info in this thread that ANYone can prove for themselves that it does.

 Is this a joke?  You're screwing with us... right?

After all this and EVERYONE  trying to help you get this straight. Im not sure if you are intentionally being dense, screwing with us, or just dont comprehend what we are discussing. It's ok to admit you where wrong or dont understand. I mess up daily and my spelling sucks. The grammar police love me. No shame. 

What process reduces the payoff by 12 years?  Paying extra to your principal..right.  No one is trying to prove that paying extra doesnt do this. 

You keep bringing up this transferring of debt to a heloc and paying it off as if its accomplishing something. Then when someone mentions it you call it a red heading and say it has has nothing to do with it. 

So i think you are in agreement that the only process that pays off your mortgage early is paying extra to your principal. And you agree that if you use a heloc you are negating any benefit because the debt is just transfered and it saves you no interest and does not help pay off your debt any faster. 

Do you agree with those statements?

@David Dachtera and @Chris May I will admit I am very interested to find out why we cannot agree on this. Some things in life are a matter of opinion. Numbers, in this case at lease, are a matter of fact so there is no reason we shouldn't agree on the numbers. I thought maybe the Vertex42 spreadsheet had something to do with it, so I downloaded it through the link that David provided in an earlier post. My conclusion is that the Vertex42 spreadsheet is just fine and it was very easy to simulate the situation. I loaded our debated scenario:

Primary Mortgage:

$150,000

3%

30 years

HELOC $3000 at 3.75% paid off in 10 months with $300 monthly payments

In one spreadsheet I loaded an extra principal payment of $3000 in months 1, 11, 21, etc. up until month 201. That situation was run through Vertex42 and I saved the spreadsheet as LumpHELOC.

I ran a second situation where I loaded monthly payments equivelant to what would be paid on the HELOC and I saved that spreadsheet at CashMonthly. Keep in mind I applied more than $300 to take into account the interest you would be paying towards a HELOC. I just took the following numbers and pasted them in a repeating pattern into the Vertex42 spreadsheet on 10 month intervals starting in month one:

309.38
308.44
307.50
306.56
305.63
304.69
303.75
302.81
301.88
300.94

I took screen shots of the Vertex42 spreadsheets that shows the total payment amount and total number of payments made. You can see in this comparison that on the primary mortgage there is a minor advantage to the total payment amount and payment term when using the HELOC lump sums. You save a total of $580.52 worth of payments on your primary mortgage by paying lump sum through HELOC versus paying HELOC equivalent payments each month to your primary.

But... you have to add back in the interest paid on the HELOC to see the total picture of how much money you paid. David said through the 20 chunk payoff cycles you will pay $1031 worth of interest. That means instead of saving $580.52 using a HELOC, you have spend $450.48 more which is due to the HELOC being at 3.75% versus your primary at 3%.

I don't have a place to load the spreadsheets, but I can e-mail them to David if you would like to review. My hope is by using your chosen tool that we can identify what you are doing differently.

Originally posted by @Andreas W. :

@David Dachtera

The only evidence given on behalf of your point is that additional mortgage payments in chunks reduce the actual loan duration and therefore the total paid interest. Nobody disputes that. If the additional mortgage payments are the result of cash flow coming from the property, this is a great way to pay less interest over the loan duration. But if the additional mortgage payments come from a different  loan (Heloc) with similar interest rate as the mortgage, there is no financial benefit, which has been shown repeatedly in this discussion.

... and this been repeatedly disproven.

Total cost to borrow from the HELOC: $1,031 and change.

Total interest saved (including taking the $1031 into consideration) is $30K and change. 

$30K may be insignificant to you and the other nay-sayers, but it means rather a lot to most of the rest of us.

@Mike Landry ,

"You keep bringing up this transferring of debt to a heloc and paying it off as if its accomplishing something."

No, everyone else keeps bringing up "transferring of debt". If you can show me where I said anything of the sort, I will GLADLY back down.

What I said was(, still is and will always be):

"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."

What part of that statement is in ANY way ambiguous?

Originally posted by @David Dachtera :

@Mike Landry ,

"You keep bringing up this transferring of debt to a heloc and paying it off as if its accomplishing something."

No, everyone else keeps bringing up "transferring of debt". If you can show me where I said anything of the sort, I will GLADLY back down.

What I said was(, still is and will always be):

"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."

What part of that statement is in ANY way ambiguous?

 Let's try something else. Instead of debating the semantics, please show us where you disagree with our math.

We're also asking very direct questions to try to understand where we're missing each other. Please answer those as well. Did you look at my spreadsheet or Joe's? Do you disagree with something in them?

@Dav id

Without going through the numbers again, my guess is your calculation goes astray at the calculation of the Heloc costs. The $51.56 interest to pay (see your previous post) is a monthly payment, not an annual payment.

@Chris May ,

You're really whipping a dead horse.

The whole principle behind mortgage acceleration involves paying the principle off faster.

How it is done is irrelevant. I've never said ANYthing to the contrary, except to report that my earlier experience using the Vertex32 spreadsheet seemed to indicate that fewer, larger "chunks" achieve a marginally quicker payoff than more frequent smaller "chunks".

I'm going to go with @Joe Au and suggest we put this to bed now. He seems to have gotten what he wanted.

Originally posted by @David Dachtera :

@Chris May,

You're really whipping a dead horse.

The whole principle behind mortgage acceleration involves paying the principle off faster.

How it is done is irrelevant. I've never said ANYthing to the contrary, except to report that my earlier experience using the Vertex32 spreadsheet seemed to indicate that fewer, larger "chunks" achieve a marginally quicker payoff than more frequent smaller "chunks".

I'm going to go with @Joe Au and suggest we put this to bed now. He seems to have gotten what he wanted.

OMG. So you agree with us then. 

All you're doing is paying off your mortgage faster. Obviously paying more towards your mortgage results in a quicker payoff and less interest paid.

That's absolutely not what the original post was about.

My head just exploded.

Originally posted by @David Dachtera :

@Chris May,

You're really whipping a dead horse.

The whole principle behind mortgage acceleration involves paying the principle off faster.

How it is done is irrelevant. I've never said ANYthing to the contrary, except to report that my earlier experience using the Vertex32 spreadsheet seemed to indicate that fewer, larger "chunks" achieve a marginally quicker payoff than more frequent smaller "chunks".

I'm going to go with @Joe Au and suggest we put this to bed now. He seems to have gotten what he wanted.

 Also, the point we've all been trying to make to you this whole time, but you keep disagreeing with, is that bigger "chunks" do have a bigger impact than smaller payments. But only when using cash.

Using a HELOC or other debt is the same as making smaller payments. That's the entire crux of what we've been debating and what you keep disagreeing with.

But, i guess this matter is resolved because you've agreed with us the whole time (judging by your latest post).

Thank you for clearing that up.

@Chris May ,

Are you arguing just to argue? Here's Joe Au's original post, in it's entirety:

"I want to build equity with my primary home as soon as possible. And I came across a method using HELOC to reduce the interest paid to the mortgage. Does any one have experience with it?"

How is my most recent post, or any other, incongruous with that?

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