Heloc to pay off mortgage faster

684 Replies

Originally posted by @Brent Coombs :

@Joshua Smith, I'm glad you got that off your chest. But, "moral gray area"? Hardly. Everyone who takes out a 30 year mortgage knows the interest they're being charged, and why.

Anyone who wants to pay off their home in less than 30 years has plenty of ways to go about it. But here's the thing: Many if not most current mortgage holders who took out a long long loan, have no reason or intention of paying it off early - even if they can easily do so!

Why? Because they are beating the bank at their own game. ie. Mortgage rates have been so low (historically), that any excess income can easily be put to better use than trying to erase a 3.5%/y mortgage. Meanwhile, their home values have been outpacing that interest rate by miles!

Well, I'm trying to look at this objectively, but I can't see it, Brent. If I say to you that you could make 8% or 3.5% on your money and ask which you'd choose, I understand why you would say 8%. I totally get that. But what I don't understand is how a person can ignore the actual sums involved and base their choice on percentages alone. If I took $1000/month and was able to invest it at 8% for a year it comes out to $12,500 meaning that I made $500 in interest. If I take that same $1000/month and put it on my mortgage for one year I'm saving over $20,000 in interest. I understand as everyone has said repeatedly that technically I'm saving the money over the course of 30 years whereas I have the $500 right now, but I'm sorry, I'll still take the $20,000. And on top of that, any investment at say 8% is variable and more risky and you could lose money. Great, you could make 19%, but you could also make -5%. Saving on mortgage interest is guaranteed. Yes, it's "only" 3.5%/year, but as I said, 73% of my money is going toward interest in the first year on a mortgage. In what other investment would you hand over $10,000 in the first year and when they take $7300 as their fee you'd say, "Man, this is such a cheap way to invest that I'm going to do this for as long as possible!"? It sounds like a sucker's investment to me and I like to think that people know better and only do it because they need a place to live. But obviously I'm finding out that people don't know any better... :)

And in regards to the "you have to accumulate savings over 30 years" thing, I understand that it's technically true, but you also have to understand that being out of mortgage debt is invaluable, because it's a free place to live. You can't live in stocks and funds, so ultimately the two are only comparable in theory and dollar amounts. Getting out of mortgage debt early is vastly superior in real life.

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

Originally posted by @Steve Vaughan :

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

The crux of the issue is that a 3-4% mortgage loan pays 60-80% total interest to balance over the course of the 30 years.  This is a significant ratio even with a "low" interest rate.  So it really depends less on the debt percent and more on how the debt is paid off and what the rest of your money is doing for you. 

99% of these 27+ pages have been focused around proving/disproving the returns of using a strategy of pulling a HELOC and using it to make large chunk payments to the mortgage.

I have been somewhat alone on an island trying to spark a discussion revolving around replacing your mortgage with a LOC (of the same amount and same percentage) and routing all your income/expenses out of it. So instead of your bank account increasing with your monthly cash flow that will be seen in the HELOC as a lower monthly balance. It functions on the same principle as making additional monthly payments to your mortgage, except 100% of your additional monthly income will be "paid" to your HELOC. I say "pay" because the money is not locked up like it is in a mortgage, preserving your ability invest it in the future. In an earlier post there is a spreadsheet where I demonstrate how significant the savings can be depending on one's financial situation. Take a look and see if you still think this is just for "peace of mind".

Originally posted by @Nick Moriwaki :
Originally posted by @Steve Vaughan:

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

The crux of the issue is that a 3-4% mortgage loan pays 60-80% total interest to balance over the course of the 30 years.  This is a significant ratio even with a "low" interest rate.  So it really depends less on the debt percent and more on how the debt is paid off and what the rest of your money is doing for you. 

99% of these 27+ pages have been focused around proving/disproving the returns of using a strategy of pulling a HELOC and using it to make large chunk payments to the mortgage.

I have been somewhat alone on an island trying to spark a discussion revolving around replacing your mortgage with a LOC (of the same amount and same percentage) and routing all your income/expenses out of it. So instead of your bank account increasing with your monthly cash flow that will be seen in the HELOC as a lower monthly balance. It functions on the same principle as making additional monthly payments to your mortgage, except 100% of your additional monthly income will be "paid" to your HELOC. I say "pay" because the money is not locked up like it is in a mortgage, preserving your ability invest it in the future. In an earlier post there is a spreadsheet where I demonstrate how significant the savings can be depending on one's financial situation. Take a look and see if you still think this is just for "peace of mind".

I like the idea of replacing completely a mortgage with a Heloc, too.  But there has to be a nastier loan to replace. If your 3-4% mortgage ends up being 60-80% interest over 30yrs, then my rental one at 6% will be greater than 100%. 

I guess I'll be on island #2. You're replacing the primary home mortgage on island #1, I'll be replacing/eradicating my 19th rental mortgage on island #2.

Now back to the deep and fruitful discussion about whether mortgages are front-loaded or not...

Originally posted by @Steve Vaughan :

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

Steve, the likely answer to your last question is: Joshua has been so busy/focused accelerating payments off his low-interest mortgage, that he's ignored the possibility of buying rentals (when their purchase prices were a lot less than they are now), altogether! So, when he finally pays off that mortgage 10-20 years early, he'll have to cope with a world of shoulda-bought-'em-cheaper-years-ago rentals!

Meanwhile, I'm done trying to show Joshua the error of his "paying $10k off the principal now will save $20k in interest" argument. If over the course of a whole 30 years making standard payments, anyone is only paying 60-80% on top of their principal (as summarized by Nick above), then they cannot possibly save 200% of interest payable on any $10k paid in advance, no matter how early! 

(But I know that you and other sensible readers will understand that). Cheers...

Updated 9 months ago

Edit: Ok, I acknowledge my math error. If you "front load" extra principal repayments during the first year, $10k will "save" you over $20k, but not until more than 26 years has elapsed! And remember, $10k of that was already yours to spend how you wanted, NOW!

Originally posted by @Steve Vaughan :

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

I think it's a matter of perspective, Steve. Yes, I've got higher rate loans to go after, but it's other peoples' income paying them down, so I'm not as worried about them. A lot of people here are so focused on the investment aspect and numbers that they're ignoring the point of doing it. You don't buy a house as an investment, you buy it because you need to live somewhere and want a yard for your kids (in general). But when you have it paid off you have a bunch of freedom you didn't have before. Everyone is intent on looking at paying your mortgage down early as an investment strategy and I'm happy to play that game, because I think it's a decent one (my mortgage came with $210,000 / 67% total interest), but it's really not. It's a strategy to get you out of mortgage debt early and have a "free" place to live. Of course, in doing so you can now invest with a greater percentage of your income for the rest of your life.

To me, it's like I brought up that I like Hondas because they get you from A to B faster than walking and everyone wants to insist that a Ferrari or Lamborghini would be better. Yes, there may be better pure "investments" out there than paying down your mortgage early, but there's a whole universe of investments that range from becoming a millionaire to losing everything and most people are never satisfied with their choices and always jockeying to make more. Saving on mortgage interest is right under your nose and you don't even need a brokerage account and stock commissions let alone a realtor and a rental manager. There's no risk and a guaranteed return. And I've explained that because the money is going there eventually anyway the returns are actually free money, which is unique, and a huge benefit. So, I'm fine with people saying they prefer Ferrari, but they are also saying that a Honda isn't better than walking and that's my only frustration. I'm using a HELOC to help channel all of my money into my mortgage and get me out of debt early. Will it do as well as your stocks or rentals? Maybe not, but will it get me out of debt early? Absolutely. Would rubbing my money on a picture of Scarlett Johansson and then paying it to my mortgage work? Yes, but I prefer the HELOC strategy. That's why this discussion has gone on and on and there's no resolution - because people can't accept that something can have clear, positive benefits and not be the perfect almighty solution or investment strategy.

Originally posted by @Brent Coombs :
Originally posted by @Steve Vaughan:

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

Steve, the likely answer to your last question is: Joshua has been so busy/focused accelerating payments off his low-interest mortgage, that he's ignored the possibility of buying rentals (when their purchase prices were a lot less than they are now), altogether! So, when he finally pays off that mortgage 10-20 years early, he'll have to cope with a world of shoulda-bought-'em-cheaper-years-ago rentals!

Meanwhile, I'm done trying to show Joshua the error of his "paying $10k off the principal now will save $20k in interest" argument. If over the course of a whole 30 years making standard payments, anyone is only paying 60-80% on top of their principal (as summarized by Nick above), then they cannot possibly save 200% of interest payable on any $10k paid in advance, no matter how early! 

(But I know that you and other sensible readers will understand that). Cheers...

Nope, I have rentals and other investments and savings. I'm just doing this strategy with the money that was lying around in my checking account. A point I've made over and over, but must still be lost on you. Have a good one.

Originally posted by @Steve Vaughan :
Originally posted by @Nick Moriwaki:
Originally posted by @Steve Vaughan:

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

The crux of the issue is that a 3-4% mortgage loan pays 60-80% total interest to balance over the course of the 30 years.  This is a significant ratio even with a "low" interest rate.  So it really depends less on the debt percent and more on how the debt is paid off and what the rest of your money is doing for you. 

99% of these 27+ pages have been focused around proving/disproving the returns of using a strategy of pulling a HELOC and using it to make large chunk payments to the mortgage.

I have been somewhat alone on an island trying to spark a discussion revolving around replacing your mortgage with a LOC (of the same amount and same percentage) and routing all your income/expenses out of it. So instead of your bank account increasing with your monthly cash flow that will be seen in the HELOC as a lower monthly balance. It functions on the same principle as making additional monthly payments to your mortgage, except 100% of your additional monthly income will be "paid" to your HELOC. I say "pay" because the money is not locked up like it is in a mortgage, preserving your ability invest it in the future. In an earlier post there is a spreadsheet where I demonstrate how significant the savings can be depending on one's financial situation. Take a look and see if you still think this is just for "peace of mind".

I like the idea of replacing completely a mortgage with a Heloc, too.  But there has to be a nastier loan to replace. If your 3-4% mortgage ends up being 60-80% interest over 30yrs, then my rental one at 6% will be greater than 100%. 

I guess I'll be on island #2. You're replacing the primary home mortgage on island #1, I'll be replacing/eradicating my 19th rental mortgage on island #2.

Now back to the deep and fruitful discussion about whether mortgages are front-loaded or not...

I surely hope no one has said not to pay off a loan with a higher interest rate first, whether it be a rental property, credit card, etc.  However I think using examples with lower interest rates illustrate that this is applicable to anyone, not just people with rental properties at 6% since a common counter-argument is that you shouldn’t pay off a 3-4% mortgage faster than you need to.  

As far as @Brent Coombs , I’m still waiting for a response to my updated numbers (pg 26) after you said “HELOCs only suit folk whose income far exceeds their expenses".  

Originally posted by @Nick Moriwaki :
Originally posted by @Steve Vaughan:
Originally posted by @Nick Moriwaki:
Originally posted by @Steve Vaughan:

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

The crux of the issue is that a 3-4% mortgage loan pays 60-80% total interest to balance over the course of the 30 years.  This is a significant ratio even with a "low" interest rate.  So it really depends less on the debt percent and more on how the debt is paid off and what the rest of your money is doing for you. 

99% of these 27+ pages have been focused around proving/disproving the returns of using a strategy of pulling a HELOC and using it to make large chunk payments to the mortgage.

I have been somewhat alone on an island trying to spark a discussion revolving around replacing your mortgage with a LOC (of the same amount and same percentage) and routing all your income/expenses out of it. So instead of your bank account increasing with your monthly cash flow that will be seen in the HELOC as a lower monthly balance. It functions on the same principle as making additional monthly payments to your mortgage, except 100% of your additional monthly income will be "paid" to your HELOC. I say "pay" because the money is not locked up like it is in a mortgage, preserving your ability invest it in the future. In an earlier post there is a spreadsheet where I demonstrate how significant the savings can be depending on one's financial situation. Take a look and see if you still think this is just for "peace of mind".

I like the idea of replacing completely a mortgage with a Heloc, too.  But there has to be a nastier loan to replace. If your 3-4% mortgage ends up being 60-80% interest over 30yrs, then my rental one at 6% will be greater than 100%. 

I guess I'll be on island #2. You're replacing the primary home mortgage on island #1, I'll be replacing/eradicating my 19th rental mortgage on island #2.

Now back to the deep and fruitful discussion about whether mortgages are front-loaded or not...

I surely hope no one has said not to pay off a loan with a higher interest rate first, whether it be a rental property, credit card, etc.  However I think using examples with lower interest rates illustrate that this is applicable to anyone, not just people with rental properties at 6% since a common counter-argument is that you shouldn’t pay off a 3-4% mortgage faster than you need to.  

As far as @Brent Coombs, I’m still waiting for a response to my updated numbers (pg 26) after you said “HELOCs only suit folk whose income far exceeds their expenses".  

Sorry Nick, the reason I didn't respond to your alternative examples is that you still have all your readers having at least $20k of savings, and $1k to burn each month, which in my book means you think every mortgage holder could accelerate their mortgage using a HELOC!

But, "HELOCs are only suitable for accelerating ones mortgage, if income far exceeds expenses"!... 

Originally posted by @Joshua Smith :
Originally posted by @Brent Coombs:
Originally posted by @Steve Vaughan:

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

Steve, the likely answer to your last question is: Joshua has been so busy/focused accelerating payments off his low-interest mortgage, that he's ignored the possibility of buying rentals (when their purchase prices were a lot less than they are now), altogether! So, when he finally pays off that mortgage 10-20 years early, he'll have to cope with a world of shoulda-bought-'em-cheaper-years-ago rentals!

Meanwhile, I'm done trying to show Joshua the error of his "paying $10k off the principal now will save $20k in interest" argument. If over the course of a whole 30 years making standard payments, anyone is only paying 60-80% on top of their principal (as summarized by Nick above), then they cannot possibly save 200% of interest payable on any $10k paid in advance, no matter how early! 

(But I know that you and other sensible readers will understand that). Cheers...

Nope, I have rentals and other investments and savings. I'm just doing this strategy with the money that was lying around in my checking account. A point I've made over and over, but must still be lost on you. Have a good one.

Well, good for you. But, will you please acknowledge that paying out $10k off a $165k, 30yr @4.5%/y mortgage in the first year will only save you around $8k in total, not $20k? [I repeat: NOT $20k!]

ie. That's the difference between the total payable between a $165k mortgage, and $155k, over 30 years! Remember, the bank does not automatically shorten the term, just because you pay $10k off early. And remember also (you too, Nick), that many if not most folk here have a mortgage that is lower than 4.5%/yr interest, so, accelerating their pay out saves them even less! [Even if they could afford to!]

So please Joshua, stop using fake math! Thank you...

Updated 9 months ago

Edit: Correction: "$10k off a $165k, 30yr @4.5%/y mortgage in the first year WILL save you about $16k, plus you get your own $10k back as well - in 26.5 years time!

Originally posted by @Brent Coombs :
Originally posted by @Joshua Smith:
Originally posted by @Brent Coombs:
Originally posted by @Steve Vaughan:

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

Steve, the likely answer to your last question is: Joshua has been so busy/focused accelerating payments off his low-interest mortgage, that he's ignored the possibility of buying rentals (when their purchase prices were a lot less than they are now), altogether! So, when he finally pays off that mortgage 10-20 years early, he'll have to cope with a world of shoulda-bought-'em-cheaper-years-ago rentals!

Meanwhile, I'm done trying to show Joshua the error of his "paying $10k off the principal now will save $20k in interest" argument. If over the course of a whole 30 years making standard payments, anyone is only paying 60-80% on top of their principal (as summarized by Nick above), then they cannot possibly save 200% of interest payable on any $10k paid in advance, no matter how early! 

(But I know that you and other sensible readers will understand that). Cheers...

Nope, I have rentals and other investments and savings. I'm just doing this strategy with the money that was lying around in my checking account. A point I've made over and over, but must still be lost on you. Have a good one.

Well, good for you. But, will you please acknowledge that paying out $10k off a $165k, 30yr @4.5%/y mortgage in the first year will only save you around $8k in total, not $20k? [I repeat: NOT $20k!]

ie. That's the difference between the total payable between a $165k mortgage, and $155k, over 30 years! Remember, the bank does not automatically shorten the term, just because you pay $10k off early. And remember also (you too, Nick), that many if not most folk here have a mortgage that is lower than 4.5%/yr interest, so, accelerating their pay out saves them even less! [Even if they could afford to!]

So please Joshua, stop using fake math! Thank you...

Brent, now I honestly just don't know what you're talking about. Do it yourself on a calculator like bankrate or mortgage-x and it'll come out just like this picture I made you. I divided up the $10,000 into prepayments of $833/month and if you do that over the first year of your new $165,000 / 4.5% / 30 year you absolutely get a savings of $26,500 and your loan is over 3 and a half years shorter (notice the last date in the table is June 2045 and should be 2049). It says "not guaranteed to be accurate", not "made up by circus clowns to trick you", so what are you talking about? You didn't realize that your loan is shorter when you pay it off early???? What did you think, that when your balance was $0 they were going to have you continue paying for old times' sake??? LOL

@Joshua Smith , ok, I'll try to get it through to you once more: If you pay $10k off your $165k mortgage early, the amount of interest payable from then on is still calculated by the bank  as if the loan is still going to take 29-30 years! The fact that you might continue to accelerate your payments in future years does not alter the amount of interest payable as at the $155k mark (over 29-30 years)!

ie. It's only your continued acceleration of paying with your extra income (not because of your HELOC) that gets you savings of $20k+, not because of that first extra $10k! 

Please check your mortgage calculator again, using the nominated 30yr mortgage term, unchanged by that early $10k (unless you ask the bank to then set up new terms)! Sheesh...

Updated 9 months ago

Ok Joshua, I've acknowledged that your first extra $10k DOES get you savings of $20k+ (in 26 years time), but please recognize that $10k of that was already YOUR money - today!

Originally posted by @Joshua Smith :
Originally posted by @Steve Vaughan:if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%.  Why do all this to pay off 3%-4% debt? And only partially?  
In the end, it's peace of mind the 3% mortgage accelerators are after I guess.  

I think it's a matter of perspective, Steve. Yes, I've got higher rate loans to go after, but it's other peoples' income paying them down, so I'm not as worried about them.  

After paying off over half of my portfolio, (but none below 6%) on purpose with a plan, I can assure you all the mortgage payments come from and net cash-flow goes to the same place- your household financial universe.

I used to think your way, too.  It's a rental. The tenants are paying down my mortgage. Why help them?

After years of doing my own PFS and Income Statements, I realized it is not so.  Every mortgage I no longer have goes to our household bottom line.  It's tons more clear if you have a holding co or management co that receives all rents, but not necessary. My mgt co has been paying my 3.375% mortgage for years. Easily in fact, because I paid off my higher rate loans along the way.

I'm all for anyone trying to get out of debt. Mindy Jensen gave me a middle name of "punch debt in the face" because I say it so often.  I just knock out my highest rate and highest hassle loans first.  Rentals are not off to the side, not mattering because there is a tenant.  You will also realize they are in fact part of your overall financial picture one day. Cheers!

Originally posted by @Brent Coombs :

@Joshua Smith, ok, I'll try to get it through to you once more: If you pay $10k off your $165k mortgage early, the amount of interest payable from then on is still calculated by the bank  as if the loan is still going to take 29-30 years! The fact that you might continue to accelerate your payments in future years does not alter the amount of interest payable as at the $155k mark (over 29-30 years)!

ie. It's only your continued acceleration of paying with your extra income (not because of your HELOC) that gets you savings of $20k+, not because of that first extra $10k! 

Please check your mortgage calculator again, using the nominated 30yr mortgage term, unchanged by that early $10k (unless you ask the bank to then set up new terms)! Sheesh...

No, Brent, when you pay an extra $10,000 on your mortgage, your interest obligation drops by $26,500 and your loan is paid off sooner, it's that simple. The lender is not imagining that you will be paying for 29 more years or anything like what you are describing. They realize that you took the balance down by $10,000 all at once and that you'll be paid of 3.5 years sooner and your payments continue from the $155,000 balance like normal. I've posted this screenshot in the past where Quicken shows in my actual account that my prepayments have saved me on interest and moved my maturity date up. Originally it was 2046. They aren't using some 'as if' scenario and keeping your loan as 30 years 'hypothetically' or any of your other statements. They are literally saying - "Okay, you've paid off this much extra, so if you continue with your normal payments and nothing else changes, here's how much you've saved and the new date you'll be paid off by." I mean, think about it - you think they're guessing at how much extra I'm going to pay going forward or something? I paid X amount this year so they're sure I'll do that same amount of extra payments every year and they recalculate my loan based on that? It makes no sense. I paid X amount and this is how much I've saved and my new date, end of story. You're taking something very simple and over-complicating it.

And btw, I specified in the calculator example that the payments were from March 2019 (start of the loan) to March 2020 - exactly one year - so there's no "continued acceleration" going on. In this example you paid an extra $10,000 in the first year and netted an interest savings of $26,500, there's no "continued" anything happening. The HELOC has nothing to do with it and there's no continued acceleration going on. You're imagining something continued happening as a way to explain the savings that you can't understand instead of accepting that you don't understand it and learning what's really happening. I mean, think about this for a second. I'm showing you calculators and screenshots of my mortgage account and you can look up any financial guru who will tell you that paying extra principal will save you a ton on interest and shorten your loan and you're using 'as ifs' about the how the bank is 'hypothetically' keeping you at 29 more years and saying the savings are minimal, but you think I'm the one who's off base. It's incredible.

Originally posted by @Steve Vaughan :
Originally posted by @Joshua Smith:
Originally posted by @Steve Vaughan:if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%.  Why do all this to pay off 3%-4% debt? And only partially?  
In the end, it's peace of mind the 3% mortgage accelerators are after I guess.  

I think it's a matter of perspective, Steve. Yes, I've got higher rate loans to go after, but it's other peoples' income paying them down, so I'm not as worried about them.  

After paying off over half of my portfolio, (but none below 6%) on purpose with a plan, I can assure you all the mortgage payments come from and net cash-flow goes to the same place- your household financial universe.

I used to think your way, too.  It's a rental. The tenants are paying down my mortgage. Why help them?

After years of doing my own PFS and Income Statements, I realized it is not so.  Every mortgage I no longer have goes to our household bottom line.  It's tons more clear if you have a holding co or management co that receives all rents, but not necessary. My mgt co has been paying my 3.375% mortgage for years. Easily in fact, because I paid off my higher rate loans along the way.

I'm all for anyone trying to get out of debt. Mindy Jensen gave me a middle name of "punch debt in the face" because I say it so often.  I just knock out my highest rate and highest hassle loans first.  Rentals are not off to the side, not mattering because there is a tenant.  You will also realize they are in fact part of your overall financial picture one day. Cheers!

I'm not saying that rentals are completely separate or not worth paying off, just that I'm not going to live there, so they are a lower priority. Basically, you're using the higher rate loans to label them as a higher priority and I'm using where I'm going to live to label that as a higher priority. Obviously, rentals are going to my bottom line, but my priority is to pay off where I'm actually going to live, that's all. Have a good one.

Originally posted by @Brent Coombs :
Originally posted by @Joshua Smith:
Originally posted by @Brent Coombs:
Originally posted by @Steve Vaughan:

I think I'll do this, but with a twist. I'm bored and not as goal-oriented as I used to be. I paid off tons of mortgages when I was motivated a couple years ago. Laser-focused.

But if I do use my HELOC ... I'll pay off completely a rental house mortgage at 6%. Why do all this to pay off 3%-4% debt? And only partially?

I'm sure my question will be ignored again, but why all this to accelerate a 3-4% loan?  Don't you have a higher rate or crappier term loan to go after?  If the loan getting punched in the face had a higher rate, I think the whole idea would be better received.   Yet these 27 pages or whatever are only about paying down a 3% loan.

In the end, it's peace of mind the 3% mortgage accelerators are after I guess. That and a perpertual LOC to mess around with.

The math says to accelerate a loan with a rate at least as high as the Heloc rate.  Why no talk about paying off rentals that at least start with a 5?  When they are fully paid off, like I'm going to do, you can re-lever if you have to and you won't lose your safety net.

Steve, the likely answer to your last question is: Joshua has been so busy/focused accelerating payments off his low-interest mortgage, that he's ignored the possibility of buying rentals (when their purchase prices were a lot less than they are now), altogether! So, when he finally pays off that mortgage 10-20 years early, he'll have to cope with a world of shoulda-bought-'em-cheaper-years-ago rentals!

Meanwhile, I'm done trying to show Joshua the error of his "paying $10k off the principal now will save $20k in interest" argument. If over the course of a whole 30 years making standard payments, anyone is only paying 60-80% on top of their principal (as summarized by Nick above), then they cannot possibly save 200% of interest payable on any $10k paid in advance, no matter how early! 

(But I know that you and other sensible readers will understand that). Cheers...

Nope, I have rentals and other investments and savings. I'm just doing this strategy with the money that was lying around in my checking account. A point I've made over and over, but must still be lost on you. Have a good one.

Well, good for you. But, will you please acknowledge that paying out $10k off a $165k, 30yr @4.5%/y mortgage in the first year will only save you around $8k in total, not $20k? [I repeat: NOT $20k!]

ie. That's the difference between the total payable between a $165k mortgage, and $155k, over 30 years! Remember, the bank does not automatically shorten the term, just because you pay $10k off early. And remember also (you too, Nick), that many if not most folk here have a mortgage that is lower than 4.5%/yr interest, so, accelerating their pay out saves them even less! [Even if they could afford to!]

So please Joshua, stop using fake math! Thank you...

It is pretty easy to verify how much you would save by paying $10,000 extra right at the begging of the loan. Plug in $10,000 @4.5% for 30 years in a mortgage calculator and it is $8240. Which is the difference between $165K loan and $155K loan as you say. 

So the first part of what you are saying is correct, but the second part is incorrect. It will shorten the time to pay off on the loan, so it happens sooner than 30 years. It will not reduce the payment, but will increase the portion of the payment that goes to principal, which has the effect of paying the loan off early. Maybe that is what you meant to say, because you got the first part right.

Either way your point is valid, which is that interest rates at 4.5% or lower do not cost much in interest. There isn't much savings to be had, so when people are transferring these low rates on to high rate HELOC, the math doesn't hold up. Transferring low interest debt to high interest debt just means you pay more money.

Originally posted by @Joshua Smith :
Originally posted by @Brent Coombs:

@Joshua Smith, ok, I'll try to get it through to you once more: If you pay $10k off your $165k mortgage early, the amount of interest payable from then on is still calculated by the bank  as if the loan is still going to take 29-30 years! The fact that you might continue to accelerate your payments in future years does not alter the amount of interest payable as at the $155k mark (over 29-30 years)!

ie. It's only your continued acceleration of paying with your extra income (not because of your HELOC) that gets you savings of $20k+, not because of that first extra $10k! 

Please check your mortgage calculator again, using the nominated 30yr mortgage term, unchanged by that early $10k (unless you ask the bank to then set up new terms)! Sheesh...

No, Brent, when you pay an extra $10,000 on your mortgage, your interest obligation drops by $26,500 and your loan is paid off sooner, it's that simple. The lender is not imagining that you will be paying for 29 more years or anything like what you are describing. They realize that you took the balance down by $10,000 all at once and that you'll be paid of 3.5 years sooner and your payments continue from the $155,000 balance like normal. I've posted this screenshot in the past where Quicken shows in my actual account that my prepayments have saved me on interest and moved my maturity date up. Originally it was 2046. They aren't using some 'as if' scenario and keeping your loan as 30 years 'hypothetically' or any of your other statements. They are literally saying - "Okay, you've paid off this much extra, so if you continue with your normal payments and nothing else changes, here's how much you've saved and the new date you'll be paid off by." I mean, think about it - you think they're guessing at how much extra I'm going to pay going forward or something? I paid X amount this year so they're sure I'll do that same amount of extra payments every year and they recalculate my loan based on that? It makes no sense. I paid X amount and this is how much I've saved and my new date, end of story. You're taking something very simple and over-complicating it.

And btw, I specified in the calculator example that the payments were from March 2019 (start of the loan) to March 2020 - exactly one year - so there's no "continued acceleration" going on. In this example you paid an extra $10,000 in the first year and netted an interest savings of $26,500, there's no "continued" anything happening. The HELOC has nothing to do with it and there's no continued acceleration going on. You're imagining something continued happening as a way to explain the savings that you can't understand instead of accepting that you don't understand it and learning what's really happening. I mean, think about this for a second. I'm showing you calculators and screenshots of my mortgage account and you can look up any financial guru who will tell you that paying extra principal will save you a ton on interest and shorten your loan and you're using 'as ifs' about the how the bank is 'hypothetically' keeping you at 29 more years and saying the savings are minimal, but you think I'm the one who's off base. It's incredible.

 Ok, Ok. Or you should put it this way: Give your Lender $10k of your extra income now, and in 26.5 years they'll give you $26.5k as your return (but in the meantime, no benefit at all). Oh, and if anyone's mortgage is lower than 4.5% interest, then their return will be lower, and later!

To everyone else out there who may want to use their extra income to not pay out their $165k @4.5%/y mortgage early (per the example), but instead use their extra $10k now, plus $51/m, to invest elsewhere for the next twenty six and a half years, I reckon you can come out much better financially by that time!

[Sorry to all that I also was incorrectly explaining the math previously. I'm learning too]...

Updated 9 months ago

Edit: The $51.00/m extra (available) income only applies IF you do pay an extra $10k off that $165k principal in year one. So, if you don't, the question is: Surely I can invest better with my $10k now, than putting it to that mortgage and waiting 26 and a half years to get back just $26.5k return?

@Brent Coombs - I guess I don’t understand where you’re coming at this from.  I’m not preaching this as a bullet proof strategy for everyone.  I understand the limitations if someone doesn’t have money in their bank account or doesn’t have a decent monthly cash flow.  But I’m assuming most people here on this site aren’t scraping by living paycheck to paycheck.   

What I am trying to do is highlight the benefits in relation to other strategies out there.  As I mentioned multiple times, the scenarios I’m providing are in comparison to someone in the exact same starting position.  So maybe you do or maybe you don’t have $1000/mo cash flow and $20K in savings.  But if you did, what strategy would you employ in that exact situation.  It sure doesn’t sound like you would do what I’m doing so our paths would diverge from the start.

In your most recent post it sounds like you would invest at least some of that money (although I’m not sure where the $51/mo comes from).  But hey, in my example so can I.  So ultimately there is no advantage gained relative to my scenario.  

You hit it right on the head when you said you would come out much better financially at the end of that example, but I’m not getting that when you respond to me.  So far all I’ve gotten from you is that my example is invalid because it only applies to some people. 

@Nick Moriwaki , if you're not "preaching this as a bullet proof strategy for everyone", then you should have no problem with my message that "HELOCs are only suitable for accelerating ones mortgage, if income far exceeds expenses". Right?

And even for folk whose "income far exceeds expenses", the best use of their HELOC is likely not to pay out their low interest mortgage quicker, but to wisely invest - every chance they get!

I've never been against HELOCs per se. I'm only against them being marketed as a way of accelerating mortgage repayments to someone who "doesn’t have money in their bank account or doesn’t have a decent monthly cash flow"! If you accept that, then what is it you don't understand?

And, you do need to understand that on the mainland, HELOCs with lower interest rates than owner-occupied fixed mortgages are unicorns! So why swap a mortgage for a higher interest rate HELOC?

[Oh, I edited my earlier post re. $51.00/m extra available income, if you pay off an extra $10k principal in year one, but you still choose to take 30 years to pay off the remaining $155k principal]. Cheers...

Originally posted by @Brent Coombs :

@Nick Moriwaki, if you're not "preaching this as a bullet proof strategy for everyone", then you should have no problem with my message that "HELOCs are only suitable for accelerating ones mortgage, if income far exceeds expenses". Right?

And even for folk whose "income far exceeds expenses", the best use of their HELOC is likely not to pay out their low interest mortgage quicker, but to wisely invest - every chance they get!

I've never been against HELOCs per se. I'm only against them being marketed as a way of accelerating mortgage repayments to someone who "doesn’t have money in their bank account or doesn’t have a decent monthly cash flow"! If you accept that, then what is it you don't understand?

And, you do need to understand that on the mainland, HELOCs with lower interest rates than owner-occupied fixed mortgages are unicorns! So why swap a mortgage for a higher interest rate HELOC?

[Oh, I edited my earlier post re. $51.00/m extra available income, if you pay off an extra $10k principal in year one, but you still choose to take 30 years to pay off the remaining $155k principal]. Cheers...

I only have an issue because I don’t see what I’m saying is any less applicable to anyone who you folks are directing your information to and I don’t see you folks saying their income needs to far exceed their expenses.   Yes, the strategy needs cash flow and some cash on the side, but do your investments not  require that?  If so, the same caveat would apply to anything you say as well.

The second part of what you said is what I'm trying to get at. Give me an example of what kind of "investment" you are talking about and we can get started. It's easy to throw around the generic "invest the money instead of paying down the mortgage" but I'm asking for something with numbers. Are you taking half of your bank account and throwing it into the stock market and averaging X% ROI? Are you waiting 3 years and then putting $X down payment on investment property since you want $X for a rainy day fund? What kind of investments are you saying are better. I believe you would say both of those are better. So throw out some hypothetical numbers and we can compare results.

And in no example have I given a HELOC interest rate lower than the mortgage. I've even modeled the interest rate climbing to 12%. So I'm not sure why the need to continuously point that out.

@Nick Moriwaki , I'm guessing you follow different topics than I do here on BP. Many if not most threads I read are started by the "no-money-no-job-no-credit-but-how-can-I-get-rich-quickly?" crowd, rather than the "I've-got-too-much-money-but-how-can-I-get-more?" threads that you seem to read. Your question to me is not relevant to this thread, so I won't respond to it. There are literally hundreds of threads that give suggestions to invest at greater returns than mortgage/HELOC interest rates.

(But I know that you already know that). Cheers...

@Nick Moriwaki the question that keeps coming up throughout this ridiculously long thread is what purpose does the HELOC serve? If you have cash on the side and monthly cash flow of $1000 and want to pay off your mortgage early, then just make extra principal payments. The HELOC serves no purpose.

I know the argument which is that you can pull money out of the HELOC, but all that means is you can borrow money. A HELOC is just a revolving credit account. aka loan

Still I think @Brent Coombs point is well taken which is you would be better off to invest your money versus paying off low interest debt.

Originally posted by @Brent Coombs :

@Nick Moriwaki, I'm guessing you follow different topics than I do here on BP. Many if not most threads I read are started by the "no-money-no-job-no-credit-but-how-can-I-get-rich-quickly?" crowd, rather than the "I've-got-too-much-money-but-how-can-I-get-more?" threads that you seem to read. Your question to me is not relevant to this thread, so I won't respond to it. There are literally hundreds of threads that give suggestions to invest at greater returns than mortgage/HELOC interest rates.

(But I know that you already know that). Cheers...

Honestly, I don't follow very many topics on BP, but I don't think that should matter. I understand there is a large population out there looking to "get rich quick", but I don't think anyone here is directing what they're saying to them, yet I don't see you policing that. In fact, the whole premise behind using the HELOC is to use your additional income to pay down the balance.  So your continuous re-direction towards people with no income and no savings is extremely confusing.  

Like I said before, it’s easy to throw the blanket statement of “invest your money elsewhere”.  But this is easier said than done.  Say you tell me investing in property is better than paying my “low” percentage mortgage.  Well, with a $20K bank account and $1K/mo excess income, when is that going to happen while maintaining a rainy day fund?  This is why I’m asking for numbers.  To run out a scenario side by side and compare pros and cons.  But I can’t force you to come up with some numbers for me to use and anything I say you immediately shoot down as unreasonable.  

Originally posted by @Jeremy Z. :

@Joshua Smith

If you insist on calling mortgages "front-loaded", do you at least acknowledge that HELOCs and auto loans are "front-loaded" too?

Sorry, Jeremy, I missed this question before. I don't know much about auto loans because we typically pay cash or finance and then pay off early, but let's compare HELOCs with 30 year mortgages. First of all, I love you right now, because you might be Johnny on the spot with this question. I think you might have just solved this whole thing in a way that I never thought of. No, I don't think that HELOCs are front-loaded like 30 year mortgages are and here are some results from a HELOC payoff calculator that explain why.

Obviously, a mortgage is usually a much higher balance, so to be fair I started with $10,000 on the HELOC per all the other examples used, but then moved it up to $35,000, which is what I figured would be a reasonable ceiling for this type of scenario. I used a rate of 6.5%, btw, and you'll notice that in both cases that with $1000 payments the vast majority (80-95%) of your money goes to PRINCIPAL each month. In the case of a 30 year mortgage obviously the opposite is true and upwards of 70% is going to interest as we have all discussed.

To be fair, it seems like this is really only be a function of the balance being lower on the HELOC, because when I move the balance up to $165,000 and 360 payments of $1000 it reverts back to about 90% of your money going to interest. But it doesn't matter what is causing the advantage - the fact remains that if you take a chunk of your mortgage and put it on the HELOC, then every month a greater portion of your money is going toward principal than if you left that chunk on the mortgage. And that's true in two senses. The first way being what I just explained and show in the tables below - on the HELOC the vast majority of your money is going toward principal - and the second is that because you've removed this chunk of $10,000 (or $35,000, etc.) from the mortgage, a greater portion of your REGULAR PAYMENT is also going toward principal.

So, the bottom line is that I absolutely disagree that HELOCs are front-loaded (at least as it pertains to this strategy), because much more of your money every month is going to principal than to interest and a mortgage works in the exact opposite way - the majority of your money goes to interest early on. I think maybe that's the crux of this whole thing that everyone had been missing. Everyone has been fixated on the rates that they never stopped to consider where the money is actually going when you pay it, which is of far greater importance and probably the key to the whole strategy. Bravo, Jeremy.

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