Heloc to pay off mortgage faster

684 Replies

You will only benefit if the interest rate on the HELOC is less than the interest rate on the fixed mortgage. Otherwise, make additional principal payments on you fixed mortgage.

@Eric Grant - That is not necessary true, as HELOC has the benefit of applying larger amount of sum to the principal now, while if you make additional principal payment every month, it may take years before you get to the HELOC amount.

Originally posted by @Nick Moriwaki :
Originally posted by @Chris May:
Originally posted by @Olivia C.:

I've seen lots of people use this strategy to pay loans early without paying a cent more each month.  I've had so many inquiries I wrote a little explanation / summary.  I get nothing for this post.

MORTGAGEACCELERATORS
These systems are designed to pay down your mortgage and build equity faster, usually without paying any extra principal toward the loan.

The general premise is to have your mortgage in the form of a home equity line of credit (Heloc), preferably in the first position. All your paychecks are deposited directly into the home equity account. You only transfer money from the equity line to your checking account once or twice a month to pay bills and get cash for general expenses. Since interest is compounded on the daily principal balance of your equity line, you will pay far less interest over the life of the loan because your paycheck income sits in your equity line rather than your checking account.

Illustration of concept
Several years ago I managed a law firm. Money market rates were 10% or more and. Passbook savings accounts paid around 8% interest. Business checking paid around 4%
Rather than depositing client payments into our checking account, we deposited all client payments directly into a money market checking account. We only transferred money from the money market account to our regular business account twice a month to pay bills. We would have paid bills with checks directly from the money market account but the bank had a high per-check fee. So we wrote only two money market checks a month to fund our general business checking account. We earned a very nice amount of interest by having our deposits sit in the money market account until needed to pay bills.

Mortgageaccelerator systems work on the same principal as in the illustration above. But instead of parking your paychecks where they will earn interest, you are parking them where you avoid incurring interest on your home loan. This makes sense because current rates for home equity lines of credit are around 7%-8% and money market accounts only pay around 3.5%. Even if you were able to secure an equity line a few years ago with a fixed interest rate of 5% or 6%, using a mortgageaccelerator system still saves money.

This is not a gimmick. This type of loan a powerful tool that must be used carefully. You must be very disciplined and in a positive cash flow situation for any accelerator to work properly. If you lack financial discipline, this type of loan can be disastrous. 

I don't understand how you can say this doesn't count as prepaying your loan. You're making prepayments, and then just borrow more. If you just took the leftover portion of your paycheck and paid that to your HELOC on the first of the month, the effect is almost the same.

I modeled it out on a previous post in this thread and the savings in one year on a 50k loan was negligible.

It is still technically "paying" but since you have the option to pull out the money you put in (without incurring additional fees besides the interest) it's not the same as putting the leftovers of your paycheck into the HELOC. In a realistic sense, how would you even go about doing that without knowing exactly how much you'll spend day to day?

Say you had a HELOC balance of $50,000 and a bank account of $50,000. You could "pay" $50,000 to the HELOC balance and zero out both accounts. The next day you could take that money back out and put it back into your bank account and end up with the exact same starting numbers. But, for that day your HELOC balance was $0 and therefore the interest you pay for that day is $0. Had you left the $50,000 in your bank account and not put it towards the HELOC you would be charged $6.85 of interest (50000 * 0.05 / 365) for that day. It doesn't work exactly like that (average daily balance, time you put the money in/take the money out, etc...), but the point is that you cant do the same with a mortgage because you would need to pay money to get that excess money out.

Regarding how you would know how much to pay towards the HELOC, my answer is that's just budgeting. I know how much of my monthly income I spend within 2-3%.

I don't disagree that your method works in a mathematical sense. In a previous post I modeled it out over a year on a 50k balance, and the savings were $73 for the year. My issue is with the risk adjusted return on that extra $73... it's horrendous. As Joe and others have pointed out, there are a number of ways this method can turn on you fast, the simplest of which is a change in the interest rate. 

You're taking an investment class, real estate, which is relatively low risk and making it substantially more risky for an extra 0.15% savings in interest.

I won't flat out say nobody should ever do this because there are too many variables and specific situations, but in  every situation this is a poor risk adjusted return.

In case you're interested: http://www.investopedia.com/terms/r/riskadjustedreturn.asp

Updated about 3 years ago

Grr... Made this revision to the wrong post. Ignore please.

Updated about 3 years ago

Just to clarify: you have 3 models. 1. Conventional mortgage with 150k starting balance at 3%. No prepayments. 2. Conventional mortgage with 150k starting balance at 3%. $300 monthly prepayments. 3. HELOC with 138k starting balance at 3%. Interest paid on month end balance with no daily average balance calculation. Principal paydown is 2k minus whatever the interest charged was... all at period end. Is that correct? I'm confused why were comparing 3 different situations with multiple different variables. Obviously model #3 has less interest paid... it has a lower starting balance and larger principal payments every month. Am I missing something?

Originally posted by @Nick Moriwaki :
Originally posted by @Bob Bowling:
Originally posted by @Nick Moriwaki:
Originally posted by @Sergey Y. :
Originally posted by @Nick Moriwaki:

@Sergey Y.

How experienced are you with using HELOCs?  Is what you're saying from personal experience?  My contract with the bank is for a set number of years for a set amount so I'm not quite sure how they would do that, but if you're speaking from experience I should definitely look into it. 

Any chance you have a home equity loan with fixed rate instead? Those do have set terms and rate.

My experience comes from a personal interest-only HELOC. According to my HELOC note agreement additional advances can be denied or amount of credit line can be reduced in following cases:
1) Value of secured property declines significantly
2) There is a reasonable believe that borrower won't be able to fulfill repayment obligations
3) Maximum APR reached
4) When a government body decides that taking addition advances constitutes unsafe banking practice
+ 3 other minor clauses

Few people I personally know have HELOCs open with pretty much the same terms.

The most risky part (at least in my HELOC note agreement) is the following: if any time unpaid balance on the account exceeds amount of credit limit then the excess becomes due immediately. This means that if HELOC has a balance of 100K secured by a property, equity falls significantly and the lender decides to lower credit limit to 50K, guess what: 50K becomes due the very next day.

This to me does not qualifies HELOC as "reserves". It is a secured revolving debt. Also, with "due on credit overdraft" clause is even riskier than a credit card.

-
Sergey

Point well taken.  However, I see this as a precaution not to be too agressive with the strategy, not that the strategy doesn't work, as most people are claiming.  

 If this strategy works as you claim EXACTLY how can you be too aggressive?

The same way you can be too aggressive with any strategy and pushing it too far too fast. If the risk is that the banks could adjust your limit or variable rates will spike then you need to make sure if that happens then your profits aren't compromised. That could mean chunking away at your mortgage using a smaller HELOC at first or waiting an extra few months before purchasing another investment property. The more aggressive you are the more the more you can save (earn), but that also means if the something happens you're at a higher risk. Is that not true with all strategies?

 Pushing it too far too fast?  I have no idea what you are saying.  Please explain.

Also, consider how this affects your credit scores and debt/income ratios. Best to keep things simple. decide how much leverage you want to take on. Run all properties on a spreadsheet to prevent going over your ideal leverage percentage. Keep things simple. Buy with cash then finance them at a comfortable ratio so it still cash flows nicely. Let the tenants pay for it for now. Move on to buying more homes. Pay extra towards the principle when funds permit and keep a healthy balance. 

Simple = low stress, more fun!

@Chris May

The returns on the first year may be small (in my spreadsheet with $150K balance @ 3% I got $500 first year savings) initially, but it's a compounded effect. If you look at the total interest paid over paying off the entire balance, the mortgage pays almost $74,000 while the HELOC pays under $14,000. Is that insignificant? If you're so worried about risk from interest rate spikes you can adjust them in the spreadsheet and see how that affects the interest paid. I adjusted the interest so that the rate jumps 1% every year and the interest paid only jumps to $23,000.

@Bob Bowling

In any strategy you can get too aggressive.  In your appreciation strategy, would you advise purchasing a place in Hawaii as soon as you have the down payment?  Or do you need to evaluate your individual scenario and find your sweet spot to mitigate the amount of risk you are taking on based on your monthly income, unforeseen repairs/expenses, negative cash flow from appreciating Hawaii properties, etc...?  

With the HELOC strategy you can get as aggressive as you like. Reallocate all or part of your savings into the HELOC to lower the balance. Utilize 0% credit cards to store debt at no cost ($$$ wise). You could pull out of your retirement to pay less interest to your HELOC and pay the interest back to your retirement account instead of to the bank. If you try and push it too far to maximize your savings and things start to turn for the worse, you'll put yourself in a bad situation that could destroy all your savings. Each individual person will approach this differently.

Originally posted by @Nick Moriwaki :

@Chris May

The returns on the first year may be small (in my spreadsheet with $150K balance @ 3% I got $500 first year savings) initially, but it's a compounded effect. If you look at the total interest paid over paying off the entire balance, the mortgage pays almost $74,000 while the HELOC pays under $14,000. Is that insignificant? If you're so worried about risk from interest rate spikes you can adjust them in the spreadsheet and see how that affects the interest paid. I adjusted the interest so that the rate jumps 1% every year and the interest paid only jumps to $23,000.

@Bob Bowling

In any strategy you can get too aggressive.  In your appreciation strategy, would you advise purchasing a place in Hawaii as soon as you have the down payment?  Or do you need to evaluate your individual scenario and find your sweet spot to mitigate the amount of risk you are taking on based on your monthly income, unforeseen repairs/expenses, negative cash flow from appreciating Hawaii properties, etc...?  

With the HELOC strategy you can get as aggressive as you like. Reallocate all or part of your savings into the HELOC to lower the balance. Utilize 0% credit cards to store debt at no cost ($$$ wise). You could pull out of your retirement to pay less interest to your HELOC and pay the interest back to your retirement account instead of to the bank. If you try and push it too far to maximize your savings and things start to turn for the worse, you'll put yourself in a bad situation that could destroy all your savings. Each individual person will approach this differently.

Nick, can you help me understand what you're doing here? I don't really understand what the bank account column represents.

For the HELOC table on the right, why is the starting balance only 138k instead of 150k like the others? Are you trying to model the HELOC checking account theory? If so, you really need to model it out by day to get the daily average balance. (the way you're doing it actually hurts your argument). The full 5k income needs to be applied at the beginning of the period, and slowly build the balance up by 3k over the month. The way your doing it, the interest is being calculated on the month-end balance with no daily average calculation. Then your applying interest minus 2k at the end which isn't really how the theory works.

Also, for comparison purposes, your should have a model that compares plunking 2k extra towards the mortgage balance every month. Right now the model shows a mortgage with 300 extra. I'm not sure what point that proves. Obviously paying 2k instead of 300 extra every month results in less interest paid. I guess I'm confused because there's no comparison of like situations.

I'm on my phone so it's a little hard to tell, but I think I got all that right. Once you clarify those things I'll try modeling it also and we'll compare notes.

Updated about 3 years ago

Just to clarify: you have 3 models. 1. Conventional mortgage with 150k starting balance at 3%. No prepayments. 2. Conventional mortgage with 150k starting balance at 3%. $300 monthly prepayments. 3. HELOC with 138k starting balance at 3%. Interest paid on month end balance with no daily average balance calculation. Principal paydown is 2k minus whatever the interest charged was... all at period end. Is that correct? I'm confused why were comparing 3 different situations with multiple different variables. Obviously model #3 has less interest paid... it has a lower starting balance and larger principal payments every month. Am I missing something?

Originally posted by @Nick Moriwaki :

@Chris May

The returns on the first year may be small (in my spreadsheet with $150K balance @ 3% I got $500 first year savings) initially, but it's a compounded effect. If you look at the total interest paid over paying off the entire balance, the mortgage pays almost $74,000 while the HELOC pays under $14,000. Is that insignificant? If you're so worried about risk from interest rate spikes you can adjust them in the spreadsheet and see how that affects the interest paid. I adjusted the interest so that the rate jumps 1% every year and the interest paid only jumps to $23,000.

@Bob Bowling

In any strategy you can get too aggressive.  In your appreciation strategy, would you advise purchasing a place in Hawaii as soon as you have the down payment?  Or do you need to evaluate your individual scenario and find your sweet spot to mitigate the amount of risk you are taking on based on your monthly income, unforeseen repairs/expenses, negative cash flow from appreciating Hawaii properties, etc...?  

With the HELOC strategy you can get as aggressive as you like. Reallocate all or part of your savings into the HELOC to lower the balance. Utilize 0% credit cards to store debt at no cost ($$$ wise). You could pull out of your retirement to pay less interest to your HELOC and pay the interest back to your retirement account instead of to the bank. If you try and push it too far to maximize your savings and things start to turn for the worse, you'll put yourself in a bad situation that could destroy all your savings. Each individual person will approach this differently.

 Ok. Just modeled the complete lifecycle of two scenarios:

Constants for both scenarios: 150k starting balance on HELOC, 5k monthly paycheck, 3k monthly expenses, 2k monthly leftover. Interest is applied to account at month end and calculated on average daily balance for the month.

Scenario 1: HELOC is used like a checking account. 5k is paid towards HELOC on first of the month, 3k spent evenly over course of month (~$100/day depending on the month).

Total interest over life of loan: $15,551

Scenario 2: HELOC not used as a checking account. 2k paid towards HELOC on first of the month, no other charges to HELOC during the month (except interest at month end)

Total interest over life of loan: $15,871

Savings from using your HELOC as a checking account over entire life of loan: $320.

If you're trying to prove something else, I'm not sure what that something is. 

I'll upload my spreadsheet in a bit so you can look through it. I'm at work and can't do it at the moment.

Originally posted by @Nick Moriwaki :

@Chris May

The returns on the first year may be small (in my spreadsheet with $150K balance @ 3% I got $500 first year savings) initially, but it's a compounded effect. If you look at the total interest paid over paying off the entire balance, the mortgage pays almost $74,000 while the HELOC pays under $14,000. Is that insignificant? If you're so worried about risk from interest rate spikes you can adjust them in the spreadsheet and see how that affects the interest paid. I adjusted the interest so that the rate jumps 1% every year and the interest paid only jumps to $23,000.

@Bob Bowling

In any strategy you can get too aggressive.  In your appreciation strategy, would you advise purchasing a place in Hawaii as soon as you have the down payment?  Or do you need to evaluate your individual scenario and find your sweet spot to mitigate the amount of risk you are taking on based on your monthly income, unforeseen repairs/expenses, negative cash flow from appreciating Hawaii properties, etc...?  

With the HELOC strategy you can get as aggressive as you like. Reallocate all or part of your savings into the HELOC to lower the balance. Utilize 0% credit cards to store debt at no cost ($$$ wise). You could pull out of your retirement to pay less interest to your HELOC and pay the interest back to your retirement account instead of to the bank. If you try and push it too far to maximize your savings and things start to turn for the worse, you'll put yourself in a bad situation that could destroy all your savings. Each individual person will approach this differently.

I think I just figured out what you're trying to do with that back account column. I think that's supposed to be the amount you'd have in savings if you didn't put all your money into the HELOC, right?

I just modeled a third scenario:

3. Same constants as before, but instead pay 1,500 of my monthly income towards the HELOC, and put the remaining $500 in a savings account.

Total interest paid over life of loan: $22,339. Loan is paid off 21 months after scenario 2. BUT total in savings is $57,500 vs $0 in scenario 2. 

So you paid $6,468 more in interest over the course of 164 months (~$39/mo), while saving $57,500 cash. To me the interest savings of scenario 2 still isn't a very compelling amount considering you'd have zero cash on hand. I still think that's a pretty poor risk adjusted return.

I'll spend an extra $39/month for financial security.

Originally posted by @Dan Schwartz :

A friend of mine was selling a system that did this back in the depths of the recession.  That's 7-8 years ago, so I don't remember the name of the program.  But I created an excel spreadsheet to act in the same capacity, and yes it pays off the mortgage early and with less total interest payments.

But so does putting every available dollar of income you have towards the mortgage. That's essentially what this does. You are left with no net savings in your savings account, because every penny has been put towards the mortgage, albeit through the scheme of the HELOC.

It works, but I pass. 

 Dan - I don't think the idea is to put "every available dollar of income towards the mortgage" and be broke at the end of the month.. More so take the 30 yr loan and pay off anything extra you can per month and it'll slowly start to add up to big savings in interest over the life of the loan or until you decide to sell.. I think it's a great idea and even if you just paid an extra $100/month that's going to equal some kind of savings down the line! I think it's just better to be able to pay extra if you want and not be forced into paying more with a 15 yr, hey to each his own!

Originally posted by @Brian J Peterson :
Originally posted by @Dan Schwartz:

  More so take the 30 yr loan and pay off anything extra you can per month and it'll slowly start to add up to big savings in interest over the life of the loan or until you decide to sell.. I think it's a great idea and even if you just paid an extra $100/month that's going to equal some kind of savings down the line! 

But those savings are coming at a price! If it is worth it to you fine but you need to be aware what the "savings" is costing you.

Do you mean as far as having "$100" less cash every month being the "cost" of the savings or something else? I think if you're pressed to even make the mortgage payment then yes of course having that extra $100/month put towards the mortgage would be foolish.. On the flip side if that won't hurt you financially why not do it? In that case I don't see what the "cost" would be, I know I'm missing something here! Aloha

Originally posted by @Brian J Peterson :

Do you mean as far as having "$100" less cash every month being the "cost" of the savings or something else? I think if you're pressed to even make the mortgage payment then yes of course having that extra $100/month put towards the mortgage would be foolish.. On the flip side if that won't hurt you financially why not do it? In that case I don't see what the "cost" would be, I know I'm missing something here! Aloha

 That's just one part of it. 

1.  You lose the money that $100 could make. 

2.  You are paying 2046 debt/expense with 2016 money.

3.  If you ever need that $100 back the bank could charge you points, fees, higher rates JUST to use your own money.  That cost could be Yuge!

@Eric Grant - Actually things are a bit more complicated that the difference in interest rates, right? How big is the HELOC? How much cash flow (extra money) are you going to have every month? How much is the HELOC interest going to change in the future?

@Chris May

Not sure how you're running your numbers, but the premise you got to was correct. The reason for the bank account is to allow an apples to apples comparison. Without the bank account all you'd see is the mortgage balance going down slightly and the HELOC balance going down a lot. As many people have correctly pointed out, this is not magic since you are simply allocating your finances differently.

If you put everything to your mortgage it should work very similarly to the HELOC only strategy. However, you lose all flexibility in your finances. In that scenario, your bank account will never grow. So if you start with $12,000, you will always have $12,000 until you pay it off. Then you start to develop wiggle room after about 7 years. Seems like an extremely risky counterargument to my scenario and my spreadsheet still shows a savings of $2700 over the life of the balance using the HELOC (since I started by dumping my savings is).

This, all without surrendering any financial flexibility since you have access to your available balance (limit - principal) at any time. I've seen earlier posts that say you need to pay to access this money but that is just flat out not true. Ironically, this is actually an argument for the HELOC strategy and is why people don't see it as "paying" extra to the balance when they put their entire income to the HELOC since the money goes in and out as easily as it does from your bank account. So if financial security is your argument, then you should stick with a mortgage scenario that has financial security built into it and then compare the numbers.

And in case you're one of the people I've seen saying that the HELOC strategy hinders your investing potential, this is also untrue. The available balance in your HELOC CAN be used as a down payment for another mortgage. Getting access to the money already put towards your mortgage requires time and additional fees.

Hi Nick, I'm here in Honolulu too. I heard about this strategy recently. I'm very motivated and excited about it. 

I'm just wondering how much I should chunk each time: a big lump sum one time every few month or a little each month?

I found a HELOC at my mortgage bank that has a better rate. I wonder if they would act against me when they find out I use the money this way.

Originally posted by NA Stevens:

Hi Nick, I'm here in Honolulu too. I heard about this strategy recently. I'm very motivated and excited about it. 

I'm just wondering how much I should chunk each time: a big lump sum one time every few month or a little each month?

I found a HELOC at my mortgage bank that has a better rate. I wonder if they would act against me when they find out I use the money this way.

 They won't care how your use the money! That's how they make money. They'll love you.

Originally posted by @Chris May :
Originally posted by @Shan Shan Stevens:

Hi Nick, I'm here in Honolulu too. I heard about this strategy recently. I'm very motivated and excited about it. 

I'm just wondering how much I should chunk each time: a big lump sum one time every few month or a little each month?

I found a HELOC at my mortgage bank that has a better rate. I wonder if they would act against me when they find out I use the money this way.

 They won't care how your use the money! That's how they make money. They'll love you.

Exactly.  They shouldn't care.  How much you chunk depends on your individual scenario.

Looks like we are going in circles and soon turn this thread into fairly recent on the same topic
"Use HELOC to paydown mortgage fast" - https://www.biggerpockets.com/forums/49/topics/329...

I trust @Chris May calculation and quickly running my own numbers see the same results:
1) No magical secret: as amortized mortgage payment has no front-loaded interest, majority of "magic" works just by making extra monthly payments whatever the source or procedure it is.
2) Using HELOC as expense account to "time" income-expense cycle only brings marginal benefits when compared to increased risk, extra bookkeeping and complexity.

If one really wants to use HELOC for something, it better be more tangible benefit given risk taken anyways: using HELOC money for downpayment or to fund a flip property.

-
Sergey

@Sergey Y.

Have you looked at my spreadsheet? There is no timing to the income-expense cycle incorporated. I would disagree that has any tangible savings as well. The counterargument that Chris provided was one that minimized the difference in interest savings (by paying all excess income to the mortgage), but this greatly hinders financial flexibility and is extremely risky in that the bank account never grew until after paying off the mortgage 7 years later. The HELOC scenario still pays $2700 less interest over paying off the balance and does not sacrifice financial flexibility whatsoever. And while saving all that money you can still turn around and use the available balance to purchase more property like you are suggesting.

Do you have a different counterargument to the difference in interest paid in the spreadsheet?

Originally posted by @Nick Moriwaki :
Have you looked at my spreadsheet?  There is no timing to the income-expense cycle incorporated.  I would disagree that has any tangible savings as well. 

Nick,

I did look at your spreadsheet as well as modeled few cases using @Chris May spreadsheet

I agree, in your case#3 there is a noticeable benefit of interest savings due to few things:
1) Noticeable interest savings on income excess: basically you are not paying 3% on ~$1.5K/mo
2) Significant interest savings on $12K (and growing ~$1.5K/mo of income excess) at @3% which otherwise will be sitting pretty much idle in a CD account.

There are no arguments here. Only caveat is that you are out of all reserves in lieu of having HELOC (or any other non-revolving financing option) in case of financial emergency. Which is fine and up to individual risk tolerance and other financial circumstances (income sources etc.).

Your case#3 with $0 balance on savings account has an unfair advantage as it is not really apples-to-apples comparison. In contrast, as modeled for "mortgage + fixed extra principal" vs "mortgage+HELOC + fixed income excess" the resulting benefits in terms of monthly interest savings (and net payoff acceleration difference as a result) are indeed marginal and (to me) not worth the risk and complexity of the whole "strategy.

I personally still stand on the following:
1) There is no "magic" in this "strategy" as it is being presented (or even worse - sold). Having transient HELOC alone does not accelerate anything, period.
2) This "strategy" can drag financially not-so-savy individuals in a big trouble if there is no excess of income over expenses cause it "sells" HELOC as a magical component of it.
3) This "strategy" only brings marginal benefits if there is excess of income over expenses and those benefits are comparable with scenario of just making extra principal payments with no additional complexity and risk involved.

-
Sergey

I read about this strategy a few months ago in a book titled, Own Your Home Sooner and Retire Debt Free by Harj Gill. It's actually how many mortgages are structured in Australia. There are many programs and variations on the concept but I figured out how to implement it in a spreadsheet model. I'm on track to paying off a $38k mortgage balance in 6 months. Focusing on the interest rate of the HELOC alone is the mistake people make. You have to calculate the full cost of the money.

Originally posted by @Sergey Y. :
Originally posted by @Nick Moriwaki:
Have you looked at my spreadsheet?  There is no timing to the income-expense cycle incorporated.  I would disagree that has any tangible savings as well. 

Nick,

I did look at your spreadsheet as well as modeled few cases using @Chris May spreadsheet

I agree, in your case#3 there is a noticeable benefit of interest savings due to few things:
1) Noticeable interest savings on income excess: basically you are not paying 3% on ~$1.5K/mo
2) Significant interest savings on $12K (and growing ~$1.5K/mo of income excess) at @3% which otherwise will be sitting pretty much idle in a CD account.

There are no arguments here. Only caveat is that you are out of all reserves in lieu of having HELOC (or any other non-revolving financing option) in case of financial emergency. Which is fine and up to individual risk tolerance and other financial circumstances (income sources etc.).

Your case#3 with $0 balance on savings account has an unfair advantage as it is not really apples-to-apples comparison. In contrast, as modeled for "mortgage + fixed extra principal" vs "mortgage+HELOC + fixed income excess" the resulting benefits in terms of monthly interest savings (and net payoff acceleration difference as a result) are indeed marginal and (to me) not worth the risk and complexity of the whole "strategy.

I personally still stand on the following:
1) There is no "magic" in this "strategy" as it is being presented (or even worse - sold). Having transient HELOC alone does not accelerate anything, period.
2) This "strategy" can drag financially not-so-savy individuals in a big trouble if there is no excess of income over expenses cause it "sells" HELOC as a magical component of it.
3) This "strategy" only brings marginal benefits if there is excess of income over expenses and those benefits are comparable with scenario of just making extra principal payments with no additional complexity and risk involved.

-
Sergey

I think we are getting somewhere now.  The first two points are the basis of the strategy, and I think you are the first person I've seen on the other side of the argument to clearly reciprocate that.  

However, I don't see why this is not an apples to apples comparison. The scenario uses the same numbers and the only difference is how the debt is stored (mortgage vs HELOC).

I also don't understand what you are saying about the unfair advantage. The advantage you speak of is the foundation of the HELOC strategy. There is (relatively) no risk in leaving the bank account at $0 because at all times you have access to your available balance. I'm not saying this is what I would advise someone to do based on the fact that banks don't count your available balance as cash on hand (even though that's essentially what it is) and may also be a red flag to them if you continually look like you have no money.

In response to your final comments:

1) I agree there is no magic.  The numbers are what the numbers are. 

2) I also agree that the HELOC could get people in trouble, but not for the reason you mentioned. The strategy revolves around your money constantly "sitting" on your balance which effectively earns you 3% (in the example) over not putting it in. However, because the available balance is essentially liquid, this could potentially adjust a person's spending habits because they feel like they have more money at their disposal (see conversation a few posts ago about pushing the strategy too far, too fast).

Side question: Isn't a person already in big trouble if they don't have excess of income over their expenses?

3) First off I'll point out that there is no additional complexity or risk involved with the strategy I presented.  In fact, I would argue the opposite point that there is extra complexity and risk by paying extra to your mortgage.  

Complexity - How do you determine how much extra to put into the mortgage when making extra payments? I'm sure people don't just make snap decisions on how much extra to dump into the mortgage. With the HELOC it's simple - all money deposited into the checking account gets immediately moved over into to pay off the HELOC balance.  

In addition, the determination needs to be made that the extra money you are putting to your principal isn't going to be needed. Otherwise, to get that money out requires effort, fees, and time. This not only includes an emergency fund, but also the opportunity cost of forgoing using it for other potential investments. I can pull any amount of the excess money from my HELOC from the comfort of my home or on my phone.

Risk - I gave a scenario earlier in this thread where I asked, what would you do if you absolutely needed $50,000 in month 24 (based on the spreadsheet)? If you were paying the minimum mortgage payment, you would be short $7000. If you were paying only $300 extra a month you would be $14,000 short. With a HELOC I would whip out my check book and write a $50,000 check in less than 5 minutes (since I would have $51,130 available according to the spreadsheet) . So who was at more risk? Sure I would be sweating it out with a maxed out HELOC balance, but assuming I'm on a bi-weekly payment schedule I would have $2500 coming very soon to get me through the month.

Basically what I'm asking is: When comparing mortgage payment plans of paying minimum and minimum + additional principal, isn't it considered riskier to put extra money to your mortgage principal because recouping that money is costly if you end up needing it? So why does that comparison not apply when comparing mortgages to a HELOC?

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