HELOC payoff strategy
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HELOC payoff strategy
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I have a secret strategy to pay your mortgage off faster. You make bigger payments and/or more frequent payments than the amortization schedule requires. Now the bad news...I have a business method patent on this so you owe me a royalty every time you do it. If you don’t pay, I sue.
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Here let's try something. Forget the HELOC for a minute. I like to drive my money around in the car to show it around town before putting it on the mortgage early. It costs me a little gas money, but that's just how I like to do it. There are certain intangible benefits for me, call them psychological benefits if you want. I'm crazy and insane.
- Am I saving money on mortgage interest or does the drive around in the car somehow negate the savings?
- Am I saving money on mortgage interest vs paying maximum mortgage interest like you do?
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Matthew Olszak:
Originally posted by @Brian Cardwell:
Originally posted by @Matthew Olszak:
The reoccurring theme in these threads is that the HELOC saves a bunch of money. Then someone (like @Chris May) comes in and proves it doesn't via the hard #'s and calculations. Then the conversation shifts that this method is just a "tool". No, its not. A tool is like when you are making dough, and you use your kitchenaid mixer attachment to kneed it, whereas what this "method" proposes is that using your left hand to kneed the dough is more effective than using your right hand. Its one-in-the-same. Or worse. Or at best, slightly better but in no way worth the effort.
To the proponents of this "method" - we aren't trying to convince you. You are just like the sovereign citizen movement who believes they are smarter than all and have "discovered" a secret loophole to not pay taxes. We are simply presenting the MATHEMATICAL FACTS - IE something that is NOT a matter of opinion, to hopefully dis-sway the lay-person reading these posts and actually considering making your same financial errors.
The reoccurring theme is that the HELOC saves you the money is what the nay sayers are saying. Those of us who know that this work will tell you it is the reducing of the principle that saves us money. Because we do something that you don't understand doesn't make it wrong. The nay sayers say no you can't use a heloc as a tool to help pay down the primary loan. Resulting in many thousands of dollars being saved. The math shows you otherwise.
The process works to get out debt.
The more debt you have the money you need to make.
BTW Mathew when the bank forcloses on that property you talk about, you still owe the money.
Present the math then if it works. Not the anecdotal, "well, I paid my loan off early". Give us the calculations to show it works vs. what many others have presented! Should be easy enough, right?
Oh and FYI - a deficiency judgement (the difference between what you owe and the auction sale amt) is rare and easily dischargeable in bankruptcy. Not that I am advocating such action, just correcting your misunderstanding.
The math has already been presented.
There would be no need to discharge in a bankruptcy if you did not still owe the money.
Originally posted by @Joshua S.:
Here let's try something. Forget the HELOC for a minute. I like to drive my money around in the car to show it around town before putting it on the mortgage early. It costs me a little gas money, but that's just how I like to do it. There are certain intangible benefits for me, call them psychological benefits if you want. I'm crazy and insane.
- Am I saving money on mortgage interest or does the drive around in the car somehow negate the savings?
- Am I saving money on mortgage interest vs paying maximum mortgage interest like you do?
1. Absolutely. In fact you're saving a billion infinity percent.
2. Yes. When you pay your mortgage early, the money fairy reimburses you so it actually didn't cost anything at all.
"How To Pwn the Bank" - The Josh Smith Story
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Here let's try something. Forget the HELOC for a minute. I like to drive my money around in the car to show it around town before putting it on the mortgage early. It costs me a little gas money, but that's just how I like to do it. There are certain intangible benefits for me, call them psychological benefits if you want. I'm crazy and insane.
- Am I saving money on mortgage interest or does the drive around in the car somehow negate the savings?
- Am I saving money on mortgage interest vs paying maximum mortgage interest like you do?
1. Absolutely. In fact you're saving a billion infinity percent.
2. Yes. When you pay your mortgage early, the money fairy reimburses you so it actually didn't cost anything at all.
"How To Pwn the Bank" - The Josh Smith Story
Why be condescending? Why not just say sure dude you are correct? It is ok not to be correct all the time.
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Here let's try something. Forget the HELOC for a minute. I like to drive my money around in the car to show it around town before putting it on the mortgage early. It costs me a little gas money, but that's just how I like to do it. There are certain intangible benefits for me, call them psychological benefits if you want. I'm crazy and insane.
- Am I saving money on mortgage interest or does the drive around in the car somehow negate the savings?
- Am I saving money on mortgage interest vs paying maximum mortgage interest like you do?
1. Absolutely. In fact you're saving a billion infinity percent.
2. Yes. When you pay your mortgage early, the money fairy reimburses you so it actually didn't cost anything at all.
"How To Pwn the Bank" - The Josh Smith Story
Well, Chris, you're the stickler for math. I'm not putting any money into paying it early, because it was already going there. Calculator says its infinity percent. Call it 1000% or whatever number suits you, it's free money, so there's no actual "returns", but you are intent on comparing the rate with everything else and that's the only way to get a "rate". It's your fault we're comparing it to every investment in the known universe, not mine. :)
Me: "Hey, here is an easy way to save thousands on your mortgage if you have money sitting around in checking."
You: "Yeah, but instead of saving mortgage interest there are way better investments that I'm not doing with that money. Let's compare all the ways that I'm not doing anything with my extra cash to the way you ARE using your extra cash."
Me: "A bird in the hand is worth two in the bush."
You: "Yeah, but if I really wanted to get those two birds I could and you'd be totally sorry you ever compared yours to mine and my dad can pee further than yours and other hypothetical things".
Me: 🤪😂🙄
Judging by the silence I guess we're all on the same page now, so that's great. I just came back to say that I think it's pretty interesting that the same people who are exulting math over all the other "feel" / "user friendly" / "intangible" / "psychological" aspects of the strategy are the same ones to make fun of the use of calculators in figuring out a rate of return. It's as if you're all of a sudden anti-intellectuals because it suits your argument when you could just say that you're wrong about something. Craziness. I think that's because of fear, but more on that in a minute.
Chris, when someone buys a lottery ticket for a dollar and wins $10,000,000 their ROI is 999,999,900% according to an ROI calculator I'm looking at (you'll have to forgive me for using a calculator, but I'm not a professional mathematician or whatever, so I'm using a tool to get the right answer). That's a ridiculous, insane return, but it's not incorrect. It's true. This is math, your best friend in the universe, the one thing you never betray, remember? So when I tell you I'm not investing any money into this process, I'm just changing the timing of the payments - a true statement - the calculator says the returns are "infinity". In other words, it's free money and the returns are incalculable, but you wanted to compare "returns", so this is as close an answer as there is. It's not my fault that this strategy needs to be compared to any other thing you can do with money before people can see it's merits. You can make as much fun of INFINITY as you want - and I'll admit it sounds like something Ron Burgundy would say, so literally have at it, go nuts - but that doesn't make it any less true. It just makes you look weak and intellectually dishonest for not being able to admit you're wrong. And if one of the other professors ever caught you making fun of a math word like INFINITY I bet you'd be hot water over it.
But I found another calculator that might make you feel better and less like Ron Burgundy, so here are the results. I had to put in a penny to make this one work, because it wouldn't accept $0, but it says my ROI is 999,999,990% (might as well be INFINITY, huh?) and you'll notice I put in 30 years like you specified and there's an annualized return of 71%.
I think you're having a hard time wrapping your mind around the idea that this is my free money vs your investment returns and that's fine, but again, not any less true. It's a unique situation, so it's hard to think of some other comparison to confirm or contrast it against, but I owe a liability and I'm paying the same total amount toward principal as the day I closed on the loan, just changing the timing. You could try to say there are opportunity costs in the sense that I could be doing something else with the same money, but why on Earth would I make 9% or 16% on a traditional investment that incurs risk when I can make guaranteed free money while I get out of debt early? It makes no sense. And I won't be lectured about opportunity costs by people who have checking account balances when I'm the one putting my cash to work. :) Anyway, if you're still struggling with it, just try to make some more fun of it and that'll make the truth go away. I mean, the much better suggestion would be to reevaluate and change your mind based on the new information you hadn't realized, but you've demonstrated that you won't do that, so the only other thing I can suggest is to make fun of the truth and maybe it won't bother you anymore.
So, back to the fear thing. I think the reason you're all so willing to talk in circles, deliberately misrepresent, deflect, and ignore perfectly good points, be condescending, hostile, and inflexible is because you're afraid you are missing out. You're all very intelligent, so you know I'm right and your checking accounts are doing nothing for you. You might as well have the money under your mattress. So, you see an idea like the HELOC thing (or rubbing your money on pictures of Robert Downey Jr and then paying your principal early) and it's big time FOMO, so you have to wail and moan that there are better hypothetical ways to do everything and make better returns with the cash in your checking account.... none of which you are doing. I get it, but you shouldn't be afraid. You can get INFINITY / free money returns any time you want, you just have to stop lying to yourselves and change your behavior.
Anyway, someone reported one of my posts earlier, which is really sad. I'm so sorry I hurt someone's feelings, I didn't mean to do that. Let's hug it out sometime. Hopefully this is the end here and this can be goodbye for now. I'll buy you all a beer next time you're in town. Have a good weekend.
What is your point? Everyone acknowledges that paying more principal on a mortgage than is required by the contractual schedule saves money (vs. paying it over the fixed term) . And, as has been demonstrated over and over, the rate of return on that money is equal to the interest rate on the mortgage. Are we done with the "Velocity Banking Strategy" or "Double Secret Prime Money Explosion Method" or whatever we're calling it?
Add a HELOC to "chunk the money" or make more frequent payments, or whatever...If you pay a 30 year mortgage (and the HELOC) off in less than 30 years, by paying extra principal in advance of when contractually required, you will save money.
So there is the strategy in a nutshell. Pay principal sooner and save interest.
Are you arguing that the savings expressed as an annual percentage rate is greater than the APR of the mortgage being paid? It isn't, it's exactly equal. So what exactly is the miracle of this strategy? And why is it any different than saying don't borrow for anything?
Originally posted by @Scott L.:
What is your point? Everyone acknowledges that paying more principal on a mortgage than is required by the contractual schedule saves money (vs. paying it over the fixed term) . And, as has been demonstrated over and over, the rate of return on that money is equal to the interest rate on the mortgage. Are we done with the "Velocity Banking Strategy" or "Double Secret Prime Money Explosion Method" or whatever we're calling it?
Add a HELOC to "chunk the money" or make more frequent payments, or whatever...If you pay a 30 year mortgage (and the HELOC) off in less than 30 years, by paying extra principal in advance of when contractually required, you will save money.
So there is the strategy in a nutshell. Pay principal sooner and save interest.
Are you arguing that the savings expressed as an annual percentage rate is greater than the APR of the mortgage being paid? It isn't, it's exactly equal. So what exactly is the miracle of this strategy? And why is it any different than saying don't borrow for anything?
Haha. You might want to brush up on your reading comprehension, Scott. Or your trolling. Have a good one.
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
The problem is when people say this process is snake oil, magic or double secret prime .... Then they say it doesn't work. Well it works. It's really that simple. Don't use this method if you aren't comfortable with it. Those that are comfortable and understand it , have at it. 😀
Originally posted by @Brian Cardwell:
The problem is when people say this process is snake oil, magic or double secret prime .... Then they say it doesn't work. Well it works. It's really that simple. Don't use this method if you aren't comfortable with it. Those that are comfortable and understand it , have at it. 😀
So what is there to understand? If you pay principal early, you save money. All this begs the question where does the money for the extra principal come from?
I paid my $200K mortgage off in 2000, less than 2 years after I got it. I used the "Scott" method. I paid massive chunks of money that I got from my really good job, toward the principal...viola it was paid off. I saved well over $100,000, making a spectacular ROI. No HELOC necessary, no software. Just a bank account and a check book.
- 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
@Scott L.
Congrats and good job. You use Ryobi tools. I use craftsman tools. We got the same result. But I am not bashing you for doing it your way.
Originally posted by @Scott L.:
What is your point? Everyone acknowledges that paying more principal on a mortgage than is required by the contractual schedule saves money (vs. paying it over the fixed term) . And, as has been demonstrated over and over, the rate of return on that money is equal to the interest rate on the mortgage. Are we done with the "Velocity Banking Strategy" or "Double Secret Prime Money Explosion Method" or whatever we're calling it?
Add a HELOC to "chunk the money" or make more frequent payments, or whatever...If you pay a 30 year mortgage (and the HELOC) off in less than 30 years, by paying extra principal in advance of when contractually required, you will save money.
So there is the strategy in a nutshell. Pay principal sooner and save interest.
Are you arguing that the savings expressed as an annual percentage rate is greater than the APR of the mortgage being paid? It isn't, it's exactly equal. So what exactly is the miracle of this strategy? And why is it any different than saying don't borrow for anything?
To answer your question, Scott, the point is that Chris and Matthew among others have said that it makes no sense to put your extra cash toward your paying your mortgage early, because you "only" save 4% or whatever. According to all the naysayers when you only save 4% you are missing out on much greater returns elsewhere. Then I explained that I'm not spending or investing any money into this strategy and Chris replied that maybe the money fairy will reimburse me and so on and so forth, which shows that at the very least he doesn't understand and it seems like you don't, either. So, here's a little game to help everyone understand this idea. Suppose you owe your friend John $100 and it's 50% interest, so you really owe a total of $150. You would never skip out on John because he's your best friend and the kind of best friend that would break your kneecaps over any amount. But he's also a really nice guy and he offers to forgive the interest completely if you give him the money by the end of the month. Obviously, that's a great deal, so you jump at it and give him the $100 ASAP. So, here's the question. How much did you "invest" or "spend" to save that $50? Zero, correct? Since the money was going to him anyway it didn't cost you a cent to make $50. Of course, you really "saved" it, but we all know a penny saved is a penny earned and now that $50 can go toward something else.
If you spent nothing to get $50, it's free money, technically there are no "returns", but one calculator says the ROI is INFINITY. Or if you spent .50 in gas to drive over to his place to give him the money the ROI is almost 10,000%, if INFINITY is too Ron Burgundy for you. These are ridiculous returns, but not incorrect, it's because you didn't spend anything to get them. I'm sure everyone can agree at least in this scenario. Now scale it up to owing John $1000 and he'll forgive $500 in interest if you give him the money by the end of the month. Don't you bend over backwards to do it, because A) now it's $500 and B) it's free money just for paying him back early? Great. Absolutely. Now scale up to $10,000 and $100,000. Obviously, the time frame changes because you're not giving that back by the end of the month, but the premise is the same. You give it back early - which costs you absolutely nothing - and you get free money aka INFINITY % returns or 999,999,900% if you want to put a number on it. The problem that happens with some of these guys is that they say, "Well, if I have 30 years to pay it back I might as well invest it in the stock market in the meantime because I can do way better than 4% while I'm trying to pay it off......". Great, put it in the stock market or buy a property or whatever if you want, but I'll put free money and INFINITY returns against traditional investment returns any day. Imagine it, Matthew was trying to make fun of someone paying their mortgage early because he gets a whopping 16% on a rental or something. I get 71% annualized paying my mortgage early, because it costs me nothing. But you know, I'm supposed to be ashamed that I trust a calculator to give me results. Anyway, most of all I was just saying it's a shame to watch people who live and die by math turn around and make fun of it to save face because of a factor they never considered and/or the returns are in the bazillions. Free money aka INFINITY returns > investment returns hands down every time.
I think Brian sees the point. The question of where to direct additional money that you have available after your required bills are paid, is essentially an investment decision. Do I pay principal on my mortgage? Or do I find another use for the money that returns more? And what tools do I use to make it easy for me to save money from my income to pay principal/make investments? A HELOC and checking account with draw privileges...or just a checking account and a ledger for expenses. Immaterial. Whatever wors.
Joshua - I think the logical fallacy is stating that paying early principal payments results in "savings" of more than the APR on the mortgage rate. I did a $100,000 4.5% 30 year mortgage, with one extra $10,000 principal payment at the end of year 1 on the Bankrate calculator. The savings is $22,488 and you pay the mortgage off in 24.6 years. If instead, you invested the $10,000 at 4.5% even without compounding, at the end of the mortgage, you would have $23,050. In neither case is your return near infinite or really any higher than 4.5%.
Originally posted by @Scott L.:
I think Brian sees the point. The question of where to direct additional money that you have available after your required bills are paid, is essentially an investment decision. Do I pay principal on my mortgage? Or do I find another use for the money that returns more? And what tools do I use to make it easy for me to save money from my income to pay principal/make investments? A HELOC and checking account with draw privileges...or just a checking account and a ledger for expenses. Immaterial. Whatever wors.
Joshua - I think the logical fallacy is stating that paying early principal payments results in "savings" of more than the APR on the mortgage rate. I did a $100,000 4.5% 30 year mortgage, with one extra $10,000 principal payment at the end of year 1 on the Bankrate calculator. The savings is $22,488 and you pay the mortgage off in 24.6 years. If instead, you invested the $10,000 at 4.5% even without compounding, at the end of the mortgage, you would have $23,050. In neither case is your return near infinite or really any higher than 4.5%.
Sorry, Scott, but you're not investing the money in early mortgage payoff, it's already owed there. You're simply changing the timing of the payoff.
Go back to the scenario where you owed $100 to your buddy, its absurd to say that you invested or spent $100 (or any amount) to get the $50 savings. You didn't spend anything to get that savings. You didn't even spend time because you got out of debt SOONER. I assumed we could all agree on that, hopefully that's true because it's pretty simple and straightforward. So, basically what you're saying is that as you scale up the dollar amount or timeline at some point the idea that you're changing the TIMING to get the savings goes out the window and all of a sudden it's an investment. At what point does that happen? If someone owes $2000? $3000? $10,000? If the loan is for a month? A year? 15 years? 30?
In other words, if you agree that you can change the timing on a $100 payback and get free money without an investment but somehow think that higher dollar amounts or longer terms don't work that way, then I'd like to know at what amount and timeline they start to behave differently.
You paid THE TIME VALUE OF MONEY. It's not a fanciful Wall Street concept, it's something everyone on this site should be intelligently weighing. There is a real cost to paying your mortgage early.
I've avoided the "is it a good investment" debate, and have really just tried to focus on your completely incorrect understanding of compounding interest and time value of money.
But, let me give a real world idea of what a bad investment paying your mortgage early really is:
The markets I operate in average 5-10% appreciation per year. I can put $200k into a $1M property that next year will be worth $1.05. In the first year, my 200k investment returns 50k appreciation, my renter contributes 12.9k equity, and pays my mortgage interest for me. That's a return of 31%! And it only goes up every year thanks to the beauty of compounding.
I want to pay as little towards my mortgage as possible so I can buy as many properties as possible!
I've been in real estate for 5 years (as a side pursuit on evenings and weekends) and have averaged over 80% (not a typo) per year return on my original investment. Plug that into a calculator and see what it looks like. I imagine many of the other folks posting here have similar results. Intelligently deploying these financial concepts is the difference between (you) retiring at 65 with some extra cash in the bank, and me (and others here) retiring before I hit 40.
Simply put, I would be insane to pursue a 4.5% return when 80% returns are everywhere you turn. 4.5% is chump change.
The point of this site seems to have gone right over your and @Brian Cardwell's heads. I imagine @Matthew Olszak and @JD Martin would agree with me here... listen to the podcast... the guests on the show have made MILLIONS leveraging other people's money and intelligently deploying capital. If you think this site is about paying off your mortgage early, you've completely missed the opportunity that real estate presents.
My main frustration with this whole debate is watching someone so willfully shoot themselves in the foot. Come on man! You can be rich! There is a treasure trove of life changing knowledge on this site. Take advantage of it.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes7y
Thoughts, and these are probably my last here as this topic has been beat to death:
1. Paying off your mortgage early may be appropriate for you but it is not an investment any more than buying a new anything now, while it's on sale, "saves you money". Your "return" is equivalent to your mortgage interest rate. Think of it this way: you borrow $1000 against your credit card at the beginning of the month. If you pay the balance in full, and therefore pay no interest, you don't have any more money than when you started, you just don't have less (by virtue of paying interest). Going less negative is not investing.
2. If you have money that's just going to sit dead in a checking account, doing nothing, ever, then paying less in interest puts you further ahead in the end (by spending less money). So if that is your criteria - an either/or scenario, then it is probably your best option to pay towards the mortgage.
3. Paying off your mortgage in a low interest situation is an equity killer. That doesn't mean it's not OK - most of my properties I own F&C, but I am a pretty conservation guy financially, and cashing out all that equity requires something else be done with the money. I'm not that interested or ambitious. That said, I fully recognize I am leaving money on the table by leaving cash locked up in homes. That's my trade-off for going the easy route, and not being willing to trade higher returns for more obligation.
4. [Moderator hat on] Be sure to criticize the approach, if you like, but leave personal attacks out all the way around. You can disagree with people without being disagreeable. If you don't know what this means, it means you can feel free to say an approach is dumb, but not a person. [Moderator hat off].
Skyline Properties - 7yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
@Chris May
One mistake I see you making is counting on appreciation to make your returns. That is probably not a good idea. I will assume that that wasn't the only criteria in picking an investment.
I also think we have fundamentally differences. If you owe a monthly debt of 4k then you need to have at least 4k coming in to cover that. If owe 0k then I need to have at least 0k coming in to cover that. I am all for using opm but to be over leveraged is a problem. If I owe nothing on a rental it really doesn't matter what the rental market doesn't. If you owe 2k month on the same rental , then you will likely lose money if or when the rental market has a down swing.
I will still be comfortable and paid but I won't need to make as much as you.
The point of this site is for one to make millions or to share knowledge? Maybe you don't know what the purpose of this site is.
Greed will make YOU poor. Be careful.
I believe operating from a 0 debt position is much better than from a position of debt. Plain and simple. That doesn't mean I won't use opm.
- Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes7y
I think we might need a summary of the past 11 pages of just this thread, and likely 100s of others like it. So the title of the thread is "HELOC payoff strategy". It started as an inquiry about a "strategy" sprouted here and elsewhere as a way to pay down your mortgage faster by making your monthly expense payments from a HELOC vs. your checking account, and paying down the HELOC with your paycheck.
That theory has been debunked by the math. There is no question to that. The end conclusions were you have 3 options when paying a mortgage:
- Pay your normal payment - You'll end up paying lots of interest across the life of your loan.
- Pay your normal payment, PLUS something extra towards principal from your regular banking accounts - You'll end up paying a lot less interest across the life of your loan.
- Pay your normal payment, PLUS something extra towards principal from a HELOC - You'll end up paying a lot less interest across the life of your loan.
The MATH, which is a fact and not a matter of opinion or understanding, supports that the difference in savings between option 2 and 3 is a negligible amount at best, possibly worse by going with 3, and by going with 3 you harbor much more risk.
I think those of us still involved in this conversation are in agreement with this?
Then somewhere, in an effort to defend their debunked theory, the supporters of option 3 stated that it provides greater discipline to ensure extra payments are made. Maybe so, maybe not, but that's not a math/factual argument. Then somehow we've diverged into an argument over whether it makes financial sense to make an extra payment at all, either through option 2 or 3. That's a can of worms to open elsewhere, much akin to the cashflow vs. appreciation debate.
The sole purpose of my involvement in threads like this is to hopefully dissuade people who inquire about this supposed "HELOC Strategy" from doing so, and likely save them money from paying someone to learn more about this. Simply countering bad information with MATH AND FACTS.
Originally posted by @Brian Cardwell:
@Chris May
One mistake I see you making is counting on appreciation to make your returns. That is probably not a good idea. I will assume that that wasn't the only criteria in picking an investment.
I also think we have fundamentally differences. If you owe a monthly debt of 4k then you need to have at least 4k coming in to cover that. If owe 0k then I need to have at least 0k coming in to cover that. I am all for using opm but to be over leveraged is a problem. If I owe nothing on a rental it really doesn't matter what the rental market doesn't. If you owe 2k month on the same rental , then you will likely lose money if or when the rental market has a down swing.
I will still be comfortable and paid but I won't need to make as much as you.
The point of this site is for one to make millions or to share knowledge? Maybe you don't know what the purpose of this site is.
Greed will make YOU poor. Be careful.
I believe operating from a 0 debt position is much better than from a position of debt. Plain and simple. That doesn't mean I won't use opm.
I hear you. That's why I've avoided the "is it a good investment" debate. The best investment isn't necessarily the one that returns the most. I've been focused on debunking the flawed math behind many of the claims people are throwing around.
Anyway, my previous post was a response to the idea that there's some unbeatable return on paying down your mortgage early--that's simply factually inaccurate. I guess that was really Josh saying that though.
If paying down your mortgage meets your investment goals, have at it. I just think this HELOC method is a puzzlingly nonsensical way to go about it. No real harm done though.
Originally posted by @Chris May:
You paid THE TIME VALUE OF MONEY. It's not a fanciful Wall Street concept, it's something everyone on this site should be intelligently weighing. There is a real cost to paying your mortgage early.
I've avoided the "is it a good investment" debate, and have really just tried to focus on your completely incorrect understanding of compounding interest and time value of money.
But, let me give a real world idea of what a bad investment paying your mortgage early really is:
The markets I operate in average 5-10% appreciation per year. I can put $200k into a $1M property that next year will be worth $1.05. In the first year, my 200k investment returns 50k appreciation, my renter contributes 12.9k equity, and pays my mortgage interest for me. That's a return of 31%! And it only goes up every year thanks to the beauty of compounding.
I want to pay as little towards my mortgage as possible so I can buy as many properties as possible!
I've been in real estate for 5 years (as a side pursuit on evenings and weekends) and have averaged over 80% (not a typo) per year return on my original investment. Plug that into a calculator and see what it looks like. I imagine many of the other folks posting here have similar results. Intelligently deploying these financial concepts is the difference between (you) retiring at 65 with some extra cash in the bank, and me (and others here) retiring before I hit 40.
Simply put, I would be insane to pursue a 4.5% return when 80% returns are everywhere you turn. 4.5% is chump change.
The point of this site seems to have gone right over your and @Brian Cardwell's heads. I imagine @Matthew Olszak and @JD Martin would agree with me here... listen to the podcast... the guests on the show have made MILLIONS leveraging other people's money and intelligently deploying capital. If you think this site is about paying off your mortgage early, you've completely missed the opportunity that real estate presents.
My main frustration with this whole debate is watching someone so willfully shoot themselves in the foot. Come on man! You can be rich! There is a treasure trove of life changing knowledge on this site. Take advantage of it.
The time value of money is basically another way of saying a bird in the hand is worth (one) in the bush. $10,000 now is worth more than $10,000 in ten years because of the money I can theoretically make on it between now and then. You know, correct me if I'm wrong, but that's my understanding. So, here's what I don't get about it. How do you calculate it if there are so many different things I could invest in and so many rates I could get? I could put the $10,000 I used earlier this year into a CD and earn a reliable low rate. I could put it in a stock that takes off and doubles in a year. I could put it in a stock that's bankrupt in a year. I could invest in my cousin's start up and be a millionaire in a year. I could make a down payment on a successful business and return 500% per year. I could buy a rental and get a bad tenant and end up in a court fight losing money. Etc. etc. on into INFINITY. So take a 1.5% CD? Is that what I could truly make with the money? Is it the stock that's going to be up in a year or the one that's down in a year? How do I tell what the time value of money is without the benefit of hindsight?
I understand the concept, but it's predicated on the notion that you A) are able to whittle everything down to one potential investment to compare to and B) know what your returns are going to be on that investment and you don't, period. You can't. It's impossible. We're all making educated guesses, but the only way you can truly calculate it is with hindsight, eg. I put this $10,000 into my mortgage, but IF I'd have put it into my cousin's business I'd have ______. Without those variables in place, the time value of money is just a vague idea, not a number you can calculate. On top of that, I have plenty of capital for another rental, but haven't found the right one. I'm in the market for one right now. I can't understand why I keep having to explain this. I have investments. I have stocks. I have properties. I have savings to buy another property in the near future. All I'm doing is putting my excess CASH into the mortgage. You know, the stuff I'm not using for anything else that was just sitting there waiting to be used at the grocery store. I understand concepts like opportunity costs and time value of money, but as I said, the rubber never meets the road and to live by them is goofy. You can't tell me what the time value of my $10,000 is, because you can't reliably tell me what the other investment is and how much I will make. It's not a fancy wall street concept or something, it just doesn't mean anything beyond a vague idea. Basically, it's the financial bookworm way of saying that you should make a good investment because that's better than making a bad investment. To which I would say no ****. But it's all guesswork to a degree. AND there's timing involved. I doubled my money on 3D printing stocks a few years ago and was very happy to cash out. Then they tanked and went back up later. If I'd have timed it wrong, a VERY GOOD INVESTMENT could have been a VERY BAD INVESTMENT yet it was the SAME EXACT INVESTMENT. You could put your 200k on a million dollar place and overall it's a good investment, but if the economy goes wrong you could have a real problem and you have no idea if it'll be good or bad because it's in the future.
So, here's a sample of a time value of money conversation to me:
I want to put $10,000 on my mortgage to save a bunch of interest.
No, don't do that, it's a low return. Put it in a bond fund, you can get 6%.
No, if I'm going for a good return I'm going to buy a pharma stock I'm pretty sure I can make 15%.
Oh, no way, dude. If you're going to risk it that much you should just it into a rental property. That way you can earn in multiple ways.
Yeah, but if I want to earn in multiple ways I can buy some blue chip stocks and get dividends and appreciation.
Oh, man, talk about appreciation! My cousin has this start up and she would really APPRECIATE you investing. She says she will double your money almost over night and you'll be a millionaire in a year.
Which one of those things is going to do the best, Chris? And how do I know what the time value of my $10,000 is if I don't know any of the variables involved or the outcomes? Maybe my dude's cousin really could flip my money over night and make me a millionaire in a year or maybe she loses my money. Maybe the pharma stock I picked will go belly up. You get it?
But here's what blows my mind for real. I'm telling you I'm getting free money for reasons I've explained a bunch of times. When you say that I'm wrong because I'm paying the time value of money you're fundamentally saying that I'm only wrong because out of all the investments in the known universe, something is bound to be better than the one I'm talking about. Do you know what I mean? In other words, you can't refute that I'm getting free money (because you know I'm right), so the only other thing you can do is say that my "investment" is a bad one because there might be better ones out there. By this rationale, I could look at your 200k example and say that another guy did the same thing, but his building appreciated to $1.07 million, so you really essed the bed, man. You could've done so much better. Oh, and there's also the guy that put in 180k and appreciated to $1.05 million, so he got a better return than you, too. I don't even know why you bother. Not to mention the guy who won $100,000,000 on a lottery ticket he bought for $1 - he blew your returns out of the water, man. You're a terrible investor, Chris. You should really stick to your day job because there are so many people that get better returns than you do. I mean, even though you made a "pretty good" return, your investment actually costed you money because you could have done what this guy did or what that guy did. You actually lost out on money because somebody else's building appreciated to $2 million, so you're paying the time value of money, too. Sorry. Comparing investments is as much art and luck as it is science and math and there's no right answer especially when you're not using hindsight. But when you clearly can't refute the free money thing except to say that I'm paying the vague and ominous TIME VALUE OF MONEY, Money, money... money..... (anyone know how to write out echos?), I hear MAJOR alarm bells. If I was wrong you'd be able to say why I'm wrong, not have to compare my investment to all other investments to say that since I must've missed out on some money somewhere I MUST BE wrong. That should even give you alarm bells about what you're saying.
So, here's the million dollar question. I'm sure you'll say I'm wrong about all of the above and the time value of money is an easily calculable figure and so on. So, go ahead and tell me what it is, please. I want to put another $10,000 on my mortgage after the holidays, say February 1st, but I really need to know what the doing it is going to "cost" me if I'm going to make the right decision, so can you tell me what it'll cost me? I'm sure your answer is going to be the financial equivalent of who would win in a fight between Santa Claus and the Easter Bunny, because it's all hypothetical nonsense, but somehow I still can't wait. Thanks in advance.
I'm so excited to see this calculated out, Chris. Maybe I could buy 10,000 different investments at a dollar each and that way I'm "assured" that I will make money. I wonder if the time value of money is negative if I buy good stocks that have a bad year and I lose money.
It's funny that we both feel sorry for each other, though. You have money sitting idle in your checking account and all my money is working for me, but I'm the one not accounting for opportunity costs and the time value of money. :-D
Originally posted by @Joshua S.:
I'm so excited to see this calculated out, Chris. Maybe I could buy 10,000 different investments at a dollar each and that way I'm "assured" that I will make money. I wonder if the time value of money is negative if I buy good stocks that have a bad year and I lose money.
It's funny that we both feel sorry for each other, though. You have money sitting idle in your checking account and all my money is working for me, but I'm the one not accounting for opportunity costs and the time value of money. :-D
My bad, I shouldn't have gotten this going again.
If you want to pay off your mortgage early, have at it.
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