HELOC payoff strategy
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
Second City Real Estate4.821 Reviews
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.
329 Replies
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
@Brie Schmidt mortgage acceleration works by making extra principal payments. Whether you write an extra check each month of float it through a HELOC makes little difference.
The system is pitched as using your HELOC as a checking account, so you never have a positive cash balance in a normal account. All your capital is deployed to principal pay down. A normal person may keep $5000 in the bank and deposit their checks into that account, then write a check towards their mortgage. Using the HELOC system that $5000 would be used to pay down the balance so you don't incur interest on $5000 worth of principal. It is kind of like getting paid 4.5% or whatever your mortgage rate is, for your savings.
You can save some interest this way, but some of the guru promise way more savings than actually occurs. The way the scam works, they say that mortgages are front end loaded with interest. They argue by making extra principal payments early, you can "skip payments" and the associated interest. The truth is that interest accrued on a HELOC is no different than interest accrued on a standard mortgage. Mortgages are not front end loaded with interest, they just have more interest early on because the balance is higher. If you took out a HELOC for the same amount as a standard mortgage and stretched payments out over the same term, you would pay the same amount.
The other scam associated with this is the idea that you can float HELOC payments. The guru says instead of paying $500 extra per month to your mortgage, make a $3000 payment from your HELOC, then pay down your HELOC at $500 per month. The theory is that making the larger chunk payment to you mortgage results in faster pay down. The problem is that it ignores the HELOC interest. All you are doing is transferring debt from my place to another. Any savings on your primary mortgage is offset by HELOC interest.
The biggest pitfall of this HELOC system is you are always running a negative cash balance. Proponents argue that having a line of credit is no different than having cash on hand. They are different.
Ultimately as @Matthew Olszak referenced, there was an epic thread on this topic. Complete with lots of math to prove the points, thanks to Chris May.
The conclusion after much debate was that mortgage acceleration works by making extra principal payments. Whether those payments are made with a HELOC or just by writing a check, really doesn't make much difference. If you pay down principal on a mortgage, it shortens the term and reduces total interest paid. The earlier you pay down principal, the bigger effect it has.
A HELOC can actually result in paying more total interest because typically the HELOC carries a higher variable interest rate. Some argue their a psychological aspect that using a HELOC will force people to pay down the mortgage, basically making it easier. If that works for you, great. It is just important for people to understand the underlying math. Interest is interest, whether paying on a mortgage or HELOC, it is all based on outstanding principal.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Simple Interest = Principal x Rate x Time
Simple Interest is not = Principal x Rate x Time x Opinion x Feelings
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes8y
@Joe Splitrock - Thanks for the thought out reply. That is exactly what I thought and was super confused as to why people thought with the same amount of extra money allocated to paying off the balance, it would be faster/cheaper with a HELOC.
Second City Real Estate4.821 Reviews - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes8y
Originally posted by @Brian Cardwell:
Originally posted by @JD Martin:
Originally posted by @Brian Cardwell:
Originally posted by @JD Martin:
Originally posted by @Brian Cardwell:
Yes and no. Instead of your leftover money sitting in your savings acct doing nothing, it is being used to pay down the HELOC.
I always hear people talk about interest rate. Interest rate is important but it isn't the end all be all. What is really important is how much real money is spent.
So on a 10k HELOC at 10%= 1000÷12=$83 a month Max interest
200k mortgage @4.25% equals $679 a month interest
So using the method outlined above, you will spend ~$3200 less in a five month period.
Month one interest on HELOC $83 max
Month one interest on 200k mortgage $679 max
I would much rather pay $83 than $679
No you won't. Your math is faulty. You only 'think' you're paying more interest. If a bundle of money somehow landed in your lap, enough to pay off the mortgage in your 5-month period, you'd find that you paid the exact same amount of interest on the HELOC as you did on the mortgage. Your mortgage 'appears' to be front-loaded on interest, and that is because the bank has taken the total amount of interest you will owe on having borrowed money and then paying it back over 30 years, divided it up into something that's reasonably close to what you would have owed up to that point, and created a payment schedule that gives you the same payment every month. Simple interest loans are always: interest rate x principal amount owed. The amortization schedule keeps you from having something that looks like the same amounts of interest & principal owed, every month, for 30 years, because that's not reality.
So my question to you is how is my math faulty.
A 10k HELOC at 10%= $ 83 month
200k mortgage @4.25% 30yrs monthly payment is $970 of which $697 is interest.
This isn't my math. It is the banks math. I am just using it to my advantage.
Wow. If you can't see how paying 10% is worse than just paying 4.25%, I'm not sure I'm the right person to explain it otherwise.
You owe interest based on the length of time that you hold the loan, the interest rate you're charged, and the outstanding loan principal at any one time. Using your numbers, let's just look at one month:
200k @4.25% = $708 owed in interest for the first month ($200,000 x [.0425/12]) = $708 total interest paid
VS.
10k @10% = $83 owed in interest for the first month AND
190k @4.25% = $673 owed in interest for the first month = $756 total interest paid
Now you take your $5k and put it in the HELOC, and use $3k of that up. You do that for 5 months, until the HELOC balance is zero. In 5 months time, you will have paid more in interest than if you had just taken the $2k and put it straight towards the primary mortgage.
Total interest is $250 paid over the 5months on HELOC.
Over the same period you would have paid $3470 had you not put the $10k on the principle from the HELOC.
So you saved $3200 in interest payments.
.
? No you didn't. Paying $10k forward, on the first month, of a $200k 30 year 4.25% loan saves you $107 in 5 months - in other words, if you were to get $190k 5 months from now to pay that loan off, you'd have paid $2,023 in interest instead of $2,130 on $200k. In your example, in the same 5 month period, you would have saved $107 on the primary mortgage and paid $200+ on the HELOC.
Skyline Properties - Developer · Bend, OR · Member since 2017 · 10 posts · 7 votes8yThe secret lies in Simple vs. compounded interest.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Originally posted by @Brian Cardwell:
Total interest is $250 paid over the 5months on HELOC.
Over the same period you would have paid $3470 had you not put the $10k on the principle from the HELOC.
So you saved $3200 in interest payments.
Remember, without the HELOC, we are still paying an extra $2k/mo against our mortgage ($10k total over 5 months) - but without hassles of transferring and moving shells twice (4x?) a month and without having to establish the HELOC (which sucks) and without their fees, monitoring, fine print and without the $250 in interest.
I stand by my saving net $8/mo estimation your way. All this PITA your are suggesting to save 8 bucks definitely does not fit into ones' napping schedule.
- 8yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @JD Martin:
There's really no point to it at all, unless you are saving some interest as @Steve Vaughan mentions on higher-interest loans - but that's really just with any loan, if you can eliminate higher interest for lower interest, safely, it usually make sense. I suspect the people that buy on to such a thing are people that have absolutely no savings, and thus having access to the HELOC makes them feel like they have an emergency fund, while they put the actual excess cash towards debt. In reality, all they have access to is a line of credit in case things go south, not any different than having a credit card. In fact, it might be worse than a credit card because it's secured against your house, whereas a person in real dire straits can walk on unsecured credit.
One thing that's worthwhile about @Brie Schmidt bringing this topic up again is that I really feel that it's incumbent upon good, reasonable people to call out BS when they see it. There are a lot of people who really struggle with finances - hey, not everyone is good with math or money - and it's easy to suck up people on the periphery with this kind of nonsense. I don't think I'd ever even heard of this until Brie brought it up, and then got to reading some of the past threads on it, it appears that it keeps coming back like a bad penny!
Mr. Martin, I would ask that you put pen to paper with an open mind before passing judgment on something you don't understand. I would say most reasonable people would look at something of which they are not familiar with an open mind.
It is about how you move the money. As I have said before I am not selling anything nor do I benefit financially in passing this information along. If I hadn't actually done this and been successful with it, I wouldn't be speaking on it.
I don't speak on buying an apartment building because I haven't done that. I have done velocity banking and know it works.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Brian Cardwell:
Originally posted by @JD Martin:
Originally posted by @Brian Cardwell:
Originally posted by @JD Martin:
Originally posted by @Brian Cardwell:
Yes and no. Instead of your leftover money sitting in your savings acct doing nothing, it is being used to pay down the HELOC.
I always hear people talk about interest rate. Interest rate is important but it isn't the end all be all. What is really important is how much real money is spent.
So on a 10k HELOC at 10%= 1000÷12=$83 a month Max interest
200k mortgage @4.25% equals $679 a month interest
So using the method outlined above, you will spend ~$3200 less in a five month period.
Month one interest on HELOC $83 max
Month one interest on 200k mortgage $679 max
I would much rather pay $83 than $679
No you won't. Your math is faulty. You only 'think' you're paying more interest. If a bundle of money somehow landed in your lap, enough to pay off the mortgage in your 5-month period, you'd find that you paid the exact same amount of interest on the HELOC as you did on the mortgage. Your mortgage 'appears' to be front-loaded on interest, and that is because the bank has taken the total amount of interest you will owe on having borrowed money and then paying it back over 30 years, divided it up into something that's reasonably close to what you would have owed up to that point, and created a payment schedule that gives you the same payment every month. Simple interest loans are always: interest rate x principal amount owed. The amortization schedule keeps you from having something that looks like the same amounts of interest & principal owed, every month, for 30 years, because that's not reality.
So my question to you is how is my math faulty.
A 10k HELOC at 10%= $ 83 month
200k mortgage @4.25% 30yrs monthly payment is $970 of which $697 is interest.
This isn't my math. It is the banks math. I am just using it to my advantage.
Wow. If you can't see how paying 10% is worse than just paying 4.25%, I'm not sure I'm the right person to explain it otherwise.
You owe interest based on the length of time that you hold the loan, the interest rate you're charged, and the outstanding loan principal at any one time. Using your numbers, let's just look at one month:
200k @4.25% = $708 owed in interest for the first month ($200,000 x [.0425/12]) = $708 total interest paid
VS.
10k @10% = $83 owed in interest for the first month AND
190k @4.25% = $673 owed in interest for the first month = $756 total interest paid
Now you take your $5k and put it in the HELOC, and use $3k of that up. You do that for 5 months, until the HELOC balance is zero. In 5 months time, you will have paid more in interest than if you had just taken the $2k and put it straight towards the primary mortgage.
Total interest is $250 paid over the 5months on HELOC.
Over the same period you would have paid $3470 had you not put the $10k on the principle from the HELOC.
So you saved $3200 in interest payments.
.
Bait and switch math is your problem. Yes, $250 is less than $3470, but it is a faulty comparison. The $10K left on your mortgage would only cost you $35 per month, or $177 over 5 months. The $3470 interest you reference is on $200K for 5 months. You are only partially reducing the principal, so you are only partially reducing interest. As JD mathematically showed you, you are paying more total interest in your example.
I think your confusion is due to some guru who claim that you "skip" entire mortgage payments. I have seen Youtube videos claiming this and it is totally false. You don't skip payments, you reduce principal. When reducing principal, you only reduce part of the interest.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Jesse Bath:
The secret lies in Simple vs. compounded interest.
False.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes8y
Originally posted by @Brian Cardwell:
Originally posted by @JD Martin:
There's really no point to it at all, unless you are saving some interest as @Steve Vaughan mentions on higher-interest loans - but that's really just with any loan, if you can eliminate higher interest for lower interest, safely, it usually make sense. I suspect the people that buy on to such a thing are people that have absolutely no savings, and thus having access to the HELOC makes them feel like they have an emergency fund, while they put the actual excess cash towards debt. In reality, all they have access to is a line of credit in case things go south, not any different than having a credit card. In fact, it might be worse than a credit card because it's secured against your house, whereas a person in real dire straits can walk on unsecured credit.
One thing that's worthwhile about @Brie Schmidt bringing this topic up again is that I really feel that it's incumbent upon good, reasonable people to call out BS when they see it. There are a lot of people who really struggle with finances - hey, not everyone is good with math or money - and it's easy to suck up people on the periphery with this kind of nonsense. I don't think I'd ever even heard of this until Brie brought it up, and then got to reading some of the past threads on it, it appears that it keeps coming back like a bad penny!
Mr. Martin, I would ask that you put pen to paper with an open mind before passing judgment on something you don't understand. I would say most reasonable people would look at something of which they are not familiar with open minds.
It is about how you move the money. As I have said before I am not selling anything nor do I benefit financially in passing this information along. If I hadn't actually done this and been successful with it, I wouldn't be speaking on it.
I don't speak on buying an apartment building because I haven't done that. I have done velocity banking and know it works.
I did put pen to paper, and I showed you examples. If you borrow money at 10%, and you pay off a loan that's 4.25%, you are spending more money, period. It doesn't matter if you benefit financially or not - you are espousing something that, financially speaking, is in people's worst, not best, interest (no pun intended). You are not saving $3k+ in interest over 5 months - you wouldn't even have owed $3k in interest if you paid off the loan in full after 5 months. Your math is faulty. You think "velocity banking" works in your example because you are not comparing apples to apples. If you want to believe in faulty math, that's entirely up to you, but anyone who does what you are demonstrating, using your numbers, is going to pay more in interest overall than someone who took that same $2k left-over funds and put it directly towards the mortgage principal. You can go to any mortgage calculator and figure that out.
Skyline Properties - Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes8y
I love BP debate days. I don't get any work done, but it is always a good time.
I have spent the entire morning running scenarios in these "velocity banking calculators" and then running the same scenario with the same additional payments in a regular loan calculator with extra payments. The HELOC costs you more money plain and simple.
Second City Real Estate4.821 Reviews - Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
I hear you @Brie Schmidt. These are fun, but I actually had kind of a busy morning, too;)
@Brian Cardwell I do applaud your effort to infom us without having an angle. A lot of seasoned BPers 'ganged up' on you and you stood for what you felt was correct without a sales pitch or attacking back. Bravo to you!
@Brie Schmidt When i first read this, i was like how would that be possible unless you have a intro rate. I currently have a HELOC that is like 5.25% (it follows the prime rate) and my mortgages are the following: 2.75%, 3.675% and 4.0%) there are no way taking out a HELOC will be better than those rates unless the prime rate is dropping below those.
- 8yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Brie Schmidt:
I love BP debate days. I don't get any work done, but it is always a good time.
I have spent the entire morning running scenarios in these "velocity banking calculators" and then running the same scenario with the same additional payments in a regular loan calculator with extra payments. The HELOC costs you more money plain and simple.
@Brie Schmidt
I would love to use the "velocity banking calculators" you are using. I have an Excel spreadsheet that was shared by another BP member that shows the exact opposite. It shows that on a 200k 30yr loan, paid out over 30 years, you will pay $152k in interest. Using the heloc method as I described above you will pay $29k in interest.
I am very curious what calculator you are using?
- 8yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
Originally posted by @Christopher Giannino:
I'm not an experienced investor especially with this HELOC payoff strategy so take what I say as me just speaking complete nonsense but from the little bit of research I've done, it only works well if you're very disciplined and have extra income. Although yes, you can make extra payments on the regular loan with a fixed amount.. will making the monthly extra payment make a significant difference opposed to a large lump sum at once? Even if rates on your HELOC go up, is the interest accruing on a $200,000 mortgage the same as a $10,000 HELOC?
I get your point where in an environment where interest rates are currently rising (especially if they continue to shoot up like how they have been) does it ACTUALLY make complete sense? Do you actually save money? Maybe, but then again maybe not.
Additionally you have to ask yourself, if your paying off your mortgage faster than expected are you really leveraging yourself to your utmost advantage? A lot of investors on BP love to leverage their investments so therefore this strategy doesn't fit their investing criteria.
To answer your question ... No the interest on the 200k is more than on the 10k HELOC. You maybe able to use the extra money somewhere else. But at the end of the day it all depends on what your goals are.
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes8y
https://www.replaceyourmortgage.com/home-equity-li...
I did a $500k loan making $5k a month with $1k in expenses, the total interest was $750k with the HELOC
With a regular $500k loan making $4k a month in payments it was $148k in interest
Running another scenario in both with a $300k loan and $10k a month income and $3k in expenses putting $7k a month in payments it $39k in interest with the HELOC and $28k with a regular loan
Second City Real Estate4.821 Reviews - Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes8y
I just went and checked my HELOC rate, it has increased 1% since December 2017
Second City Real Estate4.821 Reviews - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Brian Cardwell:
Originally posted by @Brie Schmidt:
I love BP debate days. I don't get any work done, but it is always a good time.
I have spent the entire morning running scenarios in these "velocity banking calculators" and then running the same scenario with the same additional payments in a regular loan calculator with extra payments. The HELOC costs you more money plain and simple.
@Brie Schmidt
I would love to use the "velocity banking calculators" you are using. I have an Excel spreadsheet that was shared by another BP member that shows the exact opposite. It shows that on a 200k 30yr loan, paid out over 30 years, you will pay $152k in interest. Using the heloc method as I described above you will pay $29k in interest.
I am very curious what calculator you are using?
Post a copy of your spreadsheet in the file center here on BP and share the link. I am pretty sure I know who shared it with you. I would be happy to review the formulas.
Also keep in mind that nobody is disputing that there is interest savings by paying down your $200K mortgage by $10K. The point is you have only transferred debt. You still have to pay interest and principal. If the HELOC is a higher rate, then you are paying more interest.
I can see some viability to this strategy because it puts more of your money to work faster. Yes Brian is comparing apples to oranges in terms of the interest. I believe Joe and JD have the right of it there. It is also true though that most people will not pay down their mortgage faster because they cannot reaccess the money easily. If you were making the payment to a HELOC that you could draw on whenever you want that changes the playing field. Now you can start each pay period by putting your whole paycheck toward your mortgage because you can still draw on it when you need it, theoretically. I am just not sure how much of a difference that makes in the long run.
More of a concern to me though is that HELOCs play by a different set of rules than mortgages. Much looser and faster rules. I had several HELOCs frozen on me during the downturn and I could no longer draw on them. I have also heard that they are much easier to call. Either could have a devastating effect on this strategy. I also know that the tax rules for HELOCs are different and have recently changed, which would also impact the viability of this strategy.
Bottom line, I agree that there may be something to this strategy for a well disciplined individual in a specific situation, but it is not right for everyone, or even most people.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes8y
Originally posted by @Brian Cardwell:
Originally posted by @Brie Schmidt:
I love BP debate days. I don't get any work done, but it is always a good time.
I have spent the entire morning running scenarios in these "velocity banking calculators" and then running the same scenario with the same additional payments in a regular loan calculator with extra payments. The HELOC costs you more money plain and simple.
@Brie Schmidt
I would love to use the "velocity banking calculators" you are using. I have an Excel spreadsheet that was shared by another BP member that shows the exact opposite. It shows that on a 200k 30yr loan, paid out over 30 years, you will pay $152k in interest. Using the heloc method as I described above you will pay $29k in interest.
I am very curious what calculator you are using?
If you just paid the $2k to the principal every month, rather than doing the HELOC, you would pay $28,728 in interest. And every 5 months on the HELOC, using your 10%, you have paid $283 in interest. That means over the same time period (6 years, 5 months that it takes to pay off the loan in this accelerated example) you would have paid an extra $4,500 in interest on the HELOC, making your total interest payments $33,228 - a few dollars less, since you're paying $10k in a chunk instead of $2k every month - but not materially different. Again, you are spending more interest this way than just paying chunks on the loan.
Skyline Properties @Brie Schmidt Please note in 2018, I am not 100% sure that HELOC loans are tax deductible anymore if you use it to pay your mortgage.
It is only deductible if you use it for home improvement and only up to 100k.
https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes8y
@Hui Tin - I am paying it off, it was not used for this "strategy"
I will take 30 year fixed all day
Second City Real Estate4.821 Reviews - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes8y
Originally posted by @Edward B.:
I can see some viability to this strategy because it puts more of your money to work faster. Yes Brian is comparing apples to oranges in terms of the interest. I believe Joe and JD have the right of it there. It is also true though that most people will not pay down their mortgage faster because they cannot reaccess the money easily. If you were making the payment to a HELOC that you could draw on whenever you want that changes the playing field. Now you can start each pay period by putting your whole paycheck toward your mortgage because you can still draw on it when you need it, theoretically. I am just not sure how much of a difference that makes in the long run.
In the long run, if the interest rates are as Brian has in his example, you are paying more interest. If the interest rates are close together, then there's no appreciable difference one way or the other as @Steve Vaughan noted; maybe a cup of coffee every month. I would argue that if someone was disciplined enough to put all $2k in extra money towards the principal, he/she could just open a HELOC, keep the balance at zero and consider it their "emergency fund", and put the money directly towards the principal, and accomplish the exact same thing with a whole lot more simplicity.
The proponents of this keep pretending there's some magical interest rate magic here. There is not. On a simple interest loan, you owe your interest rate x your principal x time frame. On mortgages that's generally monthly. Most HELOCs that I know of calculate on a daily rate.
Skyline Properties - Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes8y
@Hui Tin brings up an interesting point. With the new tax laws how will this "strategy" be effected?
On my personal residence I paid $16,500 in interest last year on a 30 year fixed loan. If I were to pay off my first lien with a HELOC and then treat that as my mortgage am I able to write that off the same? @Brandon Hall @Amanda Han
Second City Real Estate4.821 Reviews - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Hui Tin:
@Brie Schmidt Please note in 2018, I am not 100% sure that HELOC loans are tax deductible anymore if you use it to pay your mortgage.
It is only deductible if you use it for home improvement and only up to 100k.
https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
It now follows use of the money. So if you are using it to pay your home mortgage, it is deductible. It would also be deductible if used to pay for a rental property, but you would claim the interest on your Schedule E in that case. If you are using the HELOC to go on vacation, buy a car, pay off credit cards, it is not deductible. That is the way it always should have been in my opinion.
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