HELOC payoff strategy

189 Replies

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.

@JD Martin , 100% agree. And admittedly I have not studied the finer details of what the proponents of this strategy are selling. As someone pointed out early on it may just be a psychological difference that convinces someone to pay down a mortgage faster. I agree that the difference would not be great in the grand scheme of things for two people paying off the mortgage in roughly the same amount of time. The significant difference is in paying down the mortgage faster or not, which it sounds like the gurus are peddling as the choice you have to make. As you and others have pointed out, though, there are many ways to accomplish the same thing. Some of which are much simpler than what is proposed here.

Personally, I love the flexibility of HELOCs and I am a strong proponent of them. Undoubtedly, making extra payments to a mortgage is not the same thing as making extra payments to a HELOC as some have suggested. On my HELOC I do not have to ask anyone if I can use the money again or apply for another loan or justify what I want to spend the money on. Having been burned, though, I am also acutely aware of the limitations and potential dangers of using HELOCs.

I do think there may be something to this strategy or variations of it, but also agree that it is probably overly complicated and certainly not the panacea that some are marketing it to be.

You are saying that mortgages are not front end loaded. I would disagree with you about that. Looking at a amortization table it shows you that about 30% of your payment goes to the principle the first month. In month 240 65% of your payment goes to principle. This sounds front loaded to me. You are correct that you could take the extra 2k you have and put it on the principle. If you do that the money is gone. If you use the heloc to put the 10k on principle, you would still have access to the 2k left over at the end of the month.

@Brian Cardwell , that is because it is amortized. If you want a steady payment over 30 years, then the majority of the payment in the beginning will go toward interest. It is not that the interest is front loaded, it is that there is a lot more of it in the beginning because the outstanding principle is much larger. It is no different for HELOCs except they may be interest only in the beginning. Which means you will wind up paying more interest over time. In both cases, though, if you pay the principle down faster you will pay significantly less interest and the loan with the lower interest rate will win, all else being equal.

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.

Brian, your logic is missing a vital piece here. Are you forgetting that while you moved $10k over to the HELOC that the remaining 190k is still accruing interest? Not to mention that the HELOC is now also accruing interest... you say you'd rather pay $83 on the HELOC than $679 on the 1st mtg, but (even if those calculations were correct) you don't just suddenly get to stop paying the bank interest on the $190k you still owe... I don't understand why you believe you can avoid interest by moving debt from one loan to another.

So what you are trying to get away from is a 200k 1st mtg by transfering 10k to a heloc and only have 190k. but you STILL have 200k in total debt... so if you want to compare numbers, listen to JD when he broke down the numbers. 

Originally posted by @Brian Cardwell :
You are saying that mortgages are not front end loaded. I would disagree with you about that. Looking at a amortization table it shows you that about 30% of your payment goes to the principle the first month. In month 240 65% of your payment goes to principle. This sounds front loaded to me.

You are correct that you could take the extra 2k you have and put it on the principle. If you do that the money is gone. If you use the heloc to put the 10k on principle, you would still have access to the 2k left over at the end of the month.

That's not front-loaded, that is leveling. Front loaded is like the old "rule of 78" car loans. And having access to your own $2k at the end of the month is no different than doing nothing, because that's essentially what you have done if you don't use the $2k to pay towards the principal of the mortgage. Pretend you only did this for one month - you move $10k from the HELOC to the principal, and you keep your own money in a separate checking account. At the end of the month you owe $190k on the primary, $10k on the HELOC, and you have $2k in the bank. Your net liabilities are $198k. If you put all your money in the HELOC, at the end of the month you owe $190k on the primary, $8k on the HELOC, and you have nothing in the bank. Your net liabilities are $198k. The only difference here is how much interest you've paid - which, in your case of 10% on the HELOC, is a lot more than if you had just paid the money to the primary.

I would also point out that when you prepay a mortgage you can choose if you want that payment to go toward principle or toward future payments. So if you use $10k of HELOC money to pay down the principle, then you still have to make the mortgage payments every month, including interest which will be marginally less because of the reduced principle, but also offset by the interest on the HELOC. If you use it to pay future mortgage payments, which it sounds like you are proposing (5 months), then you did not avoid those interest payments, you simply prepaid them. And now you are paying HELOC interest on top of that.

@Brie Schmidt , I've heard about that strategy before but from my understanding it required you to be heavily involved in the process and be very disciplined which is difficult for me and most people.

What worked for me is the old boring extra principal payment. My mortgage payment is set up on the mortgage co. website. It is set up so that each month, they deduct an extra $200 which is applied to reduce the principal. So even if the mortgage payment changes due to an increase in tax or insurance an extra $200 is still applied to reduce the principal. If your automatic payment comes from your bank account then your additional principal payments might be reduced if there is an increase in escrow ( tax, insurance for example).

I started with a mortgage of $104,000 in October 2013. As of today, Im about $20k lower. The mortgage including escrow is about $1200. The extra $200 totals $2400/ year or 2 extra payments a year! The property has a nice cash flow so the $200 was very easy to do. I might even increase it next year! The extra monthly payment works for me!

they have plenty of information on this, I was looking into doing this myself the videos that I have seen, make a lot of sense and seem like they work, YouTube has a bunch.

I have to laugh here. I may not be able to explain to the members here at BP how this works but I did this almost 17 years ago and eliminated my mortgage in 6 years 9 month, while not pay any more out of my pocket than I was before I started doing it. So for me there is no one here who can convince me it doesn't work. Could I have taken what I would have Been saving and done it? .... absolutely I could have. Doing it the way I did, I still had access to my money and didn't have to pay any more than I was paying before. compound interest = mortgage

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I figured I'd run several scenarios on my own home. In one I'll do 10k 0% apr credit card transfers with one-time 3% fee yearly (first month), and another an extra principal paydown of $833.33 (10k annually) monthly.

Beginning balance -$80325, with $401.1 pi and 4.375% interest rate.

It's going to take the CC method 6 years (73 mos), with cumulative int paid of $10.14k and $1.8k in fees for a total of $11.94k in interest.

Extra payments will take 75 months for a cumulative $11.5k in interest paid.  Looks like this is our winner: less interest and no need to ding the credit if you can save this much monthly. Sure, you can probably get the balance transfer at 1.5% or even 0% in some cases, but I just ran with the most common % fee.

I'm not even going to entertain the HELOC idea :)

here is the spreadsheet that I was sent. I had already done this before I knew what it was called.

Spreadsheet

Originally posted by @Brian Cardwell :
I have to laugh here. I may not be able to explain to the members here at BP how this works but I did this almost 17 years ago and eliminated my mortgage in 6 years 9 month, while not pay any more out of my pocket than I was before I started doing it. So for me there is no one here who can convince me it doesn't work. Could I have taken what I would have Been saving and done it? .... absolutely I could have. Doing it the way I did, I still had access to my money and didn't have to pay any more than I was paying before.

compound interest = mortgage

You can't explain it because it doesn't work the way you think it works. You did in fact pay off your mortgage faster, but it had nothing to do with the HELOC. If your numbers are right I guarantee you spent more in interest than you had to spend. Yes, having a HELOC gave you access to a *line of credit*, which may have been important to you when you were spending all of your cash on pay down. Yes, paying extra money towards the principal of your mortgage paid it down faster. Your mortgage was almost certainly not compound interest, it was simple interest; I'm not even sure if compound interest mortgages are legal in any state in the US.

I realize it's uncomfortable to have your world view challenged, and I applaud you for the financial fortitude to pay off your mortgage. Paying off a mortgage early definitely saves interest. It's the HELOC approach that makes no difference - and probably no sense.

Originally posted by @JD Martin :
Originally posted by @Brian Cardwell:
I have to laugh here. I may not be able to explain to the members here at BP how this works but I did this almost 17 years ago and eliminated my mortgage in 6 years 9 month, while not pay any more out of my pocket than I was before I started doing it. So for me there is no one here who can convince me it doesn't work. Could I have taken what I would have Been saving and done it? .... absolutely I could have. Doing it the way I did, I still had access to my money and didn't have to pay any more than I was paying before.

compound interest = mortgage

You can't explain it because it doesn't work the way you think it works. You did in fact pay off your mortgage faster, but it had nothing to do with the HELOC. If your numbers are right I guarantee you spent more in interest than you had to spend. Yes, having a HELOC gave you access to a *line of credit*, which may have been important to you when you were spending all of your cash on pay down. Yes, paying extra money towards the principal of your mortgage paid it down faster. Your mortgage was almost certainly not compound interest, it was simple interest; I'm not even sure if compound interest mortgages are legal in any state in the US.

I realize it's uncomfortable to have your world view challenged, and I applaud you for the financial fortitude to pay off your mortgage. Paying off a mortgage early definitely saves interest. It's the HELOC approach that makes no difference - and probably no sense.

 The numbers in the example were not my actual numbers. My numbers were a bit different but those numbers still work.

We will have to agree to disagree and I am ok with that. The heloc absolutely assisted. Just because you don't understand it doesn't make it make no sense. It works. The HELOC helped I stand by it because the proof was in the pudding.

I think the trouble is, @Brian Cardwell , that you keep saying it works. You keep saying we don't understand. But you don't actually back it up with your actual numbers. And when real scenarios are run and calculators shown to you, you still refuse to see that you just might have spent more in interest using your HELOC method.

This isn't a "I'm smarter than you" debate towards you, but to truly make sure everyone understands the details involving the interest.

One more thought here. If you have a $200k mortgage @4.25%for 30years with payment of $983 month and a Heloc for $200k @4.25% and you pay $983 per month. Which will be paid off sooner. I will would say the HELOC would be. What say you?

Thank you for posting that!!!
It’s mind boggling to me people can understand the simplicity of it.


Mines is a little different but still...



Originally posted by @Brian Cardwell :
Here is a basic break down of how this works. The interest rate is pretty much irrelevant.

Basic facts :

Primary mortgage. Equals 200k

Salary equals 5k.

Total monthly expenses equals 3k

HELOC equals 20k in second position

So lets start this off.

First let's pull 10k out of the HELOC and put it on the principle of the 1st mortgage.

First mortgage = 190k

Heloc= 10k balance

Month 1

Then let's put your entire paycheck in the HELOC acct. This accomplishes paying the minimum payment on the HELOC.

HELOC= 5k balance

Now let's pay your expenses from your HELOC.

HELOC = 8k balance 5k(balance)+3k(expenses)

Month 1 balance

Primary mortgage 190k owed

HELOC 8k owed

Total debt 198k owed

Month 2

Put the entire paycheck in the HELOC

HELOC balance 3k owed (8k-5k)

Pay expenses of 3k

Mortgage Balance 190k

HELOC balance of 6k owed (3k+3k)

Total debt is 196k

Month 3

Pay expenses 3k

HELOC =9k

Put entire check in the HELOC

HELOC = 4k

Mortgage Balance owed 190k

HELOC = 4k

Total owed 194k

Rinse and repeat......

In month 5 your heloc balance owed will be 0.

Month 6

So in month 6 you put 10k from your heloc on the principle of your primary mortgage.

Primary mortgage Balance 180k.

HELOC balance is 10k

Total owed is 190k

Put your entire paycheck in the HELOC

HELOC balance. 5k

pay your expenses 3k

HELOC balance is 8k

Primary mortgage Balance is 180k

Total debt 188k

Month 7

Put entire paycheck in the HELOC 5k

HELOC = 3k

Pay your expenses 3k

HELOC balance is 6k

Mortgage Balance is 180

Total debt is 186k

At the end of one year your principle balance will be 180k . Not bad for living the same lifestyle and still have access to some cash.

Rinse and repeat until your debt is gone

It really is that simple.

The extra open credit (10k) on the HELOC above the 10k in this case is used as an emergency fund.

Originally posted by @Nicole A. :

I think the trouble is, @Brian Cardwell, that you keep saying it works. You keep saying we don't understand. But you don't actually back it up with your actual numbers. And when real scenarios are run and calculators shown to you, you still refuse to see that you just might have spent more in interest using your HELOC method.

This isn't a "I'm smarter than you" debate towards you, but to truly make sure everyone understands the details involving the interest.

 @Nicole A. 

You maybe correct that I paid more interest than I needed to but I saved thousands of dollars by using the heloc while still having the security of having access to my "Savings". I have issue with folks who chime in and say it's a scam. It is not a scam and it does work. Could I have done it without the HELOC ? Of course I could have. With using the heloc it enabled me to still have access to that extra payment I was making in the event I needed it while still be able to pay my mortgage down earlier. Of course the HELOC interest cost something. I believe it was a small price to pay to still have access to the money and paying down the mortgage at the same time.

Bottom line is I paid off my mortgage in less than 7years and still had access to my money. So no scam here. 

To often on this forum, about this subject I read people bashing and call BS or scam. So I think those are the people who don't understand. 

Less debt equals less money needed to be made to live on. 

Originally posted by @Brian Cardwell :

One more thought here. If you have a $200k mortgage @4.25%for 30years with payment of $983 month and a Heloc for $200k @4.25% and you pay $983 per month. Which will be paid off sooner. I will would say the HELOC would be. What say you?

Actually the mortgage. You need to pay an extra $3.75 per month on the HELOC to pay it off at the same time, to cover the annual fee

Results Summary
Current balance$200,000
Additional monthly charges$0
Current monthly payment$983
Annual fee$35
Interest rate (APR)4.25%
Rate change (per year)0%
Payoff goal (in months)360

Payoff with a $983 paymentmore than 360 months
Payoff in 360 months requires$986.75 per month

Mortgage

Onn most home mortgages, the interest payment is calculated monthly. Hence, the rate is divided by 12 before calculating the payment. 

Heloc

Interest on a HELOC. Because the balance of a HELOC may change from day to day, depending on draws and repayments,interest on a HELOC is calculated daily rather than monthly. On a 6% HELOC, interest for a day is .06 divided by 365 or .000164, which is multiplied by the average daily balance during the month.

So does this make a difference in how long it takes to pay off either of these products?

Originally posted by @Brie Schmidt :
Originally posted by @Brian Cardwell:

One more thought here. If you have a $200k mortgage @4.25%for 30years with payment of $983 month and a Heloc for $200k @4.25% and you pay $983 per month. Which will be paid off sooner. I will would say the HELOC would be. What say you?

Actually the mortgage. You need to pay an extra $3.75 per month on the HELOC to pay it off at the same time, to cover the annual fee

Results Summary
Current balance$200,000
Additional monthly charges$0
Current monthly payment$983
Annual fee$35
Interest rate (APR)4.25%
Rate change (per year)0%
Payoff goal (in months)360

Payoff with a $983 paymentmore than 360 months
Payoff in 360 months requires$986.75 per month

 I don't pay an annual fee for my heloc.

The bigger idea behind them is it is a great place to park idle(temporary) cash. It is simple average outstanding balance math. As your paycheck and any other source of money come into the account directly, your balance is significantly lowered until you need access to the funds(ie, pay bills, etc). Why let the money just sit in your bank account when it can at least be earning the rate on the HELOC while it is idle. I have access to a lender that couples the first lien heloc with a sweep checking account so it is seemless. You dont even notice any difference from your standard checking account. Just direct deposit it and write checks or debit cards for any expenses.

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