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Joshua S.
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HELOC Mortgage Payoff

Joshua S.
Posted Nov 21 2018, 14:25

Hello, everyone. I'd like to start off by saying that I've already argued with people on this topic and I'm not looking to do that anymore especially with the same people since I've learned everything I can from them. I know it's a controversial topic, so I'm going to be as meat and potatoes as I can in my discussion, but I started my own thread so I could give updates over time and not "bother" anyone else. Hopefully it resonates with someone, but if not that's fine. Either way I'm not looking for negativity. I'm obviously very happy with what I'm doing, just trying to share my experience with it. I'll start out by preemptively getting some of the points you might want to argue/discuss out of the way.

First of all, I understand that using a HELOC to pay a mortgage is borrowing from one loan to pay off another loan. I know it's not a magic trick or anything like that. I also understand that you can just skip the HELOC altogether and simply pay extra mortgage principal or you could also get a HELOC as a backup and then pay extra principal out of your normal checking. That's great, but how many people really do that to any great effect? It seems like most people tend to save up a bit of money and then come across something they want or need and the money never makes it to the mortgage. And I'm sure even fewer people take whatever money is left over in their checking account and put it on the mortgage every month. So, even though there are other similar strategies that you COULD BE using, unless you're one of those people, try to remember that we don't need to compare what you're NOT doing to what I AM doing. That's part of the point - what I AM doing is easy enough to be done and all the other similar strategies are obviously relatively hard otherwise people would be doing them. Or maybe the other strategies are easy and people don't understand the benefit, but we'll cover that, too.

Another thing I already understand is that you could just pay maximum mortgage interest and instead put all of your extra income into investments. I personally disagree with it (more on that in a bit), but that's fine. I have investments (both stocks and properties) and money saved up as an emergency / investment fund, so I'm not against investing, but to me it's about balance. The money I'm talking about putting on my mortgage is the money that was just sitting around in my checking account waiting to pay bills or be used at the store. So, one of the arguments I hear all the time is that when you put your extra income against your mortgage there are "opportunity costs" because you are only earning X amount (ex. 4.5%) with the money, but you could be earning 9% in the stock market or 20% on a real estate investment. But here's the thing. I'm putting extra money against my mortgage every single month and you can't do that with many investments, because you need to save up and do a bunch of legwork. Therefore, when you compare the time you take to save up the money needed for a down payment on a rental property, for example, you are incurring opportunity costs vs just putting it straight on your mortgage like I am. Stocks and funds, of course, are the exception where you can buy more monthly if you want to, but my point is that many investments incur opportunity costs while you save vs simply putting that same money against your mortgage.

Now here's why I disagree with putting all of your extra money toward investments instead of your mortgage. Paying your principal down early has GUARANTEED returns whereas the stock market and other investments incur risk. Also, your money is already owed to your mortgage, so by paying it early you are simply changing the timing and it isn't costing you anything. Depending on how fast I am able to pay down, I'm on track to save $100,000-$200,000 without actually investing any money. I'm just changing the timing of my payback and getting free money in return. Now you can say that I'm paying opportunity costs because I could invest in _________ instead, but I could also invest and break even or lose money in the long run. That's the thing about opportunity costs - you don't know what you are missing out on, it could be something good or something bad, but it's a grab bag. It's basically the financial version of let's see what's behind door number 3. It could be a million dollars with a tech startup or it could be a rental with a leaky roof and a tenant that won't pay. Or it could be that I'm looking for a nice average 9% in the stock market, but it's in a slump when I need the money back in 30 years and I've lost money (2008, anyone?). So, when you're comparing mortgage interest savings (aka guaranteed free money) to what's behind door number 3, I'm sticking with mortgage interest savings. And I'm out of debt in 5-10 years and ready to invest with all my extra income at that point. Of course, maybe you choose door number 3 and that's great. Maybe you do better than I do, but you also have the risk associated with your investment and the "opportunity cost" of paying maximum mortgage interest which is usually about 67% of the total sum borrowed and you're in debt for 30 years. I guess my point is that for people to say the smart move is to invest everything they can so they can earn 9% or 4% or 15% on a bit of a crap shoot, it doesn't really make sense to me when there's an easy guaranteed free money opportunity right under your nose that will also get you out of debt.

Anyway, here are some of the benefits I see from what I am doing:

  • By paying a chunk of the HELOC to the mortgage, you are then able to put all of your income toward holding a portion of your mortgage balance down, but also pay your bills when they come due.
  • You don't have to "save" money and then put it on your mortgage. You are impacting your mortgage right away simply by the way you've arranged your finances.
  • When you use this strategy you are essentially forcing yourself to put all of your left over income on your mortgage. Call it a financial discipline tool in that sense if you like.
  • When you pay on schedule via normal payments you take around 2 years and $20,000 in interest to pay down $10,000 in principal. Take a look at an amortization table if you'd like to see this in action. When I put $10,000 onto the HELOC and pay all of my income toward it, it takes 6-10 months to pay off and around $600-$1000 in interest. Others will tell you that the $10,000 is charging you the same way whether it's on the mortgage or the HELOC if the rates are the same, which is true, but it's COSTING you more depending on which way you pay it, at least in my opinion. I think of this like two companies charging me the same amount, but I have to drive 20 miles to pay one of the companies and the other takes payments online. Obviously, the charges are the same, but the actual cost to pay is different.

And here are the real world numbers behind how my scenario is playing out:

  • I've paid $17,500 extra principal onto my mortgage or $3500/month for 5 months. This is far more than we typically were able to save with typical checking/savings set up. Usually in that scenario we had about $1000-$1200/month after expenses to put into savings. Not sure exactly where that disparity is coming from yet, but that's what is happening.
  • I've paid a little over $100/month to the HELOC in order to make this process convenient/automatic.
  • I've gotten a dollar for dollar return on the $17,500 in the form of interest savings. That is, on amortization calculators such as Bankrate (link below) and the one provided by my lender Quicken Loans, when you put in, for example, $10,000 in extra principal payments per year ($100,000 total "invested") your mortgage is paid off in ten years and you save $100,000.  So, aside from the savings being guaranteed free money, they are also dollar for dollar returns. Other people say that you are only saving whatever rate you borrowed the money at (ex. 4.5%), but whatever "rate" you call that is fine with me. If you look at it honestly, it's really free money, which means the "returns" are on par with a winning lottery ticket because the money was going to the mortgage, anyway. If you say it's not free money and look at it in terms of tying the money up and opportunity costs, I still get a dollar back for every dollar I put in (and I keep the dollar I put in in the form of equity). I'll put that against 9% or 16% or 24%.
  • At $3500/month extra right now I'm on pace to be paid off in 5 years with $203,000 savings. Of course, life comes at you fast, so if we have to slow down at some point it may take longer, but right now the pace is unbelievable.

Anyway, again, this is my experience so far in 5 months, but I've been very impressed and happy with it so far. Let me know if anyone has thoughts or questions. Thanks.

https://www.bankrate.com/calculators/mortgages/amo...

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