All Forum Posts by: Eric Jones

One last comment from me about a personal experience that is different but kind of similar to what we're talking about here. 

Ever get those 0% APR convenience checks from your credit card companies in the mail? Well I took advantage of one of those to payoff a $6000 chunk of a student loan that I have @ about 7.5%. My thought was if I can borrow money at 1.32% (I paid a 2% of the balance fee up front, but then get 18 months of no interest, so that works out to an effective rate of 1.32%) to payoff a loan at 7.5% I'm saving 6.18%. But the problem was, I still had a balance on the loan, so my minimum monthly payment was still there (about $150/month), but then I had to pay the minimum credit card payment which is 1% of the balance, so $6000*1% = $60. So before I was paying $150 per month, and now, with the credit card I'm paying $210 a month. So that idea backfired - although I was paying down the balance faster, it was at the expense of paying more out of pocket each month.

Same thing applies to the loan and HELOC example we've been describing here. You continue having to pay the $632.41 per month, but now you also have to pay at least the interest on your HELOC of $7.50 per month. So your net monthly payment is going up (from $632.41 to $639.91). This contributes to a slightly faster payoff since it's mathematically equivalent to making an additional $7.50 prepayment each month to the loan. Just another factor to consider - if you want to keep your monthly payments the same, do not under any circumstance swap the debt over to some other debt instrument. Because the new debt instrument will require monthly payments that will have to come out of your pocket.

@Eric M. - Checked out the link you posted. That strategy does indeed work, because it's applying excess cashflow in your budget to your HELOC/loan balance since you are using the HELOC like a checking account. Say your monthly income is $5k and your monthly expenses are $4k - it then applies the $1k surplus to the HELOC (so you're effectivey prepaying by $1k per month). You could accomplish exactly the same thing by prepaying the loan directly for $1k, but that takes more discipline and effort since it's intentional, while using the HELOC is automatic. The claim being made in this thread is that you can payoff a HELOC balance faster than a loan, assuming the same interest rate and monthly payments. This is what I'm in contention with. 

@David Dachtera - quick question: how/when are you proposing that the HELOC balance be paid off?

@Roy N. - good post. I definitely appreciate your analytical approach.

I haven't checked your numbers, but they all seem to make sense at a high level. All I'd say is that in your analysis, the $3,000 HELOC payment was really just a $3,000 prepayment, since you are simultaneously making your standard monthly payment to the loan, while also paying additional money towards the HELOC balance. So clearly, you're talking about a prepayment scenario. It makes perfect sense that the debt would be paid off much quicker - you're paying extra each month.

I think the main source of disagreement and confusion in this thread is the notion that you can pay off debt quicker if it's in a HELOC vs. an amortized loan, assuming you're not making any prepayments. Or in other words, a 100K HELOC @ 3% would payoff quicker than a 100K amortized loan at 3%, assuming you're making the same monthly payment. The claim is that by swapping amortized debt onto a HELOC you'll save money, since the interest accrues differently on a HELOC. What I, and others, have been trying to explain is that both HELOCs and amortized loans accrue interest the same way. Or, in other words, interest accumulation is in no way related to amortization vs simple interest, but is instead wholly dependent on rate, balance, and compounding periods. Interest rate determines the rate at which interest accumulates on each dollar of debt, and there's nothing magical about HELOC debt or amortized debt for that matter.

Lastly, you're 100% right that it's pointless to transfer a balance to a HELOC when you could make payments directly to the loan itself. Not only do you not save anything in interest (assuming the rates are the same), but you're also eating up your valuable credit line, which is typically a variable rate and is subject to changes in the underlying index. It's better to save your credit line for profitable investments that earn much higher rates of return.

@David Dachtera -

Checked out the new spreadsheet you attached - what's comical is it actually matches perfectly what I showed in my post (and contradicts what YOU previously showed for your amortization table), and you act as if that discredits what I've said! Haha... well, on a more serious note, if you're having trouble with basic amortization tables you shouldn't be advising "your people" to use this strategy. What happens if/when rates rise, and the fixed rate mortgage debt that they swapped for variable rate HELOC debt is now accruing interest at a higher rate?

When multiple people on this site are telling you that you're understanding it wrong, a wise person would take a step back and analyze their way of thinking, before just assuming that others are wrong. I think I'm done here because I don't think there is anything to be gained by going on...not sure if it's an honest misunderstanding, or just pride, but this doesn't seem to be going anywhere. 

@David Dachtera - we're not talking about acceleration yet. We're talking about buiilding a basic amortization table, which you haven't even been able to do yet. I'm trying to walk you through the process, but you're jumping the gun to acceleration and not recognizing your error with the basics. First learn how to build a correct amortization table, then we can move on. 

Also, please try the exercise that I asked or I'm done here. I'm willing to explain and teach you how the math REALLY works, but you have to give a little. This is a two way conversation and I've entertained your exercises - and showed that they were wrong. At least show me the same respect in return. 

@David Dachtera - and you still haven't done the exercise that I asked you to do. I've done your exercise and proved that it's wrong. Now do mine. 

Ending balance after month 1 for a 150K loan, a 147K loan, and a 3K HELOC. If you won't even make an effort to understand I'm going to have to wrap up this conversation. I do this on a daily basis for my job - you'd be wise to at least entertain me and do the exercise instead of arguing with words. Show me the math.

@David Dachtera - You're wrong, I'm sorry. Use this amortization table, from a reputable website:

http://www.bankrate.com/calculators/mortgages/amor...

Ignore the difference in layout/presentation - what's important is that the ending balance for each month in their table matches mine exactly. Yours doesn't match. Case closed. 

@David Dachtera

Your interest only HELOC would look like this:

@David Dachtera - YES. Not sure where you got that, but it's wrong.