All Forum Posts by: Jeremy Z.

I like what others are suggesting here, and I think it would work in your situation. Get the HELOC, but don't pay off the mortgage with it, just keep it for access to cash. Now aggressively pay off $10,000 of your mortgage over the year - you still have access to the HELOC. Saves you the same amount, actually more if you have a higher rate on the HELOC. Then you don't have to mess around with funneling funds/payments through your HELOC.

I suppose there could be a slight drawback to that strategy if the HELOC you had with a $0 balance got called/frozen due to loss of job, etc. Not sure how that would differ if you were carrying a balance on it. Seems like either way you lose access to the money.

Your original premise that a HELOC is cheap debt vs mortgage debt is still flawed.

Your access to that HELOC money is a function of how much you have already paid down on it throughout the year, correct? And you would have access to the same amount of money if you put it in your bank account, without having to pay $42/month for the privilege. Then you make a lump sum payment at the end of each year. The $42/month savings roughly matches the savings you would receive from maintaining a $10,000 lower balance on the mortgage throughout the year.

@Joshua S.

Instead of taking out a $10,000 HELOC and aggressively paying it to $0 during that first year, you could aggressively SAVE $10,000 that first year and then make a lump sum payment to principle. Then repeat, just like you would with your HELOC strategy. You keep acting like your only option is to get the HELOC or leave the $10,000 in principal throughout the lifetime of the mortgage, which isn't true. Your argument, along with @Nick Moriwaki's, is that you can either use a HELOC, or stick to the full amortization schedule. Those aren't your only options.

The HELOC method might save you a little money over several years if you can stick to the plan, but you can achieve almost the same results through saving and lump-sum payments.

Edit: I should clarify that Nick's example does pay down the mortgage more aggressively than 30 years, but he is still throwing much of that money into savings where of course it is not going to help with your average daily balance.

@Nick Moriwaki

Your example should include a scenario where you put your $50,000 savings down and start with a mortgage of $150,000, then put the difference of the $3,000 monthly payment entirely toward the mortgage each month. That would be the proper comparison, and the savings is negligible.

I guess you could argue that it's safer to take a HELOC out now, but what are the real odds of not being able to get a HELOC down the road? Also, bear in mind that this conversation was re-initiated by someone claiming that taking out a $10,000 HELOC was saving him $21,000 (even though he didn't have specifics about how quickly he was paying off that HELOC).

@Nick Moriwaki

Your example has a HELOC with a fixed rate equal to the mortgage rate. In your experience, have you found those terms to be typical?

@Chris May

I believe the difference in the $3,000 paid each month in Nick's example is added to the principal and bank account columns in each scenario. I'm not sure why one scenario is called "Mortgage" and one "Mortgage+additional" when they both appear to have additional going toward principal, just different amounts. The rest is then put in the bank account column. I believe it stems from him using a monthly mortgage payment of $1,703.64 which was used in a previous example. The numbers do appear to check out that way - when you total up all three columns (well, you have to move down a row in the bank account column to see how much was deposited there).

 Oh yeah, I forgot reading about those "services" that have been mentioned throughout this thread. Paying a fee for advice that boils down to "Pay off your loan really fast!".

Great idea to use this as a Podcast topic.

I'm pretty much with you 100% here, but I am sort of curious why you believe it goes to the level of being a scam? Seems like the fees on a HELOC are fairly nominal and I could see how someone might like the flexibility of having access to the money. Is it just that it is pitched as this "money saving" scheme to sell more HELOCs? Is that false sales pitch actually lucrative for them, or is this just a case of the people pitching the idea also being confused/mistaken?

I was actually in the process of looking up your first post anyway. You argued that a $10,000 HELOC at 8% was cheap money, while a ~$200,000 mortgage at 4% was NOT cheap money, presumably because the monthly interest payment of the larger loan was larger. Here is the part I am referring to:

There's no magic involved, you're simply borrowing super cheap money to pay off really expensive money more quickly than you could do on your own. People say that a 4% mortgage is cheap money, but it's not.

If something happens and you can't pay off the HELOC quickly you will be paying MORE money over the life of your loans. You were advocating a strategy without being fully clear on the potential downsides (you suddenly can't pay HELOC down quickly, the adjustable rate keeps rising, etc.).

Let's be very clear here... you didn't use $10,000 of cheap money to pay down $10,000 of expensive money. Exactly the opposite. You paid down $10,000 at 4% with a different loan at 8% (or 5%, whatever).

 I'm well aware of how amortization works. I use an amortization calculator on a regular basis. I have 30-year mortgages and a 15-year mortgage. I run different prepayment scenarios frequently.

We have finally fleshed out that the main benefit you are really arguing for here is flexibility. Be aware that flexibility can be problematic if the HELOC gets frozen due to a job loss, etc. or if the adjustable rate goes up thereby canceling out the savings.