All Forum Posts by: Joshua S.

I think you're missing the point. I'm telling you that moving the money over to a different vehicle is about paying it in a different way and your response is that it's about the difference between the two rates. This is why the discussion never goes anywhere. Everyone understands that the rate is higher on the HELOC, but you're paying interest on the $10,000 while you pay down the $10,000. The interest on the mortgage is lower, but you're paying interest on $200,000 while you pay down the $10,000. There's a massive difference between those two things. And let's say that hypothetically you "lose" money because of the difference in the rates, I call that paying for the convenience of having it all be automatic. You ever take your car to an automatic car wash, pay anyone to mow your lawn, go out to dinner, etc.? Any time you pay someone to do something that you could do, you are "losing" money on the difference between what you paid someone to do it and what you could have saved doing it yourself. This strategy more than pays for itself and saves you thousands in the long run, but if you want to call the difference in interest a "fee" to make the whole thing automatic, that's fine. Many people pay for far worse. Hell, some people drop over a hundred dollars to do things like going to the movies every month. If that little bit of extra interest on the HELOC is what I pay for the peace of mind that all my cash is working for me at all times, so be it. I'll gladly pay that few dollars every month.

And the rest of your response is off base, too. The HELOC is not "a bill you have to pay every month", it's essentially your new checking account. Most people (probably you) have money sitting in checking right now that's doing nothing for them. I put my entire checking account and another $10,000 on my mortgage and then my income and bills just come and go from the HELOC until it's paid down. It's forced discipline in the sense that you don't have to decide every month to put more money against your mortgage and then figure out how much you can afford (it's done for you through your regular income and bills), but it's not a gun to my head. The money is just paid back as I go at my own pace. It's forced discipline in the loosest possible sense. My point was that it's done automatically for you, which as I said is a good thing. I don't have to carry my electricity back from the electricity fields in a bunch of buckets and store it on my shelves, for example. I pay the power company to harvest it and have the tiny chipmunks run electric acorns through the power lines or however that works, so that when I flip a switch it's there. But you'd never begrudge anyone for paying to have electricity be automatic, because some conveniences are worth paying for.

And if you want to talk efficiency, take a look at that dead money in your checking account and then think about the fact that my checking account is always working for me and getting 4% returns and I'll be out of debt in under ten years. Part of the problem is that everyone wants to compare this strategy to "just paying the same amount (what you would have paid to the HELOC) to the mortgage every month", but no one is really doing that, so it's an unreasonable comparison. It's basically like saying you could pay your mortgage down a lot faster than me if you won the lottery or you bet you could throw a better fastball than me if you were Randy Johnson. Start comparing what you are actually doing to what I'm actually doing and I promise you if you do traditional banking I'm hands down blowing you out of the water at paying your mortgage down quickly. That's the real point of the discussion that no one wants to acknowledge. There might be a couple flaws in my way of doing it, but if you need hypotheticals to win in a comparison, you actually lost the comparison and don't want to admit it. 

I think I can explain how it works pretty easily. When you're paying down your mortgage via the normal payments you are paying interest from the entire balance while trying to pay the principal down. This means that it's hard to build equity (especially early on) because most of your money is going toward interest.

When you move a chunk of the balance over to the HELOC you are able to pay it down without having to pay interest on the entire balance. That is, for example, if you move a chunk of $10,000 to the HELOC you are paying interest on the $10,000 while you pay down that $10,000, which means you can pay it down in 6-10 months at an interest cost of around $500. If you leave that $10,000 chunk on the mortgage, you are paying interest on the full balance, so it takes around 2 years to pay down at an interest cost of about $20,000. Of course, you could also just make additional principal payments without using the HELOC, but using the HELOC makes it automatic so it's a form of forced discipline. The HELOC is paid down naturally over time due to the fact that you make more than you spend and then you reload and repeat the process.

I think of it like that service Acorns where they round all of your purchases up to the nearest dollar and put the difference into an investment account for you. You're technically setting aside money to invest, but since it's happening organically behind the scenes and you don't really miss it, it's almost as if it's free money. In the case of the HELOC, you use it like a checking account so all of your surplus funds pay the balance down gradually and again, you're technically making extra principal payments every month, but since you aren't really missing the money it's like your mortgage is automatically being paid down faster. It's essentially a system that keeps all of your extra income going toward your mortgage principal every month.

In a comparison between using the HELOC strategy and paying all of your extra income toward your principal every month, the difference is negligible and you'd get comparable results.

But in a comparison between using the HELOC strategy and what most people do, which is pay their regular payments (and therefore maximum mortgage interest), the HELOC strategy is vastly superior because it saves tens of thousands of dollars and years off of your mortgage automatically simply by rearranging the way you do your banking. Hope this helps.

I really hope you can explain what you mean here, Chris. In the first year of the mortgage, 74% of your money goes toward interest. By the time you have paid off the first $10,000 in year two 66% of your money is still going to interest. If you move that same portion of your mortgage to the HELOC 4-5% of your money is going to interest and it's paid off in less than a year. I really want to understand what you mean when you say these two ways of paying have the same cost, because I don't get it.

The HELOC and the mortgage are charging roughly the same "rate", but the cost of paying it down via the regular payments is $20,000 on the mortgage, because you're paying interest from the entire balance. The cost of paying it down via the HELOC is a few hundred dollars. This is the type of thing where I think your knowledge of math is actually working against you. I might have mentioned this before, but it makes me think of a story I heard awhile back where a semi was stuck underneath an overpass and a bunch of engineers were trying to figure out how to get it out without damaging the overpass. One of the engineers had his 4-5 year old kid there and he suggested to just deflate the tires and of course it worked. Maybe it's a fictional story, but you get what I'm saying. I realize I don't know all the math you do, but I know that when you're paying down your mortgage with regular payments you are paying a ton of interest from the entire balance, which keeps you at a very expensive crawl. Moving a portion of the balance to a place where you only have to pay interest on THAT PORTION while you pay it down is obviously quicker and more cost effective. It's not a question of math, it's common sense that you're trying to answer with equations, which is why you don't get it. So, like I said, I'm all ears if you can explain how paying $20,000 in interest via the regular payments is the same as paying a few hundred dollars in interest via the HELOC, because I don't get how those two things could be the same.

It doesn't make any sense because you're not listening. When the $10,000 is on the mortgage, your regular payments are bogged down with interest from the rest of the loan, which is why it "costs" you $20,000 or so in interest to pay it down via regular payments even though it "charges" you $400. We've covered this many times. I'm not saying that the $10,000 is charging you $20,000 in interest, but that to pay down the $10,000 via regular payments it "costs" you $20,000. I think of it like two companies charging me the same amount, but I can make online payments with one and have to drive a check 50 miles to pay the other. I'm "charged" the same amount, but the actual "cost" is greater to pay the second company.

All I'm saying is that when you move that same $10,000 portion of the balance over to the HELOC, the cost and the charges are now the same for that portion and you're no longer paying that $20,000 "cost" associated with the regular payments for that $10,000. You're paying the interest on the $10,000 while paying down the $10,000, not interest on $165,000 while paying down the $10,000. You honestly can't get that, huh? In the first year of this hypothetical $165,000 / 4.5% loan we've been talking about - when you're whittling away at that first $10,000 - around 74% of your money goes toward interest. When you're paying down the $10,000 on the HELOC about 4-5% of your money is going toward interest. The $10,000 itself is generating roughly the same interest either way, but that's not the true cost of paying it down. I can't believe we can't get on the same page with that, either. How a person could say that those two things are the same is beyond me.

Of course you'll say that you could just make additional principal payments without the HELOC to avoid the interest and then we'll go for another lap because you can't acknowledge that the point of this discussion is to compare this technique to what most people do with their mortgage - pay their regular payments. Your philosophy is let's compare this strategy to paying your mortgage off in another way or putting your extra money in stocks or saving up to buy rentals or buying a sports car or going to Disneyland or starting a secret family with your secretary, it'll be fun. Like when your wife asks which movie you want to go to tomorrow night and you remind her that you could go out to dinner or rock climbing or for drinks or to a play or to a game. You're such a good friend and husband that when someone asks you to compare A and B directly, you insist on comparing A through Z regardless of the discussion at hand because you know there must be a better choice out there. :)

Really, though, tell me how having 74% of your regular payments go toward interest is the same thing as having 4-5% of your HELOC payments go toward interest. To me, that's a vastly different true cost depending on where you pay down the $10,000, so I'd be interested to know how you could consider it the same.

Just to clarify, Brent, I realize it might seem contradictory to say that the HELOC strategy is "just a way to keep all of your extra money going toward the mortgage", but also say it has all these benefits and I think that's the argument in a nutshell. Like, for example, if somebody came on here and said that the doctor told him working out and losing weight saved his life and he was extoling the virtues of exercise and your response was that it's "just working out, it's not really a big deal" - YOU'RE BOTH RIGHT.

The HELOC method has all the benefits I've mentioned, but when you boil it down the end result is similar to taking your extra money and putting it against the mortgage. Both are true. But instead of the detractors acknowledging it, it's a tooth and nail fight to try to convince people that it's a worthless scam and all the other nonsense and you don't want to give an inch because "you're right, too".

It's about perspective and unless you can accept that and put yourself in the position of someone who really values being out of debt sooner than 30 years over having a bunch of stocks or whatever, you'll never understand. That's why the argument goes in circles. Both sides are right in some sense and yours doesn't want to acknowledge it. Have a good one.

Well, first of all, I've been insulted since I joined the discussion, so I'm just responding in like kind. But secondly, the reason the argument has been circular and non-productive is because of the detractors. Proponents have conceded a bunch of points and tried to come to an understanding and instead of doing the same, opponents ignore perfectly good points and then go back to, "The HELOC method doesn't magically save you interest" as if that's what the argument is at this point.

Have you ever argued with someone, your wife for example, and she's mad at where you leave your socks as well as 2-3 other issues? You explain why you put your socks there and justify it and then she keeps bringing it up over and over and can't get over it. You ever argue with someone like that? That's been the majority of the argument from your side:

"I like the HELOC method, because my money isn't just sitting around in my checking account, it's working for me."

"Yeah, but it's not a magic way to save on interest."

"No, I realize that the $10,000 in question generates the same amount of interest whether it's on the HELOC or the mortgage, but this is a more efficient way to pay it down because you're not paying interest from the rest of the loan at the same time and you can use all of your income toward it."

"Yeah, but it's not a magic way to save on interest."

Refusing to acknowledge perfectly legitimate points ostensibly to save face means you are goofy at the very least. That's the most polite way I could put it, in fact. So, no, that isn't what the detractors have been saying all along. They have been saying the strategy is pointless / useless, a scam, you could do better putting your money in stocks, you could do the same thing just paying all of your extra income toward the mortgage and using a HELOC as a backup, you're paying opportunity costs and the time value of money, it's not a magic way to save on interest, etc. etc. in circles and mostly refusing to acknowledge very simple points:

• You get guaranteed "returns" paying your mortgage early if you choose to look at it like you could be using the money elsewhere
• You are actually getting free money, not "returns" because you are just changing the timing of your payments
• If you have money sitting in your checking account, then you are the one who is paying opportunity costs
• You might do better in a rental, but you have to save for a down payment, which means more opportunity costs while you save
• Getting out of mortgage debt is invaluable - you can't live in stocks and bonds
• The HELOC may "charge" the same amount of interest, but doesn't "cost" the same because on the mortgage you are paying interest from the entire balance
• It's more efficient to set up a situation where all of your income can go toward your mortgage and you can still afford to pay your bills

Etc. etc. etc. etc. etc. etc.

In other words, I've made a perfectly valid argument for the strategy on many fronts and instead of opponents saying something like, "Wow, I really can't see myself doing that, but I can definitely see some of the benefits you're describing.......", it's just, "Hey, I think I'd rather be deliberately obtuse and ignore perfectly valid points because I don't want it to seem like I could be wrong about something now that they've clarified. ROBOT VOICE: The HELOC method isn't a magic way to save on interest. The HELOC method isn't a magic way to save on interest."

So, that's why I think you're "goofy", because you're more or less incapable of updating your opinion or accepting new information and I'm the opposite. I've learned a ton about the math behind the decision and what the strategy is and what it isn't and updated my opinion accordingly. Or you can look at it this way - you've learned nothing and still have money sitting in your checking account wasting away and I just put another $3500 against my mortgage yesterday without breaking a sweat or taking anything out of savings. You'll be in debt for 30 years and have to hope your investments outpace what you are spending on interest. I'm on pace to be out of debt by 2024 and then I can invest all I want for the rest of my life. I think saying "goofy" is being polite. :)

Hi, Don. I know you're not talking TO me, but obviously since you're talking about me, I figured I'd give you a response. :)

It's interesting all the mental gymnastics people prefer to do to ignore what is common sense to me. Everyone says that the savings is over 30 years and that's fine, but let's do a thought experiment. I plan on driving for at least another 30 years. If I call around for car insurance quotes and find one that saves me $50/month, then I can "project" that my savings will be $18,000 over the next 30 years. Now, obviously, I can't go out and write a check for $18,000 and, who knows, maybe I decide to get rid of my car in a decade and walk everywhere, so the savings are "theoretical" or "projected", but they aren't IMAGINARY. I can redeploy the $50/month somewhere else, because I no longer have the same obligation / liability that I had last month. 

The difference here is that I've signed a contract that includes paying about $210,000 worth of interest if I pay on the lender's schedule. Paying it ahead of time saves a portion of that money and I have to "collect" the savings over 30 years. Great. You seem to be suggesting that there are no savings in this situation because I could've just paid cash and avoided the interest altogether. No offense or anything - and I'm trying to be polite here - but that sounds ridiculous. I didn't have the full cash amount to pay for the house, that's why I got the mortgage. To suggest that the savings are only theoretical because I could've just paid cash.... WHEN I COULDN'T HAVE PAID CASH means you are fully ignoring logic and facts to find conclusions you want to find. I have to live somewhere. I need a decent size house in a good school district for my kids close to where my wife and I work and so forth. This is the place we chose to live and are now on the hook for $210,000 because we got the best financing we could with the money we had at the time. Those are factual pieces that almost any rational person can understand can't just be turned off for the sake of argument. Now I can deal with those things by paying on schedule or accelerating the schedule - you know, the whole point of this discussion - but it's easier for everyone to say that I should've just paid cash for the house or I should invest the money or a million other irrelevant variables. Or maybe while I'm at it I should have Marty McFly go to the future and get me a sports almanac so I don't have to worry about money at all. 

So, yes, when I save that money I have to collect it over time and that means it's worthless and useless and a scam and all that. And if you were considering a Hummer and go with a Civic you didn't really save anything because savings don't really exist, I totally get it now. Like, for example, if you are with financial advisor who charges X and move to someone else who charges Y you didn't really save anything, because you could just advise yourself. Or, you know, maybe you need to learn that ALL SAVINGS are theoretical comparisons and join in the discussion that's actually taking place. Either way is cool. Have a good one.

The replace your mortgage technique means your whole mortgage is exposed to a variable rate, but you can accomplish the same thing by getting a traditional fixed rate mortgage and then getting a small ($10,000-$20,000) variable rate HELOC to complement it. You take "chunks" of the mortgage over to the HELOC and then use the HELOC like a checking account (bills out / income in) and it's gradually paid down over time. Then you take another chunk of the mortgage over to the HELOC and repeat the process. The end result is that you are putting all of your extra income against the mortgage, which is what actually accomplishes the early pay down. Please don't pay someone thousands for a program, I don't think it's worth it to do that. They are a bit of a scam, because it's simple enough to do on your own. If you can't get it figured out, though, just follow these steps to get similar results:

1. Buy a house on a fixed rate mortgage.
2. Set aside some money / savings for an emergency (and possibly get a HELOC as a backup in case you need it).
3. Move all of your billing dates to the first week of the month.
4. After all the billing dates have passed, take all the money left over in your checking account and pay it toward the principal on your mortgage.
5. Let your income build up your checking for the rest of the month.
6. Alternate between #4 and #5 for the duration of your loan.

I personally don't think this will be quite as effective as using the HELOC as a checking account like I described, but the math wizards on this website say it's basically the same thing, so for someone who is struggling to figure out how to implement the HELOC strategy this would be the way to go. Using the HELOC as a checking account is mainly a way to keep all of your extra income going toward your mortgage and if you do these steps it will accomplish roughly the same thing. Good luck which ever way you decide to go. :)

Hi, Brian. The savings really boil down to prepaying on your mortgage, but the manor in which you do it isn't very important. For example, you can just take all of your extra income and make extra principal payments without the HELOC and your savings will be comparable.

Having said that, I use and like the HELOC method because the real world "cost" of paying down the next $10,000 on your mortgage is usually around $20,000 in interest and two years paying on the regular amortization schedule and when you move that same debt to the HELOC it "costs" less than $1000 and 6-10 months. Detractors will tell you that the $10,000 is generating roughly the same amount of interest (ex. 4% vs 5% ) regardless of what debt vehicle it is on, but that's not the only relevant factor. When you pay that $10,000 down on normal schedule you are paying interest from the entire balance, not just interest from the $10,000 itself. So, again, you could just make extra principal payments, but by moving that $10,000 over to the HELOC you able to sort of isolate it and pay it down with all of your income, yet you are still able to pay your bills.

The other goofy thing about the detractors is that they will roll out the spreadsheets to explain that the $10,000 generates the same amount of interest and say that a person could just put all of their extra income toward the mortgage and get the same results and then cap it off by saying that by putting your extra income against your mortgage you are incurring opportunity costs by not saving that money and investing it in the stock market or a rental. 

The counters are obvious:

1. As I said, paying the $10,000 via your normal schedule means paying interest from the entire mortgage, NOT JUST interest generated by the $10,000 itself.
2. A person COULD just put all of their extra income against the mortgage, but the detractors aren't because there are practical reasons not to do so. To me, this is classic armchair quarterback / lazy naysayer stuff.
3. If you have money sitting in a checking account when I'm putting my equivalent funds on my mortgage, it means YOU are paying opportunity costs because your money could be working for you. How hypocritical, right?

Anyway, as for the savings, just look up a good amortization calculator such as Bankrate and plug in extra payments to see what your savings could be and then you can save up to do it or use the HELOC or rub your money on your dog and then put it on the mortgage. The HELOC is just a tool that makes it convenient to keep all your extra money going toward the mortgage and, in my opinion, a more efficient way of paying down the debt if you have the extra money and it's your main goal. Good luck if you end up trying it.

Well, to be fair that's why I was leaving it to the calculators such as Bankrate and Quicken Loans. I've said that over and over and no one can accept it for some reason. I don't have to be able to explain the savings other than to describe what I think is happening and then point to a reliable source. Everyone else seems to think I need to be able to model it in excel and explain it myself, which is ridiculous. When a baseball player hits one out of the park, but can't explain the physics behind it, does it cause you to rag on him and suggest that if he can't explain it, he's doing it wrong? 

I'm saving money - this is my preferred way to do it along with my best explanation and a suggestion to work it out for yourself using proper resources. I never said it was the tooth fairy, I was just pointing out that where the savings come from is a distant second in the discussion, in my opinion - hence the use of calculators. To be honest, aside from being off by a couple thousand, my explanation is every bit as down to Earth as the "you're really starting a new loan with a shorter term and hypothetically lower payment" thing, if not more, so don't hurt yourself getting down off of that high horse. But you know, thanks for the math lesson. :)