All Forum Posts by: Joshua S.

That's cool, you can poison everyone if you want. But let me make sure I understand. My extra cash is going toward my mortgage - something that Dave Ramsey or anyone will tell you is a good way to save money on mortgage interest and get you out of debt faster - and yours is gathering dust in a checking account and that's what you would prefer that any readers do with their money? Let it sit around like yours does? That definitely sounds like poison, you're right.

Do you maybe not understand how prepaying on your mortgage works or something? Here's a screen shot of a mortgage calculator that might help you. Just an example where if you can manage annual prepayments of $15,000 you can save $122,000 in mortgage interest and shorten your loan by almost two decades. That's a lousy way to save money and overly complicated coupon cutting? Yikes. I'd hate to hear your opinions on some things that actually aren't worthwhile. :-D

I have plenty of liquidity in my 5 figure savings and brokerage accounts. This money was sitting idle in my checking account waiting to pay bills and be spent at the store. I'm not looking at the post directly right now, but I believe I said that. If you disagree with what I've said then your checking account must be amazing, because mine is getting me out of debt and giving me a guaranteed dollar for dollar return. What is your checking account doing for you?

Right, it has nothing to do with the HELOC, I'm saving due to prepaying on the mortgage. Didn't I say in the post that I pay the monthly interest on the HELOC in order to make the whole thing convenient/automatic? Didn't I say you could do the same thing with no HELOC? Sorry if I'm not remembering correctly, but I'm pretty sure I said all this.

Some people pay an investment advisor to do something they could do on their own. Some people pay to have their car washed and vacuumed and they could do that on their own. I pay for a HELOC to make it automatic that all my income is going toward my mortgage and I'm still able to use the money to pay bills. Sorry, I don't see how that's a scam.

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...

No, I realize all that, but listen to what I'm saying. I'm not comparing the HELOC strategy to just paying additional principal. I understand the different merits of each and I'm not interested in that comparison any longer.

What I'm saying is that hypothetically if I was just paying additional principal, then I would have roughly $1000/month to do it, which I would say is about average / normal for most people with decent jobs and frugal spending, BUT that is not the math that is coming out of the HELOC strategy. Somehow, through the HELOC I have been able to put $3500/month extra toward the mortgage, but my before I started this HELOC process my checking and savings wasn't growing at a rate of $3500/month. All I'm asking is let's say there was a constructive, open minded person who came to this forum - what would they say COULD BE causing such a drastic difference in the results of the HELOC vs what I had left over in checking / savings in the past. Like if everyone could imagine that they were open minded and not hellbent on comparing this strategy to simply paying extra principal, what would a person say if they could look at the results I'm telling you and not compare it with other preconceived notions of better ways to do everything? What would a person like that hypothetically say if they existed on this forum?

Well, I was trying to avoid this discussion, because I thought it would muddy the waters and we were already spinning in circles, but I'm not "paying off" the HELOC and then reloading it as the original strategy states, I'm paying it down a bit and then taking another small chunk to put toward the mortgage. Basically, I'm keeping the HELOC balance around $8000-$10,000 because I figured that it would allow me to keep more pressure on the mortgage itself if I'm paying a few more thousand toward it every time the HELOC balance drops. This is probably "wrong" because of the flux capacitor rule of investing and all that, but it's the way I've elected to do it and it has allowed me to take $17,500 off of the mortgage in only 5 months.

But to answer your question I pay a total of a little over $100/month in HELOC interest to keep the balance this high.

So, these guys have all said my savings don't technically take place until 30 years from now and all that, which is fine, but here are my real world results so far:

$100/month interest cost toward HELOC (which is a wash considering the savings, in my opinion)

HELOC balance ~$10,000 (will take an additional 6-10 months to pay off after mortgage is done)

$17,500 total ($3500/month) off of the mortgage (Yes, I can pay this indefinitely according to what I'm seeing so far. In fact, my HELOC balance has dropped down again and I was considering making another payment to the mortgage, but with holiday travel and gifts I'm going to hold off and do it in the spring.)

Payoff date Jan 2024

Projected interest savings $203,000

The things I keep coming back to are not the interest rates and how I'm saving money over 30 years instead of 5 and all that, but the fact that $10,000 was COSTING me $20,000 in interest to pay in the old way and about $1200 in interest to pay in the new way and that all my income is going toward paying down the HELOC whereas just a portion of it was going toward paying down the mortgage. I just wish a discussion of the real world merits of the strategy was possible, but it's not because we have to compare it to just putting your extra money toward the mortgage and putting your extra money into investments and rubbing your money on a butterfly's wings and drawing smiley faces on it while listening to Neil Simon records and everything else we can think of. The bottom line is, the strategy is doing what it is intended to do, all I'm saying is that it seems to be working even faster than expected, so if anyone has any idea why that could be feel free to let me know.

So, I'm glad we got this all settled. If anyone's in a more constructive mood, I have a question for anyone who's interested. As I posted previously, so far I've paid a total of $30,000 early to my mortgage, but only a portion of that has been through the HELOC and then had my income go toward it and so forth. There was a $10,000 payment I took out of savings to sort of try out the process and see what the savings would look like along with two other payments totaling $2500 that I did on my own before starting with the HELOC strategy. So, $12,500 was mine and the other $17,500 has been through the HELOC. The $17,500 has been an initial $10,000 and then a couple other random payments as well as $200-$300 extra on my normal payments.

Now I know everyone will probably want to argue about this, but although I still have a HELOC balance, from my perspective I've taken $17,500 off of my mortgage, not $17,500 minus my HELOC balance. I say that because although I know the reality is once the mortgage is paid off I'll still have to pay off the HELOC it's going to take 'who cares' amount of time especially because I won't be paying my normal monthly payment anymore. So, again, to be clear - I know the HELOC balance means I haven't technically put a full $17,500 toward my mortgage, but since I don't care when the HELOC is ultimately paid off after the fact, it doesn't factor into what I'm about to ask, in my opinion. The mortgage is my real target, so hopefully everyone can let go of that part of the situation and understand my real question.

So, I've gotten $17,500 off of the mortgage in five months - June, July, August, September, and October - for an average of $3500/month with this strategy. We haven't made any other adjustments to our finances. We aren't skipping lattes or saving anything additional. In fact, my wife has been spending a bit of extra money on a hobby recently and I had been a little worried that we weren't saving enough money to make a real effort toward paying off the mortgage early. In the past, we've generally had a pretty stagnant checking account, but at times have been able to save $1000-$1200/month depending on what else was going on. But here's what I'm getting at. If we've generally stayed even on our checking account or had max $1200 excess for the month, how have I been able to put $3500/month extra toward the mortgage without saving any extra vs what we used to? I'm not trying to say the HELOC is magical and all that like we've covered over and over, but at the same time it seems to me like it's somehow allowing me to put more toward the mortgage than was previously possible with our normal checking / savings, but I can't figure out how. I have agreed over and over that the HELOC is just a mechanism to easily keep all of my extra cash going toward the mortgage, I get that. But knowing that I'll have to pay off the HELOC at the end of this process - aside from that fact - how am I keeping this high of a pace? $3500/month additional payment has me paid off in 5 years with a savings of over $200,000, so from my perspective, why do I care if I need an extra six months or whatever to pay off the HELOC after the mortgage is done?

I don't know, I'm REALLY, REALLY not trying to start an argument back up or anything, I'm just legitimately asking that if I wasn't seeing my checking / savings growing by $3500/month before, but I'm now managing that pace (and say what you will about having to pay off the HELOC afterward, the mortgage has, IN FACT, gone down by that much) with the HELOC, could there be some other force at play that none of us have thought of? Maybe everyone could put their devil's advocate hats on instead of getting the pitchforks out and think about how it could actually be taking place? Let me know if you come up with any ideas. Thanks.

Totally. Translation: You can't possibly know the value of your $10,000 in a year or ten years if you're investing for high returns. And the guy who made the absolute maximum return in that time period is the only one who didn't pay any "opportunity costs" or the "time value of money". Everyone else paid for not being in the top spot, but let's compare all the losers because the guy who made 10% is better than the guy who made 2%, but the guy who made 2% is better than the guy who let his money sit around and the stagnant guy is better than the guy who lost money. Aaaannnddd that guy is better than the guy who lost even more money. Meanwhile, they all have different motivations and goals. The guy who made 2%, maybe his priority is to hold onto his money, so he's winning in his own way and so on. 

When you're comparing the entire universe of investing to come up with a couple of phrases to encapsulate the idea that "if you're not doing as well as you could be, then you're losing out", it's a terrible, defeatist attitude. It makes no sense to say that you're losing because you're not doing the maximum. I go to the gym to stay in shape, but my goal isn't to look like Arnold Schwarzenegger, because  guys that spend that much time on their own bodies are probably lacking something in their lives, missing out, neglecting someone, don't have another skill they need, aren't very smart, live paycheck to paycheck, etc. or some combination of those. You might invest to be able to retire early, but maybe it's more important to me to get out of debt and leave tangible paid in full assets to my kids.

So, at the end of the day I'm sitting here thinking that I could put that next $10,000 in the market and maybe it'll be worth $150,000 in 30 years or maybe it'll be worth $75,000 or $20,000 or $0, so there's no way to know what the "opportunity cost" is. That's why the theory of opportunity cost is only useful if you're comparing two possibilities directly and know both outcomes (ie. rarely or never useful). But I do know that if I pay it back to my mortgage early I get a "return" without investing anything  and I get out of debt much sooner. So, why would I gamble on making more with that money especially when getting out of debt is more important to me? To people that are "sure" their investments will outpace their debt, great, go for it. Leverage and hustle and make it happen. I've got my hand in both buckets. I make some passive income every month off of my investments, but I'm also getting out of debt early and getting dollar for dollar returns on paying my mortgage early, so I obviously prefer balance. Maybe you like all your eggs in the "investment" basket and that's fine, too, I just don't get it. And truth be told I'm probably going to turn my home into a rental when it's paid off someday, anyway, so it'll be $2500-$3000/month income at that point. If I still have a mortgage on it at that time obviously it's worth a lot less monthly income. 

Anyway, my point is, if you have to compare mortgage interest savings to every other investment that exists to find a flaw with it, you're really reaching. There's no other investment that exists where you can simply speed up paying an existing liability, which doesn't cost you any money and make a dollar for dollar "return", therefore it's one of the best opportunities that exists in terms of "investments" - PLUS, it's a sure thing and you're getting out of debt faster. Hopefully this is over like you said, but probably not, huh?

I'm so excited to see this calculated out, Chris. Maybe I could buy 10,000 different investments at a dollar each and that way I'm "assured" that I will make money. I wonder if the time value of money is negative if I buy good stocks that have a bad year and I lose money. 

It's funny that we both feel sorry for each other, though. You have money sitting idle in your checking account and all my money is working for me, but I'm the one not accounting for opportunity costs and the time value of money. :-D

The time value of money is basically another way of saying a bird in the hand is worth (one) in the bush. $10,000 now is worth more than $10,000 in ten years because of the money I can theoretically make on it between now and then. You know, correct me if I'm wrong, but that's my understanding. So, here's what I don't get about it. How do you calculate it if there are so many different things I could invest in and so many rates I could get? I could put the $10,000 I used earlier this year into a CD and earn a reliable low rate. I could put it in a stock that takes off and doubles in a year. I could put it in a stock that's bankrupt in a year. I could invest in my cousin's start up and be a millionaire in a year. I could make a down payment on a successful business and return 500% per year. I could buy a rental and get a bad tenant and end up in a court fight losing money. Etc. etc. on into INFINITY. So take a 1.5% CD? Is that what I could truly make with the money? Is it the stock that's going to be up in a year or the one that's down in a year? How do I tell what the time value of money is without the benefit of hindsight?

I understand the concept, but it's predicated on the notion that you A) are able to whittle everything down to one potential investment to compare to and B) know what your returns are going to be on that investment and you don't, period. You can't. It's impossible. We're all making educated guesses, but the only way you can truly calculate it is with hindsight, eg. I put this $10,000 into my mortgage, but IF I'd have put it into my cousin's business I'd have ______. Without those variables in place, the time value of money is just a vague idea, not a number you can calculate. On top of that, I have plenty of capital for another rental, but haven't found the right one. I'm in the market for one right now. I can't understand why I keep having to explain this. I have investments. I have stocks. I have properties. I have savings to buy another property in the near future. All I'm doing is putting my excess CASH into the mortgage. You know, the stuff I'm not using for anything else that was just sitting there waiting to be used at the grocery store. I understand concepts like opportunity costs and time value of money, but as I said, the rubber never meets the road and to live by them is goofy. You can't tell me what the time value of my $10,000 is, because you can't reliably tell me what the other investment is and how much I will make. It's not a fancy wall street concept or something, it just doesn't mean anything beyond a vague idea. Basically, it's the financial bookworm way of saying that you should make a good investment because that's better than making a bad investment. To which I would say no ****. But it's all guesswork to a degree. AND there's timing involved. I doubled my money on 3D printing stocks a few years ago and was very happy to cash out. Then they tanked and went back up later. If I'd have timed it wrong, a VERY GOOD INVESTMENT could have been a VERY BAD INVESTMENT yet it was the SAME EXACT INVESTMENT. You could put your 200k on a million dollar place and overall it's a good investment, but if the economy goes wrong you could have a real problem and you have no idea if it'll be good or bad because it's in the future.

So, here's a sample of a time value of money conversation to me:

I want to put $10,000 on my mortgage to save a bunch of interest.

No, don't do that, it's a low return. Put it in a bond fund, you can get 6%.

No, if I'm going for a good return I'm going to buy a pharma stock I'm pretty sure I can make 15%.

Oh, no way, dude. If you're going to risk it that much you should just it into a rental property. That way you can earn in multiple ways.

Yeah, but if I want to earn in multiple ways I can buy some blue chip stocks and get dividends and appreciation.

Oh, man, talk about appreciation! My cousin has this start up and she would really APPRECIATE you investing. She says she will double your money almost over night and you'll be a millionaire in a year. 

Which one of those things is going to do the best, Chris? And how do I know what the time value of my $10,000 is if I don't know any of the variables involved or the outcomes? Maybe my dude's cousin really could flip my money over night and make me a millionaire in a year or maybe she loses my money. Maybe the pharma stock I picked will go belly up. You get it?

But here's what blows my mind for real. I'm telling you I'm getting free money for reasons I've explained a bunch of times. When you say that I'm wrong because I'm paying the time value of money you're fundamentally saying that I'm only wrong because out of all the investments in the known universe, something is bound to be better than the one I'm talking about. Do you know what I mean? In other words, you can't refute that I'm getting free money (because you know I'm right), so the only other thing you can do is say that my "investment" is a bad one because there might be better ones out there. By this rationale, I could look at your 200k example and say that another guy did the same thing, but his building appreciated to $1.07 million, so you really essed the bed, man. You could've done so much better. Oh, and there's also the guy that put in 180k and appreciated to $1.05 million, so he got a better return than you, too. I don't even know why you bother. Not to mention the guy who won $100,000,000 on a lottery ticket he bought for $1 - he blew your returns out of the water, man. You're a terrible investor, Chris. You should really stick to your day job because there are so many people that get better returns than you do. I mean, even though you made a "pretty good" return, your investment actually costed you money because you could have done what this guy did or what that guy did. You actually lost out on money because somebody else's building appreciated to $2 million, so you're paying the time value of money, too. Sorry. Comparing investments is as much art and luck as it is science and math and there's no right answer especially when you're not using hindsight. But when you clearly can't refute the free money thing except to say that I'm paying the vague and ominous TIME VALUE OF MONEY, Money, money... money..... (anyone know how to write out echos?), I hear MAJOR alarm bells. If I was wrong you'd be able to say why I'm wrong, not have to compare my investment to all other investments to say that since I must've missed out on some money somewhere I MUST BE wrong. That should even give you alarm bells about what you're saying.

So, here's the million dollar question. I'm sure you'll say I'm wrong about all of the above and the time value of money is an easily calculable figure and so on. So, go ahead and tell me what it is, please. I want to put another $10,000 on my mortgage after the holidays, say February 1st, but I really need to know what the doing it is going to "cost" me if I'm going to make the right decision, so can you tell me what it'll cost me? I'm sure your answer is going to be the financial equivalent of who would win in a fight between Santa Claus and the Easter Bunny, because it's all hypothetical nonsense, but somehow I still can't wait. Thanks in advance.