All Forum Posts by: Joshua S.

Sorry, I thought of this after I posted it, but was hoping you guys would accept it in good faith knowing what I meant. With my mortgage, the money is not gone, it's in the form of equity, which I keep / get back. So, to make the analogy correct my daughter gives me back my original investment plus 100% total return. In that case what is the total annualized return? 10%? 20%?

Originally posted by @Chris May:

No, your ROI was 0%. You sank $100,000 into a business that returned $100,000 to you.

No. You invested $10,000 in year one, got $10,000 back in year one. You invested $100,000 over 10 years, and got $100,000 back over 10 years. ROI is 0%. You just said (above), using the same numbers, that your ROI was 100%. Now you're saying it's 10%. Which is it? (It's 0%).

Ok, let's try something else, Scott. Forget the mortgage and the HELOC and everything else, I just want to try to get on the same page with you numbers wise.

Let's say I invest in my daughter's lemonade stand and she's really kick *** at lemonade, so I put in $10,000 per year for ten years. She makes $10,000 back each year. So, all total I put in $100,000 and since I got the same amount back my total ROI was 100%, right?

Now look at it annualized. If I made $100,000 total over the ten years that breaks down to $10,000/year on average. If I averaged $10,000 return each year on a total investment of $100,000, then my annualized return is 10%, correct?

Remember, there's no mortgage, no cups, no ball, etc. - just you and I trying to calculate my investment return on my daughter's lemonade stand. Did I do the math correctly, or no? If it's wrong, that's fine - what did I get wrong?

Originally posted by @Scott L.:

----The street hustlers with the cups and ping pong balls...you know they're just palming the ball, right?  :-)   That's why you never pick the right cup.

Let's lay out the scenario, then see where it leads (without palming the ball). You have a $100,000 30 year mortgage @ 4% in year 0. At some points between years 0 - 10, you come into $100,000 in $10,000 chunks. For simplicity, we'll say $10,000 a year. You have a decision whether to pay those $10,000 payments into the mortgage or invest them. The simple question is, do you think you can find a better than 4% return. If you can't, pay down your mortgage and receive a "return" of 4%. Your only other choice is not the stock market. The point is, you are only getting a 4% return on the chunks you prepay on the mortgage...from the time you prepay, to the time your mortgage is paid off. If I had a spare $100K to invest over 10 years, I'd buy 3 SFR's in my market with 25% down on each and make about 12-15% cash on cash return. It would, of course require some risk and sweat equity, but in my view a better use for the cash.

This is coming from a person who DID pay off a $200,000 mortgage in 2.5 years 20 years ago. At the time (1998-2000) my interest rate was 7% and I did NOT expect to reasonably beat it in the market with 0 risk.

The math is simple. The return on paying down your mortgage early is the interest rate on the mortgage.

Oh, hi, Chris. Pretty audacious of you to see that I'm using financial calculators to back up what I'm saying and ask for written proof as if I'm quoting from the fairy bible of finance or something. LOL You're right, my lack of Excel knowledge really proves something...... MY LACK OF EXCEL KNOWLEDGE. :-D

Take care and good luck with the trolling elsewhere.

Originally posted by @Chris May:

 This thread is completely exhausting. Amazing how many people jump in here to argue that using debt to pay your debt is a "system", yet clearly have no expertise and repeatedly tell people who do this for a living that they're wrong. Truly incredible. I actually suspect some are the same people on different accounts, but I digress.

Josh - I'll give you the same challenge we've given we've given everyone else: post an Excel workbook where you model out 1) the full lifecycle of a 30 year fixed amortizing loan 2) the same loan and HELOC over the lifecycle of both loans.

Every person who had attempted has either finally conceded they were wrong or disappeared after we pointed out holes in their model. Every. Single. One.

Show your work. I'm confident you will see where you're going wrong.

Awesome, now we're getting somewhere. So, if I understand correctly basically you want to flash forward ten years and now I've got $100,000 to put in the market because I didn't pay it into my mortgage early. You want me to put that money into the market for 20 years and beat my 100% ROI, so let's see how it works out - screenshot below.

I kept it at 4% to give us a baseline, but I made $122,000 off of my $100,000 if I'm not paying taxes on it. Nice work and that's a fair point. But here are a couple issues I have with it. If I make 9% in the market I'm doing a great job, but if I make -9% I'm screwed, so that seems like a huge gamble compared to a guaranteed ROI.

Not only that, but now I'm waiting 30 years to have the chance to make more than I could've made in 10. In other words, that's not a fair comparison, either, because you're basically saying that instead of making a guaranteed return of 100% over the next ten years, I might as well hold onto the money to put into the stock market and HOPE I can beat the guaranteed return. AND I'M STILL IN DEBT while I'm hoping that this gamble pays off. 

So, choosing between the two scenarios is pretty simple for me.

1. Have a guaranteed 100% ROI over the next ten years and get out of debt. After ten years invest in the market with all the money that's not going toward debt anymore.

2. Continue to pay a ton to mortgage interest and save all my money to buy stocks. Hope my stocks make more than 4% per year (and 100% total) over 30 years to beat what I could've done in ten years. Finally get out of debt in 30 years and hope that my gamble paid off.

I'm going with #1. 

Otherwise, Scott, there is a place called Assumption, Ohio and I think you'd really like it there. Lots of people who just assume instead of actually thinking through it and working it out. :-D

Scott, I understand why a person would say that. It makes sense. If you borrowed money at a 4% rate then if you pay it back early that's all you're saving. But you're just regurgitating that instead of working it out for yourself. Go to any amortization calculator and plug your own numbers in and then put in $10,000 annual prepayments and look at the savings. Look, I've already done it for you with my numbers below. There is a total savings in my case of $107,000 after ten prepayments of $10,000 ($100,000 total). The TOTAL RETURN is just over 100%. 

Look, they say that you have a 4% annual rate, but it's really around 67% total interest over the 30 years. In my case on a $315,000 mortgage I'm scheduled to pay $210,000, which is more than enough to buy another smaller house. The simple act of paying some of the loan back early nets me a total ROI (not yearly, but total) of 100% and I'm showing you evidence of that fact.

Again, aside from just regurgitating what you think is correct. There is a screenshot below of an amortization calculator that contradicts what you are saying and supports me. How is it wrong exactly?

It's funny, Don, I just showed all my calculations and backed it up with a screen shot of mortgage calculator results. Instead of refuting them with your own calculations you're refuting them with ideas. Go ahead and show me with numbers how it's wrong that if over the next ten years I put $100,000 in and get $100,000 back it's not 100% total ROI. That's what I've asked for over and over. Show me the calculations about that and/or the opportunity costs you're so worried about.

Well, you probably won't, so here, I'll do a comparison for you. If you put $10,000/year into the stock market with an annualized return of 9% you end up with $170,000 if you're in a tax deferred vehicle or $144,000 if you were taxed - see the pictures below. Congrats, you made a total return of 44-70% return over ten years. Awesome. But remember, that's if the stock market average holds up at 9%. You could hit a rough patch and end up with -9%. And, hey, you could make 18%, but that's your gamble.

Now look at the mortgage interest savings again. If I put in $10,000/year over ten years I'm not getting $44,000 back or $70,000 back, I'm getting $100,000 back and it's guaranteed because it's built into my loan. I'm currently on the hook for it, so I'm guaranteed the returns if I pay it back early. Not only that, but I got out of debt early and you still have your mortgage payment. 

So, you know, I'm not a financial genius like you guys are - maybe I'm wrong. If I'm wrong, SHOW ME. It will make me very happy to learn something if I'm wrong, but I'm not taking anyone's word for it, you need to show me.

And if it seems like there's a chip on my shoulder it's only because everyone says I'm wrong, but can't show me any legitimate math as to how it's wrong. It's like arguing with a bunch of teenagers who still believe in Santa and I'm showing them satellite images of the north pole. Man, I crack myself up sometimes! Show me the calculations.

Sincerely,

Show Me The Calculations

PS - Show me the calculations.

No, Don, everyone here understands opportunity cost. But many people have lost their life savings in the market, whereas mortgage interest savings is guaranteed and equity in your house a much more stable investment. Plus, being debt free is basically priceless. So, it's not a question of me or anyone else not understanding the variables at play. Some people might want to put their money in the market and HOPE for a better return while they toil away in debt. I prefer to take the guaranteed return and get out of debt. 

And when you say 4% return on mortgage interest savings, you're overlooking what I said just a couple posts back - I've put in around $30,000 in early principal and saved around $50,000 in interest. That's an ROI of 160% so far. It will come down as I go, because of diminishing returns (less to save so less is saved), but I'll still end up around 100% ROI. What type of investment do you know that gives you a guaranteed return of 100%? Again, I'm not conjuring up magic numbers, it's right there for you to read. Or you can look up any mortgage calculator you want and see that prepaying principal has a much higher ROI than 4%. I'm on the hook for $210,000 in interest, for example, on a $315,000 loan. But if I can manage $100,000 in prepaid principal over the next ten years or so I can save $100,000 on interest. ANY MORTGAGE CALCULATOR WILL TELL YOU THIS. It's a guaranteed ROI of 100%. I mean, Jesus Christ, just pull up any amortization calculator and do it, it's not hard. Here, I'll do it for you. See below - 10 annual prepaid lump sums of $10,000 to keep it really simple ($100,000 total) nets a savings of $107,000 or 107% ROI. I honestly pity all of you, I hope you eventually realize that there's more out there than what's in your head currently. What egos you all must have to see this plainly laid out for you and still refuse to see it. LOL Geez.

Actually, Brent, I think I just figured out a better way to explain this concept to you. Everyone kept saying that the $10,000 in question is the same regardless of whether it's on your mortgage or the HELOC, but I think this is what you are all missing. The $10,000 itself is only charging you X amount of interest when on the mortgage, but the scheduled payments themselves are charging you a huge amount of interest compared to the payment itself. In other words, out of a $1000 payment, $800 of it might be interest early on in a mortgage because the balance is so high. But this interest on your normal payment hasn't been "charged" or "accrued" until you get to that point in the loan. It is SCHEDULED to accrue and be paid, but when you knock the balance down to a lower level (again, forget the HELOC for a minute, maybe someone gave you the money), now you have skipped those scheduled payments and pick the loan up at the new balance. Because you skipped those payments the interest never had a chance to accrue and therefore you saved the money and never had to pay it.

If you can't grasp this concept - the idea that just because the interest is scheduled, does not mean you have to pay it - imagine you won the lottery and were able to pay off the whole thing in one shot. Do you pay the principal or the principal plus all the interest? 

Ok, now follow me here - those payments, the ones that are ~80% interest early on in the mortgage are loaded with interest from not only that first $10,000, but the entire loan. Not as a function of a scam or evil or anything like that, but because your balance is so high. The mortgage company could say, "Well, you owe us $210,000 in interest over the next 30 years, so we're going to divide that by 360 payments and the interest portion of your payment will be $580/month", but they don't. They charge you based on how much you owe, so your payments are loaded with interest early on. In my case it was about $950/month. This is why you take 2 years and $20,000 in interest to pay off $10,000 - the interest is basically "getting in the way" of you paying off more principal. And it's also why if you give the money back earlier than is scheduled, they are now charging you based on a new amount and you are able to skip the interest charges associated with whatever you paid early. Does that make more sense? The $10,000 itself is "charging you" X amount of interest, but actually COSTING you a lot more, because when you pay it down on schedule you are paying interest on the rest of the loan at the same time. I think that's the piece everyone is missing. It's not about what the $10,000 is charging you, it's what it's actually COSTING you to pay it down. Those are two separate things. Imagine if your insurance company was charging you $100/month, but you also had to drive 100 miles to submit the payment. The charges and the actual cost are vastly different.

Anyway, in regards to the HELOC, when you take the $10,000 over to a revolving line of credit, you are paying it directly without the interest from a $XXX,XXX loan getting in the way. It's two completely different ways to pay the same money.

I don't know, in the end it doesn't matter if you guys get it, I'm just astounded that a group of adults who think they are financially savvy can't get this. I'm starting to think that it's ego and the fact that you're against it won't allow you to understand it. Like if I told you there was a button you could've been pressing and your mower would have mowed the lawn by itself all these years and you told me to _____ off because you're mad at yourself for not knowing any better.

Brent, I honestly don't know what you're talking about. I just came back to show you how it's going and ask a question:

In my opinion, I'm using the HELOC strategy to skip mortgage payments and save the associated interest. This calculation lines up with what I'm being told is my savings by every mortgage calc that exists and my mortgage company. If this is not correct, THEN WHAT IS THE CORRECT EXPLANATION OF THE SAVINGS THAT MATCHES UP WITH THE CALCULATION I'M PROVIDING YOU?

I may have asked it five different ways to try to cover all bases, but it's that simple. Actually, you seem to be confused by the idea of my money vs borrowed money, so let's make it even simpler. When you prepay principal on your mortgage (regardless of where the money comes from - your aunt gave it to you or you took it out of savings or won $10,000 on a scratch off card), I believe you are skipping payments and therefore not paying the interest that you were scheduled to pay. This is supported by the savings and calculations I'm giving you. It all matches up nicely. If you disagree, then in what way are the savings occurring and what are the supporting calculations? That's all I want to know. Remember, Aunt Jody gave you $10,000 and you put it on your mortgage - where does the interest savings come from?

Originally posted by @Brent Coombs:

@Joshua S., I'm not sure why you reckon that reverse psychology will work on your readers, but the answer to "where the savings comes from if I'm not actually "skipping payments"" is in your previous post: "I simply put in a chunk of my own money at first"!

The concept of using borrowed money to try and achieve the same result makes zero sense!

And, what's the bet you do take up one of those offers, well before paying out your mortgage!?

[Or, you could be irresponsible as an investor, and refuse to re-borrow against your equity]...