All Forum Posts by: Joshua S.

It's unfortunate, everyone talks about the time value of money and comparing the velocity strategy to an "investment", but that's not the conversation at all. If the question was, "What should I do with this $10-$20K I have sitting around?", then obviously the answer is whatever gets the best return with acceptable risk. But that's not the question. 

The real question is, "What are your checking account funds doing for you right now?". Of course, the answer is nothing, whereas I'm using my income to keep my interest costs down until my bills come in. See, if you're asking the wrong questions and using the wrong premise then you're going to get the wrong answers. I've been able to put an extra $60K toward my mortgage in under 3 years and it wasn't just lying around in my bank account nor did I scrimp and save. My wife's spending habits are pretty gnarly, tbh. The simple fact is, this is a way to put extra money toward your mortgage balance without accumulating it first. You're just leveraging the modest amount that's in your checking account and a different way to pay to save on interest. 

I have a savings account, stocks, rentals, etc., too, but my checking funds are working for me and I'm reasonably sure yours aren't, so that's where you should be applying that time value of money question. What's the time value of money that's just sitting there every month, right? 

I was just curious where you landed on this. This strategy is so maligned and misunderstood it's unbelievable. LOL I do it and I've been able to put about $60K extra to my mortgage in just under 3 years. Critics must think I've just skipped that many lattes, but that's absurd. Here's why and how it works. When you're paying down the mortgage on your normal schedule, the interest comes to around $20K to pay down the first $10K on your balance. It takes roughly 2 years. Everyone always says it's "cheap money", but your ACTUAL INTEREST COST is about 200% early on in your mortgage. It costs you $20K to pay off $10K. That's all based on the average mortgage. Anyway, if you move that $10K over to your HELOC it costs about $1K in interest and takes 6-10 months to pay down. You're saving time and money, because you're paying it down in a more efficient way. People say that you can do the same "just paying extra principal", but this ignores the fact that most people don't have a ton of extra money lying around. This strategy is specifically a way to pay extra principal even if you don't have the money lying around. That's the whole point.

What's crazy to me is that people will admit that paying additional principal saves you on interest, but then they'll say that if they have extra money lying around they'd rather buy stocks or a rental. Great - ***IF*** you have extra money lying around that you're not paying bills with. Then I ask them if they have money sitting in their checking account and it's crickets. All you're doing with this strategy is using money that was sitting around in your checking account to bring your mortgage interest costs down. If nothing else, you can imagine that if your mortgage functioned like a line of credit (put all your income toward it, but still be able to pay your bills) then it would be more efficient than what you're doing now. Moving a small portion of your fixed 30 year to a HELOC accomplishes the same thing. It's that simple. People are so brainwashed and won't accept anything they weren't taught decades ago, that's the bottom line. It's pathetic. If you want to see my amo table and most recent statement (proof that I'm $60K ahead of schedule) let me know, I just don't think I have them right here on my phone. Good luck!

Part of the problem here is that fundamentally people don't understand what happens when you pay extra principal (ie. pay it back early) and I think that's a terrible, ridiculous shame, so here's a little experiment for anyone who's interested. 

Go to this calculator at put in a $10K loan at 4%. Leave the 30 years. Let's imagine it's a car loan for 30 years. 

https://www.bankrate.com/calcu...

Here's what it looks like if you don't feel like doing it. 

You pay about $50/month and early on about $33 of that goes to interest. Over the 30 years you pay about $7200 worth of interest, which is obviously 72% interest total. 

Now imagine you set this all up, but then tax time comes around and you get a $10K refund, so you figure let's knock out some debt. You pay the $10K off in full. When you do that, it LITERALLY 100% CANCELS the interest that you were scheduled to pay. In other words, the bank isn't going to continue charging you for the $7200. Everyone knows this. 

But here's the thing: Regardless of how much you pay, paying early principal LITERALLY 100% CANCELS the corresponding interest. 

So, think about your mortgage. You know that every month early on you are paying far more in interest. On the average $200K mortgage, the interest that corresponds to the first $10K of principal is over $20K. That means if you give them $10K early, it LITERALLY 100% CANCELS $20K worth of interest. This is true whether someone gives you a gift or if you win a scratch off ticket or you take it from a HELOC. The difference with a HELOC is that I pay about $1000/year ($83/month) to do it.

So, the question is - is it worth $1000/year to save $20K in interest? Obviously it is. 

Now as my balance goes down my savings will go down, because obviously the less there is to save the less I will save. But either way, I'm still always in a winning position by keep all my checking funds working for me all the time. 

I hope people can get this, because knowing that paying extra principal saves money, but not understanding how it works is really a shame. 

It's interesting, earlier on in this process I did think it was a bit nefarious of the banks to "charge more interest up front", but now I understand that it's just a function of how much you owe. However, just because it's not nefarious or morally wrong doesn't mean it isn't true. To pay down the first $10K on a $200K / 4% mortgage it costs you over $20K in interest and takes over 2 years. Or looking at it another way, you pay about $11,500 in total payments in the first year and about $8000 of that goes to interest. That means your ACTUAL interest cost in the first year comes to 69% of what you pay. Again, it's not a nefarious, evil thing, but you do, in fact, pay way more to interest in the first years of a mortgage. I find that very wasteful.

On the other hand, I can isolate that top $10K off of my mortgage and because I'm putting all of my income toward it (and not paying interest on the rest of the mortgage while I do it) it costs me around $1000 in interest and takes less than a year. I don't understand how people can look at the difference between $20K and $1K and shrug it off. Go look at my amortization table and my latest statement a couple pages back - I'm $58K ahead of schedule. Where did I come up with that kind of cash? You think I skipped enough Starbucks to save that up, I guess, which is a little far fetched especially if you knew my wife's spending habits.

Lastly, you talk about the time value of money, but I have investments (rentals, stocks, etc.) and emergency savings. I'm using the money that would have been sitting in my checking account to do this, so all of my money is working for me. I'm sure you have money sitting in a checking account right now, so what's the opportunity cost of letting that money sit there? How much could you save or earn off of that if you had a way to make it work for you? You're worried about the time value of money for someone who's doing a strategy like this, but your money is just sitting there, so aren't you calling the kettle black? 

Here's a summary of this thread for anyone else who wants to play.

Me: "Hey, this is pretty cool. I found a way that a person can put their checking account funds to use instead of just letting the money sit there like you're all doing right now."

You: "But I don't want to sell my rentals and stocks and stuff."

Me:

LOL 

I have to give you guys credit, you have been able to spin the same ridiculous argument a thousand different ways. 

If your primary increases by 1000% and you pay 52% interest, that's great. 

If your primary increases by 1000% and you pay 26% interest, that's better. 

You could put your checking account funds to use and be in an even better position, but you don't want to and that's cool. Some people like leaving money on the table. Some people give to charities, you like to give to banks. It's not how I like to roll, but to each his own. Have a good one. 

The opportunity cost is attached to the money in your checking account that's not working for you right now. I'm not foregoing rentals, stocks, etc., I'm simply making sure all my money is working for me by putting it against my mortgage in a line of credit. That sweet sweet sub 5% ends up costing a total of around 67% interest if you pay it off over 30 years and I've got my checking account funds leaning on it to bring it down. What is your checking account doing for you?

Refer to the other comment I just made - If all of your money is working for you right now, what is your checking account balance? Zero, correct?

This is bonkers, I can't believe I'm the only person who gets this. Listen, everybody.

I have rentals.

I have stocks.

I have emergency savings.

I'm not advocating doing this HELOC strategy in place of any of those things. I don't understand how I can make that any clearer.

But here's something you have that I don't want: a checking account where your money is sitting there rotting while you wait to pay your bills.

Instead, I have used this method to put all my CHECKING ACCOUNT FUNDS (ie. the money you have rotting in your checking account right now) plus a portion of a line of credit against my mortgage. Everyone agrees that paying extra principal saves you money on interest. I'm not selling my current rentals or foregoing buying others to do it. I'm not selling my stocks to do it. I'm not using my emergency savings to do it. I'm simply using my checking account and a line of credit to do it. The whole process costs about $83/month in interest on the HELOC and I've saved tens of thousands of dollars doing it.

People keep saying that they'd rather invest the money than do what I'm doing. Awesome. Then what is your checking account balance right now? It should be zero if you'd rather invest the money, so who's got the first screen shot of their checking account with a zero balance, because it's all invested somewhere? Let me know!

Again, this isn't an investment or in place of an investment. It's simply a better way to run your checking and makes your money work for you constantly instead of sitting around waiting for you to do something with it.