All Forum Posts by: Joshua S.

I didn't say it was a trick or a scam. I said that it's extortionate. I would definitely say most people don't know what they are paying, because everyone says 4% is cheap money, but it's not a "scam". I understand that it's because it's a larger dollar amount amortized over a long time and it's right there in the documents. 4% per year, 67% total. So, don't read into what I'm saying to take your own meaning. When I used the term front loaded I didn't mean that it was a trick. Maybe that it was unfair to make the customer pay off interest first, but I understand it's a function of how high the debt is at first. The term front loaded simply means you pay way more interest in the beginning and that's true. You really seem to be reading between the lines for things that aren't there instead of listening to what I'm saying.

As I said to Chris, the point of the credit card comparison was not the rate of interest, eg 18% vs 4%. It was the fact that a responsible person will look at a $1000 big screen and go, "You know, I can't really afford that, so let me save up over time or get something cheaper", but that same person will not say, "Wow, this is a $200,000 house and I can't afford that, so I better find something cheaper". They will pay $350,000 for that house by putting it on the 4% credit card (aka their mortgage) and making minimum payments. Yes, of course the rate is different, but other than that it's exactly the same as misusing your credit card and living beyond your means. 

Maybe we are "forced" to do this to an extent and I accept that, but we don't have to accept making minimum payments or trying to find 10% investments when we have a 100% investment right under our noses.

No, of course not. Some traditional knowledge is accurate and "pay off high interest debt before lower interest debt" is one of those things. I wasn't equating them mathematically, but the fact that you went there is an example of what I was trying to tell you: it's extremely difficult for you to see past the equations to anything else in this debate.

I was equating them strictly in the sense that they are both ways to buy things you can't truly afford and pay a ton of interest because you are living beyond your means. Of course 18% interest is more than 4% interest. What I'm trying to tell you is that all you guys see is 4% and think that's cheap because it's much lower than 18%. In other words, you use the comparison between the numbers to obscure the fact that 4% is still extortionate.

Pretty much anyone will tell you when looking for investments that the best investment is to pay off high interest debt first, eg. credit cards, and then they will ignore that 4% because "that's the cheapest money you will ever borrow". I'm just making the point that the mortgage is still high interest debt because the true / total interest is 67%, therefore prepaid principal is a great investment people should be bending over backwards to do. A mortgage is basically like getting a credit card at a low interest rate to buy a house and then making minimum payments for 30 years and wondering where all your money is going. Making minimum payments on credit cards the plague of the financial world, but making minimum payments on your mortgage is business as usual because we need to save up and buy rentals. Sad slide whistle.

Well, Jeremy, from my perspective if you understand so well the concepts we're talking about, then there would be a general consensus about a lot of this and there really isn't. It's been like pulling teeth to get people to acknowledge what to me seems like a simple truth:

You can save $100,000 and 20 years off of your loan by paying an extra $10,000 of principal per year. If that costs $5000 over the ten years to do it conveniently then who ________ cares???

That, to me, is stupefyingly easy to understand, yet everyone wants to split hairs over it.

1. You can do it without a HELOC.

Yes, and most people don't because there are drawbacks that we've covered a million times. The HELOC just makes it more convenient.

2. There is a cost.

Yes and there is a cost to any investment. If you're asking me to invest $5000 to get $95,000 and get out of debt 20 years early I will sign up every day and twice on Sunday.

3. You are just moving debt to a different loan. All else being equal, you are not saving anything.

All else is not equal. It has nothing to do with math. You are paying the debt in a completely different way. Again, we have covered this.

4. Mortgages are cheap money because they are 4%.

Mortgages are absolutely extortionate. People say credit cards are the devil, right? If you put a $1000 TV on a credit card at 18% and pay the minimum payment it will take 70 months and $1473 (47% interest) worth of payments to pay off. People use credit cards to buy things they can't truly afford and then pay a crazy amount of interest in order to live beyond their means. Mortgages are the EXACT SAME THING, but at 360 months and 67% interest. We are conditioned to do it, because we all need a place to live and have little choice with housing prices the way they are, but people also convince themselves they NEED a huge big screen TV. A person should take every advantage they can get to avoid paying the interest on a mortgage because they are practically being forced to buy a second home and only get one.

5. If you use all of your money to pay down the mortgage, you don't have the ability to invest.

This is an investment and a far better one. I've shown that over and over and then we just bump the objection wheel around to the next one and keep going. 

On and on and on, there are disagreements about the most simple aspects of this discussion that anybody who is willing to look outside the box can see. I thought, especially on a website with a bunch of free thinking investors, more people would be able to grasp the whole thing, but it is a damn shame that people like you can't get over the nitpicking and admit that it's a viable strategy. Wowowow. Oh well, I guess. :)

That's what I've been saying, Gary. I think of it like when you're making your normal payments it's like you're making tiny principal payments and paying for plane tickets to fly them to the lender. It's that expensive to pay on their schedule. 

Just a bunch more incorrect assumptions / misconceptions, Brent. On the contrary, using $10,000 at a time to pay down the mortgage gives me room to do other investing with the credit lines. I'm far from maxed out and also have plenty of reserves. A person could also use $5000 "chunks" if they were that worried about it. Plus, the thing that you guys keep missing over and over is that saving the mortgage interest IS an investment. My rentals are at about a 10% cap rate and as I've repeatedly tried to explain the early mortgage principal returns 100%.

Think about this for a second. Each $10,000 over 10 years ($100,000 total) nets $100,000 in interest savings. That's 100% ROI verified on financial calculators. No one can explain why this is wrong. But I'll do you one better than 100% ROI. The additional principal you pay is money you were already going to pay, anyway, so it's simply the act of paying it EARLY that nets you the savings. Therefore you're not even investing anything to get the return. Of course there are "opportunity costs", but you're passing up earning 5-10% elsewhere to earn 100%, so in my book it would only count as opportunity costs if you WEREN'T paying your mortgage down early. Not only that, but getting out of debt in 9-10 years allows plenty of time for investing for the rest of my life whereas your investing is just funding your 30 years on the mortgage treadmill. 

Really think about it, Brent, don't just react. You can do this! You owe your buddy $5,000 with 4% annual interest and a deadline of 5 years. But he says that if you pay him early you don't have to pay the interest. You don't even have to make payments. This is a good friend, he just wants interest if you take the full term to pay (different from a mortgage, I know, but easier to calculate). You have to pay either way, so scrape together the money, borrow, steal, whatever and pay early at zero cost or pay at the end of the term, but add on $1000 ($200 interest per year) because you took so long to pay. There's no investment to get that $1000 savings other than paying early, so you can't even calculate an ROI on it because it's free money. You got $1000 for no money. You'd be stupid not to do that "investment".

I'm sure you won't be able to follow any of that, but compare it with another investment. If I bought a gas station or a multifamily or something, I have to outlay some type of money to get the returns. With my mortgage, it's money that I'm scheduled to pay, anyway, so I'm only changing the timing of when I pay it to get the returns. I know I'm only Ben Affleck and you're Will Hunting, but that's free money in my world, which is even better than 100% ROI. Either way, this investment burns yours to the ground, so I wouldn't worry too much about my kids. :)

That's pretty funny, Brent. Your mortgage is shortened to about ten years, but you would just continue paying on the HELOC for another 20 years for fun. Bravo on the logic, bud. Oh, and proving my point about how little everyone comprehends the idea. I love it. :-D

I appreciate your outside perspective and saying it looked emotional and that's fair. I can't speak for anyone else, but if it looked emotional or passionate from my angle, it's just because I enjoy a good debate and maybe a little bit because I felt frustrated that I wasn't being heard. I have absolute zero emotion about the HELOC idea itself and if anything (as I said in one of my other posts), I'm happy to be absolved of teaching friends and family about it lest it devolve into a math lesson about percentages instead of a discussion about different ways to pay debt.

No one was offended or insulted at you adding your two cents, I guarantee it. We were all mixing it up and enjoying pushing each other and the frustration and challenge of trying to make someone see each other's points of view. It was just a pickup game of ball where we all got knocked in the dirt at one time or another. During the game you get caught up in the moment, but when the egg timer goes off no one really cares, we all just want to make it home on time for dinner. But like I said, thanks for the input, I can understand your perspective, too. Have a good one.

I think what people mean here is more to do with the economy or housing starting to tank. If house prices go down then it obviously could affect your equity and if the bank doesn't act they could have a revolving line of free money hanging out there in a sense, because there's little or no equity backing up anymore. That's my understanding, anyway.

PS - You can all count me for a non-emotional vote, too. If anything, I was just trying to spice things up by dropping in jokes and pushing people, but this isn't that serious of a thing. It helped me understand a few things a little more clearly and reinforced that some people prefer to stay on the same path regardless of what you say. In the end, you guys are strangers and I couldn't really care less if anyone adopts the strategy beyond what I said originally, which was that I think it's a general shame that more people don't get it.

Glad it's finally settled, everybody. Drinks on me.

Shiloh, I actually think that's a great summation of this argument. Those are some of the points that I've been trying to get across, so I appreciate you articulating them a little better than I do. I'm not taking this very seriously, so I tend to crack jokes and these guys think I'm an idiot partly because of it. I, in turn, make more jokes because 'who cares' and the argument goes on.

Chris, I understand your point that paying 4% in this vehicle and paying 5-8% in that vehicle, with everything else being equal will not net you any savings. I do, I get that. But I've said repeatedly that everything else is not equal and asked you to get away from the idea that you are simply paying on two debts, which you refuse to do. In the case of the HELOC you are using all of your income to depress your ADB and pay off the highest possible amount each month to save interest and only taking it back as you need it, not simply "making a payment". Plus, 99.9% of your money goes toward principal whereas with the mortgage about 33% does. Those are DIFFERENCES that you are not willing to acknowledge or account for so that you can keep saying there are no interest savings with a straight face. You already stated that if someone shortened his commute by switching jobs - oops, by shortening his career - that you wouldn't accept that his results are different because he explained it wrong. That's all that happened here. I had some misconceptions that the interest was calculated differently and stuff like that - I admit some of my statements have been off base, which I understand now. But you are unable to admit that even though I might have explained it wrong there are differences in the real world costs associated with both approaches. I acknowledged and conceded these points AND asked for you to show me (if I am wrong) where the savings comes from when you prepay principal in case there's a better way to explain it and you're "too busy". That's fine, but who is deliberately being obtuse and/or ignorant for the sake of this argument? It's not me. I've learned and changed my views accordingly and owned up to my mistakes and now I'm the one giving the explanation that no one can come up with an answer for besides "you need to learn financial math".

So, for the fifth time, show the math that roughly matches with the calculators and shows how prepaid principal savings are achieved OR if you can't come up with something better that my calculations (that worked out and matched), you can own up to the fact that the "miraculous" savings of this "magical" HELOC approach have nothing to do with math, but simply the differences in HOW you pay off the debt. Or, you know, you can go on denying the very clear differences for the sake of your ego, which is what it seems like you are intent on doing. Either way, it's been fun.