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All Forum Posts by: Joshua S.
Joshua S. has started 2 posts and replied 293 times.
Originally posted by @Chris May:
Originally posted by @Gary Floring:
"I paid $10,000 (from his HELOC) and was able to save $21,000 on interest (on his primary mortgage in which he accelerated the amortization schedule by approx. 23 months). The fact that I pay $50/month to my HELOC (interest paid per month = $50 x 10 months = $500).
Does everyone accept the scenario above as arithmetically correct (or feasible)????
I'm not responding to Josh anymore, but I'll entertain your question. The premise of the argument is flawed.
Mortgage payment stays the same. Now there's an additional $50 per month being paid. Whether he pays that $50 to the HELOC, or adds it to his mortgage payment every month, the result is the same. The combined loans will be paid off on the same day whether he splits the balance between HELOC + mortgage or keeps the full balance on the mortgage. The interest savings and early payoff is the result of paying $50 more every month, regardless of whether it's to a HELOC or directly to a mortgage.
Sorry, Gary, this has nothing to do with what I've been saying. Chris is butchering the premise completely, so I'll spell it out for you. Go look up any financial personality who talks about a bi-weekly payment schedule or paying additional principal and they will tell you it saves you interest. That's factual. How does it happen? Well, your mortgage payments are scheduled with interest to be applied, but the interest is charged or "accrued" daily. Every day you get a new $20-$30 ding and at the end of the month the interest portion of your payment is way higher than the principal portion early on in a mortgage. So, when you make a lump sum payment, you actually skip to a new spot in the amortization table and all those payments that were "scheduled" were never able to be charged or accrued to your mortgage, so they are erased. If you need confirmation of this, imagine you won the lottery and wanted to pay off your house tomorrow. Would the bank let you skip over the scheduled interest payments and just give them the balance as a payoff or would they charge you the full amount with interest? Obviously, it's the former. And again, when anyone tells you to pay extra principal to save on interest, this is what they are talking about - skipping payments and not allowing interest to accrue. WHERE ELSE WOULD THE SAVINGS COME FROM???
So, what you do is take out a HELOC and put a lump sum against your mortgage. Then you have a nominal interest charge from the HELOC, but you are putting all of your income and bills in there and as long as you make more than you spend the balance will come down over time. Then you repeat the process. Now the downside to this is that all of your discretionary income is essentially being used to pay down the HELOC balance. The upside is that if something comes up, it's a credit line so you can get money out again. You could also just put all of your discretionary into your primary mortgage, but then you can't get it back easily if something comes up. The HELOC strategy is basically a way of paying down your mortgage more quickly while maintaining more liquidity. I gladly pay the $50/month to have the best of both worlds - I put more against my mortgage and save on interest, but I'm also able to keep my emergency funds intact, have investments, etc. instead of using all my discretionary to pay my mortgage faster.
Originally posted by @Gary Floring:
"I paid $10,000 (from his HELOC) and was able to save $21,000 on interest (on his primary mortgage in which he accelerated the amortization schedule by approx. 23 months). The fact that I pay $50/month to my HELOC (interest paid per month = $50 x 10 months = $500).
Does everyone accept the scenario above as arithmetically correct (or feasible)????
Gary, I can tell you how to work this out for yourself. Get your mortgage out and find the amortization table. Then find your current loan amount and the balance you will jump to with a large lump sum - say $5000 or $10,000. Let's say for you that's 19 payments. Take those 19 payments and add up the interest portions. You can also add the first and last ones together and divide by two to get the average and then multiply the average by 19 to get the total. That number is how much you will save if you jump from your current balance to the target balance you picked out. There are amortization calculators online to help with this if that makes you feel better, but I don't have a good recommendation because my lender has one built into their site and they also tell me how much time and interest I'm saving off of my mortgage whenever I make an additional principal payment.
Second step. Figure out the cost to borrow the money to accomplish this. Everyone here generally agrees that to carry a HELOC balance of $10,000 at 5% interest should be $40-$50/month and that's without the fancy voodoo of using it as a checking account. But obviously you will need to pay it down. Proponents of the strategy suggest that you should try to pay it off within a year and then repeat the process. Good luck trying to get someone else's opinion, but they think all borrowed money is created equal and it's not. My mortgage is a 67% loan AND if you take my total interest of $213,000 and divide it by 360 payments it comes out to $592/month, so I say it's "front loaded with interest" because I pay over $900/month currently. I get to subtract a dollar or two each time I make a payment - woohoo - so it would take me 194 regular payments to get to that "fair", evenly divided $592/month interest portion. Totally not front loaded with interest, right? LOL
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Eric M.:
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.
Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.
It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D
How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.
If you pay $50/month on a $10,000 HELOC, it will take you 431 months to pay off and will have paid a total of $21,550.
You've saved exactly nothing. Zilch. Zero. Nada. Goose egg.
How clever and sarcastic of you. Obviously I meant $50 in interest costs. The balance is paid down each month by your surplus funds, but you already know that. But this is awesome, though, you proved my point! For the $10,000 to have equal costs on the mortgage and the HELOC, you'd have to pay take 35 years to pay off the HELOC. When you take 6-12 months depending on your discretionary income, you are obviously saving a ton vs what it would cost on the mortgage. I'm glad we could finally agree.
That was your takeaway? I have no words.
Your confidence in your ignorance is remarkable.
Likewise! Look, if you can ever explain this I'm all ears. Someone can make an additional payment each year - bi-weekly schedule, using a bonus or tax refund, inheritance, etc. and literally erase thousands and years off of their mortgage, you know..... that whole accepted mortgage wisdom thing.... but if they pay give or take $50/month to borrow the money to do it they are a moron that is somehow losing meowny and doesn't know it. You've been too busy doing calculations to actually address this statement at all this whole time. If I said that I got some inheritance from my parents and used it to erase / skip a bunch of mortgage interest, I'm sure it would be a slam dunk, but doing the same thing for $50/month somehow doesn't work out because..... calculations. Maverick calculated that after Goose died he'd be better off hanging back, but then he jumped in and saved the day, Chris. And he got the lesbian in the end. You're Cougar and quit in the first five minutes. 8===o {;}
:-D
My $10,000 HELOC has an interest rate of 5%. Monthly interest charge is $41.67.
Today, I paid off the entire HELOC balance with my 20% interest rate credit card, thus saving $41.67 per month!
#winning
It's funny, though, you comparing interest rates like that and bringing credit cards into it. I chuckled. The interesting part about it is I'm actually paying that $41.67/month to save on my 67% interest loan, but everyone is stuck on 4-5%, I guess because they don't understand what the true cost of a mortgage is? Maybe redo your equation with 67% on the mortgage side and 5% on the HELOC side and see if that comes out differently.
Someone else talked about slight of hand before in terms of the HELOC strategy, but to me the slight of hand is being able to call a 67% interest loan a 4% loan and trick people into paying for 1.67 houses and only getting 1. If you ever need money and are happy with a 67% interest rate, please, PLEASE come to me and we will draw something up. Here's the page on my mortgage where it talks about the total / true cost, I'd be interested to see or hear about yours and why you're so comfortable paying on schedule and wasting all that money.
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Eric M.:
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.
Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.
It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D
How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.
If you pay $50/month on a $10,000 HELOC, it will take you 431 months to pay off and will have paid a total of $21,550.
You've saved exactly nothing. Zilch. Zero. Nada. Goose egg.
How clever and sarcastic of you. Obviously I meant $50 in interest costs. The balance is paid down each month by your surplus funds, but you already know that. But this is awesome, though, you proved my point! For the $10,000 to have equal costs on the mortgage and the HELOC, you'd have to pay take 35 years to pay off the HELOC. When you take 6-12 months depending on your discretionary income, you are obviously saving a ton vs what it would cost on the mortgage. I'm glad we could finally agree.
That was your takeaway? I have no words.
Your confidence in your ignorance is remarkable.
Likewise! Look, if you can ever explain this I'm all ears. Someone can make an additional payment each year - bi-weekly schedule, using a bonus or tax refund, inheritance, etc. and literally erase thousands and years off of their mortgage, you know..... that whole accepted mortgage wisdom thing.... but if they pay give or take $50/month to borrow the money to do it they are a moron that is somehow losing meowny and doesn't know it. You've been too busy doing calculations to actually address this statement at all this whole time. If I said that I got some inheritance from my parents and used it to erase / skip a bunch of mortgage interest, I'm sure it would be a slam dunk, but doing the same thing for $50/month somehow doesn't work out because..... calculations. Maverick calculated that after Goose died he'd be better off hanging back, but then he jumped in and saved the day, Chris. And he got the lesbian in the end. You're Cougar and quit in the first five minutes. 8===o {;}
:-D
My $10,000 HELOC has an interest rate of 5%. Monthly interest charge is $41.67.
Today, I paid off the entire HELOC balance with my 20% interest rate credit card, thus saving $41.67 per month!
#winning
Congrats! :)
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Eric M.:
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.
Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.
It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D
How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.
If you pay $50/month on a $10,000 HELOC, it will take you 431 months to pay off and will have paid a total of $21,550.
You've saved exactly nothing. Zilch. Zero. Nada. Goose egg.
How clever and sarcastic of you. Obviously I meant $50 in interest costs. The balance is paid down each month by your surplus funds, but you already know that. But this is awesome, though, you proved my point! For the $10,000 to have equal costs on the mortgage and the HELOC, you'd have to pay take 35 years to pay off the HELOC. When you take 6-12 months depending on your discretionary income, you are obviously saving a ton vs what it would cost on the mortgage. I'm glad we could finally agree.
That was your takeaway? I have no words.
Your confidence in your ignorance is remarkable.
Likewise! Look, if you can ever explain this I'm all ears. Someone can make an additional payment each year - bi-weekly schedule, using a bonus or tax refund, inheritance, etc. and literally erase thousands and years off of their mortgage, you know..... that whole accepted mortgage wisdom thing.... but if they pay give or take $50/month to borrow the money to do it they are a moron that is somehow losing meowny and doesn't know it. You've been too busy doing calculations to actually address this statement at all this whole time. If I said that I got some inheritance from my parents and used it to erase / skip a bunch of mortgage interest, I'm sure it would be a slam dunk, but doing the same thing for $50/month somehow doesn't work out because..... calculations. Maverick calculated that after Goose died he'd be better off hanging back, but then he jumped in and saved the day, Chris. And he got the lesbian in the end. You're Cougar and quit in the first five minutes. 8===o {;}
:-D
Originally posted by @Jeremy Z.:
Originally posted by @Joshua S.:
Originally posted by @Eric M.:
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.
Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.
It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D
How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.
If you didn't take out the HELOC and instead just made those payments as additional principal toward you mortgage you would save the same amount. And then you could take out a HELOC later if needed.
Look, I'm not saying a HELOC is bad. They certainly serve a function. But they aren't the magic solution that they often get pitched as being.
And for the fifth time, just making additional principal payments is great, but most people don't have large chunks of money lying around or are purposely keeping them as emergency funds and don't want to lock them up in their mortgage.
I'm not saying it's magic, either, it's just a way to pay large chunks of your mortgage without using your emergency funds to do it. You could do the reverse and put chunks of your emergency money into your mortgage and use your HELOC as backup, but that defeats the purpose in my opinion.
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Eric M.:
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.
Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.
It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D
How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.
If you pay $50/month on a $10,000 HELOC, it will take you 431 months to pay off and will have paid a total of $21,550.
You've saved exactly nothing. Zilch. Zero. Nada. Goose egg.
How clever and sarcastic of you. Obviously I meant $50 in interest costs. The balance is paid down each month by your surplus funds, but you already know that. But this is awesome, though, you proved my point! For the $10,000 to have equal costs on the mortgage and the HELOC, you'd have to pay take 35 years to pay off the HELOC. When you take 6-12 months depending on your discretionary income, you are obviously saving a ton vs what it would cost on the mortgage. I'm glad we could finally agree.
Originally posted by @Eric M.:
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong.
Joshua, It's OK if you can't come up with your own spreadsheet, but you have to at least show us where Chris made an error in his calculations. It seems that you keep trying to use "logic" for your arguments instead of math. If you can't come up with your own calculations which show that your method is superior AND you cannot show us where Chris has made a mistake in his calculations, I cannot see how you expect anyone to be persuaded by your arguments.
It's because his calculations are correct in that they work out mathematically, but don't take into account how a mortgage actually works in the real world. Your lender calculates out the interest and "schedules" the payments before you close on the loan, but if you don't follow the actual schedule then you make changes to the amount of interest you pay. Everyone agrees on this if you tell someone you pay bi-weekly or make extra principal payments - paying your principal early saves / cancels out interest - woohoo, everyone knows that. In my case, I paid $10,000 and was able to save $21,000 on interest. The fact that I pay $50/month to my HELOC I guess just makes me a dummy, right? Or is it the fact that I don't have a mathematical equation to explain it that makes me a dummy? :-D
How about this. If I tell you that light travels faster than sound, but I don't know the equations to prove it on paper, I'm a dummy. But if I take my car down the road and slam the door and you see it before you hear it and you won't believe it without seeing the equations then you're the dummy. The equations are getting in the way of your real world understanding of what's happening when you pay principal early. You guys write out the equations and I'll save money, I'm fine with that. I actually just wanted to help people understand, but as I said originally, it's too bad people don't or refuse to understand. Have a good one.
Originally posted by @Jeremy Z.:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Steven D.:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Jeremy Z.:
"It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413."
You didn't skip 23 payments, you reallocated your payments to a HELOC, or you reallocated some money in savings that you were then not able to use elsewhere. You didn't get to magically skip out on payments.
Then you went on to say... "If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't"
That is a gross misrepresentation of what your supposed strategy does. Just flat out wrong.
Nope, you literally skip the interest payments. Look at your amortization table. It shows the break down of principal and interest for each payment on the schedule. The interest is calculated daily on your balance - in my case around $31/day or $931/month. When I pay principal ahead of time, I move up to that spot in the schedule where my new balance is, which literally - "MAGICALLY", if you like that word - lets you skip out on paying that interest. Where else would the interest savings come from when you pay additional principal?
In other words, when pretty much anyone including my mom will tell you that if you pay additional principal it will save you on interest, how do you think that's taking place if you're not skipping over those interest payments?
The error in your statement is that you don't "move up to that spot in the schedule where my new balance is". When you make extra principal payments, the loan recalculates your principal/interest split. It is true to say that more money goes towards principal, but it is incorrect to say you skip payments. When pay off principal using a HELOC you are simply moving money from one loan to another. Assuming the interest rate on the mortgage and HELOC were the same, the amount of interest you avoid on the mortgage will equal the amount of interest you pay on the HELOC.
In your example you claim to avoid $931 per month of interest by paying $25 on your HELOC. The problem is you only avoid $25 or that $931 and still pay the other $906. Plus you still pay the $25 on your HELOC, so at the end of the month, you have paid the same amount.
This is becoming a waste of time, so I'm just going to summarize and leave you guys to figure it out.
1. Your mortgage is designed to keep you in debt indefinitely and charge you as much as it can up front, so your scheduled payments are loaded with interest and do very little to bring your principal down early on. Again, nothing controversial here.
2. To combat the above, pretty much anyone will tell you to make additional principal payments to bring it down faster and save yourself on interest. Great, another slam dunk we can all agree on.
3. Maybe you have the money lying around and don't mind it being tied up in your mortgage. Throw it in there and save on interest and hope you don't have a family emergency or a job loss or something. Good job and good luck.
4. Maybe you have a rich uncle you can borrow from who wouldn't mind giving you a break if you run into an emergency. You borrow $10,000 from him and throw it on your mortgage. Remember, we all agreed this will save a bunch of interest and time off of your mortgage. Now you pay back $500 at a time and he doesn't even charge you interest. Again, great job and thank God for Uncle Morty.
5. Maybe you don't have a rich uncle or any savings. Or maybe you do have some savings but don't want it all tied up in your mortgage because you want to maintain liquidity. One thing you can do is get a HELOC and take $10,000 and dump it on your mortgage and AGAIN, we've all agreed this will save you a ton of time, interest, and keep your savings intact. But oops, the HELOC isn't Uncle Morty and charges interest. Well, 5% divided by 12 months is .0014666, so even if I carry that whole $10,000 and just pay against it, that's about $41.66/month in interest. Gosh darn it, I'll never get the whole thing paid off with interest charges THAT BIG. That's like $900 in mortgage money or it's like 17 in dog years. Or something.
6. Maybe what you can do is create a plan where you put all of your income and bills against the HELOC to keep your average daily balance lower and save on interest. If you can keep your ADB down around $6000, that 5% comes out to around $25/month. So, depending on which strategy you choose, $42/month on the high end will cost you $504 for the year or $25/month will be $300/year.
Now, look, you PAID to do this strategy vs using your savings or your uncle's money, but you paid a nominal amount of interest in order to keep your savings intact and stay liquid instead of just putting all your discretionary income into the mortgage and praying that you don't have an emergency. Call it liquidity insurance. You paid money to both pay down your mortgage quicker *AND* keep your savings intact in case you need it. You paid money to do both at the same time instead of one or the other. But at $3-$500/year to keep you liquid while you pay your mortgage down and save thousands and years off of your mortgage, holy cow, I'll take that deal every time. Have you ever paid in order to save or make money elsewhere? Do you belong to Costco? Do you own a rental property or a business? Do you own stocks? Ever taken a potential client out to dinner? Have you ever bought a more fuel efficient car? Have you ever made any investment at all, ever? Great, then you understand that you pay money and then have the chance to save or make money. Except this is guaranteed because your mortgage interest is definitely coming if you don't do something about it. <3
1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.
2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.
I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.
Seriously. Model it out. Prove us wrong. Share your Google doc with the group.
Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now... :-D
You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.
You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this.
I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.
Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".
200,000 loan, fixed 5%, 30 year
Month 1: interest is 200,000*(.05/12)=$833.33
Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.
Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.
And I'll say it yet again, prove your theory and show us the math.
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount?
Distributive property of multiplication: r * ( m + h ) = r * m + r * h
r = interest rate, m = mortgage balance, h = HELOC balance
200,000 loan. Use HELOC to pay down 10,000.
.05/12 * (200,000) = .05/12 * (190,000 + 10,000) = .05/12 * (190,000) + .05/12 * (10,000)
Again, I did this for years. For a salary. On billions of dollars of amortizations. If you can't prove it, but I can... Maybe that should tell you something?
Moving 10,000 to a HELOC incurs the same amount of interest on the combined principal of the two loans, as just keeping the the entire balance on the mortgage.
The only part of this strategy that "works" is gaming the average daily balance calculation on the HELOC. However, again, even the best examples yield like $5 savings per month. If you're HELOC rate is higher, it kills the whole thing.
I get it, you're a math wiz. So you should be able to answer my simple question. Do you owe the full $513,000, the balance plus all the interest that was originally scheduled or do you owe the balance?
You only owe the principal balance (plus a little interest), which proves the mortgage isn't "front-loaded" as you stated before.
The payments are front loaded in the sense that if you pay them as scheduled most of the payment goes toward interest and very little toward principal. I don't understand why this is up for debate. Maybe you don't like the term "front loaded", but your early payments mostly go toward interest and very little to principal if you prefer the longer explanation.
Anyway, you're right, you owe the principal balance because the interest hasn't had a chance to accrue. In other words, you "skip" or "cancel" these payments from occurring when you pay principal down early. My mortgage (and probably yours) accrues around $30/day for a total of $9XX.00/month in interest. When I pay principal early - ie. bring down my balance, I then pay less interest because my balance is lower and the interest associated with those payments I skipped never has a chance to accrue on my mortgage. This is true whether you win the lotto and pay it off completely or pay off $10,000 or $50,000 chunks at a time. You can't be charged interest on money that isn't on the balance anymore.
I'm sure everyone agrees that if you won the lotto and paid off the mortgage, you aren't paying the scheduled interest associated with the rest of the loan, because it was "scheduled", but didn't actually accrue. You paid it off before it could be charged. So, why is it such a leap to the idea that if you pay off a large chunk of the loan you also cancel those scheduled payments and skip down to the next payment associated with your new balance? What is everyone missing about this? I don't get it.
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Steven D.:
Originally posted by @Joshua S.:
Originally posted by @Chris May:
Originally posted by @Joshua S.:
Originally posted by @Joe Splitrock:
Originally posted by @Joshua S.:
Originally posted by @Jeremy Z.:
"It's an average of $931 per month I would have paid in interest and I skipped 23 payments, which comes out to $21,413."
You didn't skip 23 payments, you reallocated your payments to a HELOC, or you reallocated some money in savings that you were then not able to use elsewhere. You didn't get to magically skip out on payments.
Then you went on to say... "If you don't want to pay $35/month to save $21,000 per year on mortgage interest, then don't"
That is a gross misrepresentation of what your supposed strategy does. Just flat out wrong.
Nope, you literally skip the interest payments. Look at your amortization table. It shows the break down of principal and interest for each payment on the schedule. The interest is calculated daily on your balance - in my case around $31/day or $931/month. When I pay principal ahead of time, I move up to that spot in the schedule where my new balance is, which literally - "MAGICALLY", if you like that word - lets you skip out on paying that interest. Where else would the interest savings come from when you pay additional principal?
In other words, when pretty much anyone including my mom will tell you that if you pay additional principal it will save you on interest, how do you think that's taking place if you're not skipping over those interest payments?
The error in your statement is that you don't "move up to that spot in the schedule where my new balance is". When you make extra principal payments, the loan recalculates your principal/interest split. It is true to say that more money goes towards principal, but it is incorrect to say you skip payments. When pay off principal using a HELOC you are simply moving money from one loan to another. Assuming the interest rate on the mortgage and HELOC were the same, the amount of interest you avoid on the mortgage will equal the amount of interest you pay on the HELOC.
In your example you claim to avoid $931 per month of interest by paying $25 on your HELOC. The problem is you only avoid $25 or that $931 and still pay the other $906. Plus you still pay the $25 on your HELOC, so at the end of the month, you have paid the same amount.
This is becoming a waste of time, so I'm just going to summarize and leave you guys to figure it out.
1. Your mortgage is designed to keep you in debt indefinitely and charge you as much as it can up front, so your scheduled payments are loaded with interest and do very little to bring your principal down early on. Again, nothing controversial here.
2. To combat the above, pretty much anyone will tell you to make additional principal payments to bring it down faster and save yourself on interest. Great, another slam dunk we can all agree on.
3. Maybe you have the money lying around and don't mind it being tied up in your mortgage. Throw it in there and save on interest and hope you don't have a family emergency or a job loss or something. Good job and good luck.
4. Maybe you have a rich uncle you can borrow from who wouldn't mind giving you a break if you run into an emergency. You borrow $10,000 from him and throw it on your mortgage. Remember, we all agreed this will save a bunch of interest and time off of your mortgage. Now you pay back $500 at a time and he doesn't even charge you interest. Again, great job and thank God for Uncle Morty.
5. Maybe you don't have a rich uncle or any savings. Or maybe you do have some savings but don't want it all tied up in your mortgage because you want to maintain liquidity. One thing you can do is get a HELOC and take $10,000 and dump it on your mortgage and AGAIN, we've all agreed this will save you a ton of time, interest, and keep your savings intact. But oops, the HELOC isn't Uncle Morty and charges interest. Well, 5% divided by 12 months is .0014666, so even if I carry that whole $10,000 and just pay against it, that's about $41.66/month in interest. Gosh darn it, I'll never get the whole thing paid off with interest charges THAT BIG. That's like $900 in mortgage money or it's like 17 in dog years. Or something.
6. Maybe what you can do is create a plan where you put all of your income and bills against the HELOC to keep your average daily balance lower and save on interest. If you can keep your ADB down around $6000, that 5% comes out to around $25/month. So, depending on which strategy you choose, $42/month on the high end will cost you $504 for the year or $25/month will be $300/year.
Now, look, you PAID to do this strategy vs using your savings or your uncle's money, but you paid a nominal amount of interest in order to keep your savings intact and stay liquid instead of just putting all your discretionary income into the mortgage and praying that you don't have an emergency. Call it liquidity insurance. You paid money to both pay down your mortgage quicker *AND* keep your savings intact in case you need it. You paid money to do both at the same time instead of one or the other. But at $3-$500/year to keep you liquid while you pay your mortgage down and save thousands and years off of your mortgage, holy cow, I'll take that deal every time. Have you ever paid in order to save or make money elsewhere? Do you belong to Costco? Do you own a rental property or a business? Do you own stocks? Ever taken a potential client out to dinner? Have you ever bought a more fuel efficient car? Have you ever made any investment at all, ever? Great, then you understand that you pay money and then have the chance to save or make money. Except this is guaranteed because your mortgage interest is definitely coming if you don't do something about it. <3
1. Anyone who says interest is front-end loaded on a mortgage has a fundamental misunderstanding of financial math. It's patently false.
2. I challenge you to put your money where your mouth is. Open up a Google Sheet, model your strategy out over the entire lifecycle of both the HELOC and mortgage.
I'll say it again, the savings from this strategy boil down to this (assuming HELOC and mortgage are same interest rate): rate * (daily average balance - ending balance). Extrapolated out over the life of the loan, it's an insignificant amount.
Seriously. Model it out. Prove us wrong. Share your Google doc with the group.
Now I'm just curious - if you don't call it "front loaded with interest" when the majority of your early payments on a mortgage go toward interest, then what do you call it? Have you never looked at your amortization schedule? Are you saying that you pay the same amount of interest on each payment or something? I feel like I'm arguing about the sky being blue now... :-D
You do pay the same rate of interest because it is a fixed %. 4.5% interest rate is the same at the start of your loan as at the end (obviously assuming you have a fixed rate mortgage). The amount differs because of the amount borrowed, or remaining UPB.
You seriously don't know that your mortgage payments early on are mostly interest? No wonder no one can understand this, there's a lack of basic understanding about your mortgage payments. Look at your own amortization schedule and/or look at this article. You pay more interest early on, which is why it's hard to build equity in the beginning. I thought everyone knew this.
I'll say it again. Prove your theory in a spreadsheet you share with us. Continuing to not prove it tells me you can't.
Of course you pay more interest at the beginning... the balance on the loan is higher. It doesn't mean it's "front end loaded".
200,000 loan, fixed 5%, 30 year
Month 1: interest is 200,000*(.05/12)=$833.33
Month 120: balance is 163,078.28. interest is 163,078.28*(.05/12)=679.49.
Interest paid each month is ONLY a function of interest rate and remaining balance. Same formula for literally any loan. Amortization is NOT an interest calculation, it's a payment calculation.
And I'll say it yet again, prove your theory and show us the math.
You're right, I'm probably not good enough with spreadsheets to prove it in that way. But that doesn't mean I'm wrong. Anyway, this is good, we're finally getting somewhere. So you agree that having a lower balance means you are paying less interest, awesome. So every time you lower your balance significantly you are paying less interest going forward, you seem to get that. But what no one seems to understand is that by paying down your principal faster, you are skipping the associated interest payments. Think about it like this. Your payments are "scheduled", but the interest is not actually owed until it's accrued, do you agree with that? It accrues daily, correct? So, let's say you are three years into your loan and you originally owed ~$300,000 with a total interest cost of ~$213,000 over 30 years like what I was describing, but then you win the lottery and decide to pay it off. Do you owe $513,000, the full amount with interest, or do you pay off just the balance, maybe a little bit more as a payoff amount?
Distributive property of multiplication: r * ( m + h ) = r * m + r * h
r = interest rate, m = mortgage balance, h = HELOC balance
200,000 loan. Use HELOC to pay down 10,000.
.05/12 * (200,000) = .05/12 * (190,000 + 10,000) = .05/12 * (190,000) + .05/12 * (10,000)
Again, I did this for years. For a salary. On billions of dollars of amortizations. If you can't prove it, but I can... Maybe that should tell you something?
Moving 10,000 to a HELOC incurs the same amount of interest on the combined principal of the two loans, as just keeping the the entire balance on the mortgage.
The only part of this strategy that "works" is gaming the average daily balance calculation on the HELOC. However, again, even the best examples yield like $5 savings per month. If you're HELOC rate is higher, it kills the whole thing.
I get it, you're a math wiz. So you should be able to answer my simple question. Do you owe the full $513,000, the balance plus all the interest that was originally scheduled or do you owe the balance?