All Forum Posts by: Joshua S.

Overcoming the mindset of paying down mortgages is a dilemma for me. Considering the low interest rates I am going to refinance a couple of my SFH rentals and my primary residence. It makes financial sense to me to refi and use the proceeds to buy more and better assets. On the other hand its hard for me accept reduced cashflow and new 30 year terms. I understand all the reasons to use leverage and pull equity out. I have no desire to pay off any RE other than maybe my primary residence and even that goes against financial sense. Has anyone else had this struggle?

See, I don't really understand that mindset. Yes, I want assets and positive cash flow, especially passive income, but think about it like this. WHY do you want the cash flow? It's so that you have more coming in than going out, correct? So, if you pay off your residence (maybe not your rentals, because leverage is helpful there), then you have less going out, which is half of the wealth equation.

I want both - positive cash flow (passive income) AND low expenses, that's how you get out of the rat race. Over-leveraging just so you can get more cash flowing assets but keeping your expenses high can lead to disaster if market circumstances go bad on you. I feel like whittling down my expenses (especially interest) is a very safe investment and half of the wealth / early retirement equation, so I tend to put at least as much focus there. People always say 3-4% is cheap money, but you end up paying for two houses over 30 years and only getting one. That's not cheap to me! Anyway, good luck.

0 Votes

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

@Joshua S. Josh, looks like the biggest portion of your argument hinges on the average monthly balance, which is something I can't either prove or disprove. However, if you do go back to that model I've posted and plug $200k for loan amount, 4% interest, 30 year term. $5k monthly income, $3045.17 monthly non-mortgage expenses (leaves $1k disposable). Heloc at 5% with 10k to transfer and paycheck parking option as "yes". Also, adjust cell AA38 to $1k as your initial payment. According to the model, you will save $99,077 with the heloc option and $99,249 with the extra $1k of principal pmts monthly. 10.5 yrs to payoff with either scenario.

On a $200K mortgage @ 4% your interest on the first month is $666.67.

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."

Actually, if you were to apply your savings ($1k) as your initial payment (since you're counting $10k from heloc as your baseline), your first month's interest would've been $663.33 (calced off $199k) and second month's $659.03, so slightly better than your heloc example. You can plug this into the model in the far right table. The model was setup to take into account your disposable income ($1k) + the initial payment, but i've kept only the $1k in row 38 as a starting point.

Again, we're pinching pennies here.

Sorry, Victor, but that's not honest. I didn't make a $10K payment out of my income at the word go, I simply moved the debt from one vehicle to another. That's not a head start, it's just the beginning of the strategy. Your strategy is to go all month doing nothing and then putting your disposable income on the mortgage, so own it. If you need to move the goalposts like that maybe it's a sign that your strategy isn't as good as mine. We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES.

Unfortunately, this is the kind of disingenuous goalpost moving that always happens in these conversations. It's crazy to me that people can't just say, "Wow, I guess you're right, I never thought about it that way". Mind boggling, actually. Later.

i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...

"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."

but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.

again, if you feel like this strategy lets you get ahead, great. i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread. good luck.

"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."

You want to compare apples to apples and when I do that and prove the strategy has advantages you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say). Now you're saying, "No, no, in this example I make my payment UP FRONT... Yeah, that's what I meant!" You're inventing changes to the comparison to benefit your side of the argument. You might as well say that Spider-Man swings in and knocks me over so you can make your payment first. Have some respect for logic, for christ sake. How about I get laid off from my job as a giraffe semen collector the minute I make the first HELOC payment and you win because I have no income? Or how about you time travel and save the Titanic and use your presidential medal of honor to blind me and I accidentally send my payment to the north pole? You could at least be more creative / entertaining if you're just going to throw in random changes to cheat logic and try to save face.

"i'm simply arguing there is really no tangible benefit in using a heloc vs simply adding extra payments to your principal, as demonstrated in this thread."

You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.

Me: "4 + 4 = 8"

You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"

Have a good one.

I'm not sure who you're trying to be all cute for with your stream of consciousness, but it ain't working on me. If you can drop $10k from your heloc as your first payment, why can't I do the same with my "strategy"? You haven't provided a compelling argument that your "velocity" strategy is even marginally better that simply paying additional principal payments.

"...you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say)..."

Do you work for CNN, by chance? The only thing I said I can't prove/disprove was your daily average balance that gets charged interest. C'mon, man!

PAYING $1K of your INCOME to the mortgage.

MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.

These two items are the same thing? Is that what you're trying to say?

What's with the all-caps? Fun Friday night? Again, we were comparing paying extra vs heloc, so are you struggling with somebody having $1k to put up-front or what?

The caps are for EMPHASIS. Are you struggling with answering the question or what?

PAYING $1K of your INCOME to the mortgage.

MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.

It's a simple question. Are these two items the same?

See, you've backed yourself into a corner saying stupid stuff trying to save face and pretend you're right. Now it's getting worse because you can't be a man and admit that you're wrong.

Your choices are:

A. Be a man and admit that you're wrong. Using income and moving debt are obviously two very different things and you made a mistake. It happens.

B. Continue pretending that paying money out of your income and moving debt to another loan are the same thing and hope nobody except me can tell that you're an idiot (although I'm obviously making it very clear for them).

C. Play dumb and ask me about my caps and my Friday night.

D. Not come back because you're above it, which admits that I'm right without actually saying it.

Anyway, it's up to you. I was ready to agree to disagree, but you wanted to push the issue and call in Spider-Man and Santa Claus so here we are. Hopefully this is the end. If not and you want to continue pretending then I'll just make an up front payment of $1K in my strategy since we both have the same disposable income and you're back on the losing end. To be honest, I don't really care what you think, I just find it APPALLING that people can't admit MISTAKES and I feel sorry for anyone reading this and not knowing the difference between my KNOWLEDGE and your OPINION, so I'm trying to help them out. Have a good one.

1 Vote

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

On a $200K mortgage @ 4% your interest on the first month is $666.67.

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."

Again, we're pinching pennies here.

i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...

"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."

but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.

"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."

You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.

Me: "4 + 4 = 8"

You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"

Have a good one.

"...you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say)..."

Do you work for CNN, by chance? The only thing I said I can't prove/disprove was your daily average balance that gets charged interest. C'mon, man!

PAYING $1K of your INCOME to the mortgage.

MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.

These two items are the same thing? Is that what you're trying to say?

What's with the all-caps? Fun Friday night? Again, we were comparing paying extra vs heloc, so are you struggling with somebody having $1k to put up-front or what?

The caps are for EMPHASIS. Are you struggling with answering the question or what?

PAYING $1K of your INCOME to the mortgage.

MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.

It's a simple question. Are these two items the same?

0 Votes

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

On a $200K mortgage @ 4% your interest on the first month is $666.67.

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."

Again, we're pinching pennies here.

i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...

"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."

but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.

"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."

You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.

Me: "4 + 4 = 8"

You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"

Have a good one.

"...you say you can't prove or disprove it (code for the fact that I'm right and you don't know what to say)..."

Do you work for CNN, by chance? The only thing I said I can't prove/disprove was your daily average balance that gets charged interest. C'mon, man!

PAYING $1K of your INCOME to the mortgage.

MOVING $10K of your DEBT to another type of mortgage WITHOUT USING ANY INCOME.

These two items are the same thing? Is that what you're trying to say?

0 Votes

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

On a $200K mortgage @ 4% your interest on the first month is $666.67.

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."

Again, we're pinching pennies here.

i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know...

"We both know that anyone who pays extra principal doesn't calculate how much they'll have down the road and do it up front, they do so WHEN THEY HAVE THE EXTRA MONEY AFTER EXPENSES."

but somebody using a heloc would simply load it up with those expenses, right? your heloc gets paid down with the left-over cash, so you're simply dragging the eventual payoff out into the future.

"i mean if your strategy is threatened by $1k up-front payment from an alternative "strategy", i don't know..."

You're simply arguing a point that I proved wrong and you are unwilling to admit it. Fixed it for you.

Me: "4 + 4 = 8"

You: "Well, I added one in ahead of time, so actually, 4 + 4 = 9"

Have a good one.

0 Votes

Originally posted by @Victor S.:

On a $200K mortgage @ 4% your interest on the first month is $666.67.

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy."

Again, we're pinching pennies here.

0 Votes

Originally posted by @Joe Splitrock:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Thomas Rutkowski:

@Victor S. The original question that was posted was "Does Velocity Banking Work?". It was not asking for an opinion on the merits of paying down equity on a home. I find that when people are losing an argument, they like to change the subject. @Joshua S. did a great job explaining the strategy and proving that "velocity banking" does, in fact, work. Though I know that the debate will continue ;)

Whether or not it makes sense to pay down the equity has been beat to death in other threads.

except for there is no gained velocity vs simply adding extra pmts to your principal, as demonstrated in the spreadsheet i've linked in my post above. second post in this thread by @Wayne Brooks had succinctly summarized this whole debate into once sentence.

Maybe I'm missing it, but where is the spot in the spreadsheet about your income holding your mortgage balance down for part of the month until you need the money for bills? The HELOC / velocity strategy is to put all of your income on your mortgage, which brings down your average daily balance (and saves you on interest) until you need it.

I'm going to stop here and break that down step by step, because people either don't understand it or aren't listening or something.

Let's say you make your first payment from the HELOC to the mortgage and now your HELOC balance is $10K.

Now you get a paycheck and you put the whole thing on the $10K and your new balance is $7K.

Couple weeks go by and you get another paycheck and your new balance is $4K.

Now bills start coming in - pay the mortgage, pay the car, pay the cell, etc. - now your balance ends up at $9K for the month.

All total you took $1K off of the balance of the HELOC for the month (that's your disposable income), BUT you only pay interest on the average daily balance. That would be $7.5K NOT $9-$10K like someone who's making a lump sum payment to principal.

So, you're concerned with the differences vs just paying extra principal.

Difference #1: My money is on my mortgage balance all month long while you make a lump sum payments. Time is in my favor. The faster you pay off the principal the more you save.

Difference #2: I'm paying interest on a smaller balance than you are, so I'm saving more vs making lump sum payments. The amount is in my favor. You're paying interest on your entire balance and I'm using my income to hold the balance down, so I will pay less interest.

Difference #3: Because I'm paying less interest and paying principal faster, I'm also able to put MORE toward principal than you are over time. For example, in the first month because of my advantages I'm now ahead of you in the following month - let's say it's a small amount like $25 or something - that means my balance is $25 lower than yours. Obviously, since my balance is lower I'm paying even less interest than you are and able to put even more toward principal faster the following month and my advantage grows like that every month.

Where is any of this information in the spreadsheet? Am I missing it or is it just a part of the strategy you don't understand and haven't accounted for?

Your explanation reveals a misunderstanding of how interest is calculated. Using your numbers, let's do the math on interest on $7500 in a HELOC versus $9000 on a mortgage. Let's assume the interest rate is 3% on both the HELOC and your primary mortgage:

Here is one months interest calculation for both:

$7,500 @ 3% for one month is $18.75

$9,000 @ 3% for one month is $22.75

Monthly savings in this scenario is $4. You are not going to pay your mortgage off years earlier by paying an extra $4 per month. Where the fast pay down occurs is through extra principal. It is the extra cash you throw towards your HELOC (or primary mortgage) that accelerates the mortgage.

The true advantage of this method is you "trick" yourself into paying extra principal by running a negative balance and continually trying to pay it off. If an individual has good self discipline, you could just pay an extra $500 or whatever per month and pay it off just as fast. The problem is people don't have self discipline. They see a positive balance in their bank account and want to spend it.

So yes it does work, but not in the way people claim it works. It can also work out worse if the interest rate on the HELOC is higher than your primary mortgage. Even with daily calculated balances, you could end up paying more if the HELOC interest rate is higher.

$7,500 @ 4% for one month is $25

$9,000 @ 3% for one month is $22.75

Changing the rate to 1% higher on the HELOC causes the interest go to be higher, even though the balance carried is lower. In this example, you pay more interest every month.

Hi, Joe. Hopefully this will help us get on the same page, because I'm not sure what we're missing. We both have $1K disposable income to pay extra to principal.

On a $200K mortgage @ 4% your interest on the first month is $666.67.

On a $190K balance @ 4% my interest on the first month is $633.33.

On a $7.5K balance @ 5% my interest on the first month is $31.25.

$633.33 plus $31.25 is $664.58. So, I've saved $2 vs your strategy in the first month even though the HELOC rate is slightly higher.

LOL at $2, right?

Second Month

Your new balance is $198,711.84 - just lifting this off of bankrate's amo calculator and subtracting $1K extra principal payment. Interest $662.37 this month.

My new balance is $189,709.84. Interest is $632.37.

My new HELOC ADB is of course $6.5K ($1K less than last month). Interest at 5% this month is $27.08.

$632.37 plus $27.08 is $659.45 total interest this month. Around $3 saved vs your strategy.

Third Month

Your new balance is $197,419.38. Interest this month is $658.06.

My new balance is $189,386.38 - notice, my tiny $2-$3 savings is coming off of my principal. It's small in the beginning, but that can add up over time. Interest this month $631.29.

My new HELOC ADB is of course $5.5K. Interest is $22.92.

$631.29 plus $22.92 is $654.21. Saved about $4 this month vs your strategy.

So, I think we can agree I'm saving a dollar more than you each month that goes by unless I'm doing something wrong with my math - let me know. So, 3 years in, for example, I'm saving $37/month (the first $2 plus a dollar for every month) more than you on interest and that's also being applied to my principal. Again, $37 is not going to buy you a car or anything, but it's still an advantage vs just paying extra principal. Actually, if you plug in $37/month extra principal into bankrate your savings is a little over $11K, so it kinda does buy you a car. I'm not starting that calculation 3 years in, but I don't think it needs to be exact for you to see my point. :)

The thing is, the spirit of this strategy is that you're supposed to be able to do it if money is tight and disposable income is at a minimum, so comparing it to someone who has an extra $1K to put on the mortgage every month is out of bounds, in my opinion, but I'm humoring you, because you don't seem to be able to see any difference. Anyway, even when comparing to paying the equivalent amount of extra principal this strategy has advantages. I'm also not factoring in the idea that if we both have $5K in our checking accounts, for example, mine goes straight on my principal which gives me a boost / head start and yours is in your checking account waiting to pay bills. I left that out so we could compare apples to apples, but it's still an important advantage you can't account for. That's not money I'm taking out of savings or investments or something, it's just coming out of my checking / spending money.

So, think about it this way. Your strategy is always going to net you X amount of savings, which is limited by your income minus your bills.

My strategy is going to net me X + Y + Z savings - my disposable income PLUS my savings from the strategy itself (that is also applied to the balance and will amplify the effect) PLUS whatever is in my checking account that gives me a head start. Of course I'm going to come out ahead - my few dollars of savings comes off of my principal and makes my strategy MORE EFFECTIVE as time goes on. You are left paying X amount every month. Anyway, I'm guessing you'll move the goalposts and say that the $1K/month would do better in an index fund or something, but hopefully I'm wrong and you'll admit that there are advantages that have nothing to do with magic or tricks or anything. It's the simple mechanism of saving a little and putting that toward the balance, subsequently saving MORE, and so on until it snowballs into a tangible result.

0 Votes

Originally posted by @Victor S.:

Originally posted by @Joshua S.:

Originally posted by @Victor S.:

Originally posted by @Thomas Rutkowski:

Whether or not it makes sense to pay down the equity has been beat to death in other threads.

To clarify my last post, because my HELOC average daily balance is $7.5K, my total mortgage balance would be $97,500 that month.

Your balance would be $100K (or $99K if you want to suppose that you know what your disposable income is and pay it up front every month).

At 4%, I would pay $325 that month and you would pay $330-$333. A smaller difference than I had guessed, but it grows each month because I'm always paying less and less interest and more and more principal, which accelerates my results vs paying lump sum payments. Any of this accounted for?

the model, as presented in that spreadsheet, does not account for average daily balance. The stipulation was: "This simulates a person depositing their Monthly Income into the line of credit at the beginning of the month, paying Monthly Non-PI Expenses via a credit card, then using the line of credit to pay off the credit card AND the Monthly Loan Payment at the end of the month." The difference between heloc interest on $7.5k and $10k at 4% is a little over $8. Typically helocs carry a higher interest rate than your morgage and are variable in nature. What we're experiencing right now isn't a typical environment (my heloc rate is 3.75% currently). How would you model for interest rates that increase in the future? (not saying they will, but it is a possibility) Or how would you model for having more expenses for months where you daily average balance grows quite a bit? Obviously, an Excel model can't account for all these variables (or can it? throwing a challenge out there).

In your example, you say "At 4%, I would pay $325 that month and you would pay $330-$333." Does that include your heloc interest due on your balance and what heloc % are you using? I also don't know what principal amount you're basing those numbers on, as your typical mortgage payment stays fixed for the entire duration.

I might take a crack at doing a model with the average daily balance, but we'd have to make some of our assumption static (like heloc interest rates, not ever having an emergency, etc.). Again, I'm not saying this "strategy" doesn't work, but it shouldn't be this hard to show its alleged benefits vs simply paying more towards your mortgage monthly (maybe even daily, even you want to get this nuanced).

You'll have to correct me if I'm wrong, but here's how I see it working out. Let's say you and I have $200K @ 4% loans that started today. We both have the same $1K disposable income - in fact we have the same job and bills and everything. We're twin brothers, but I'm doing the velocity thing and you're paying extra principal via lump sum.

My balances are $190K and $10K. Yours is $200K.

We get a paycheck today. Mine brings me down to $190K and $7K. Yours goes into your checking account.

We get a paycheck in two weeks. Mine brings me down to $190K and $4K. Yours goes into your checking account.

Bills start to come in - mortgage, car, cell, electricity, etc. - my balances go up to $190K and $9K. Your checking account is $1K higher vs last month and you use it to make an extra principal payment.

My average daily balance on the HELOC (which is at 5%, btw) is $6.66K (part of the month at $7K / $4K / $9K divided by 3) and I get charged $27.77 ($6.66 ADB x .05 / 12) for that month. My mortgage interest on the $190K is $633.33 so I have a total of $661.10 in interest charges for the month. Your interest charges on the $200K are $666.66.

So, obviously, that's not a lot, but in one month I've saved $5 more than you've saved, but we are both supposedly doing the same thing - "paying extra principal".

Your month 2 balance is $198,711.84 ($199,711.84 minus the extra $1K you put on principal). You'll pay $663.37 in interest.

My month 2 balance is $189,706.84. Same as yours except $9K lighter, obviously, and minus the $5 I saved on the first month's interest, because that goes to my principal. I will pay $632.35 on my 4% loan and the average daily balance on the 5% HELOC is $5.66K (same as before except $1K less, obviously). That's $23.60 in interest. With my $632.35 that's a total of $655.95. This month I beat you by $7.42. Again, not a lot, but that's also 48% more than just one month ago.

So, after just a month or two I'm saving a little bit more than you because I have a lower average daily balance. I'm also not factoring in the idea that you still have $5K in your checking account, for example, but my $5K can go on my mortgage, because I don't really need a checking account anymore. We each have emergency funds and investments, but my checking account balance can go on my mortgage and yours is waiting around to pay bills.

I'm no math wizard, so when you work out this average daily balance math I will be interested to see if my savings increases by 48% relative to yours every month. If that's the case after 6 months I'm paying $52 less to interest than you are ($5 from the first month x 1.48 x 6 months) and the advantage is exponential. That jibes with my early post where I explained that over two years I've put an extra $50K on my mortgage just by changing the way I'm paying it. People always say, "Big deal, you saved $5", but It's not the $5, it's the fact that money I save on interest goes on my balance and then I'm paying EVEN LESS INTEREST and so on. It's a snowball effect from having a smaller and smaller balance relative to the other guy who's just "paying extra principal". In other words, ANY ADVANTAGE I have is amplified, because whatever I save by having a lower average daily balance and emptying my checking account onto the mortgage means that everything I save on interest is going to principal and I'm that much further ahead next month. There's no way to compete with that just by paying extra principal.