All Forum Posts by: Nick Moriwaki

I'm assuming you're saying if you pay extra to the mortgage and have a side HELOC. Yes, IF you took out a LOC you could replicate it but most people who are countering the strategy don't do this. So there's some reason that's keeping those out there who are saying "yes it works but it's exactly the same as having a 0 balance HELOC" from actually doing it.

As a side note, the way I do it is to swap the mortgage for HELOC entirely. So in that case there definitely is an opportunity cost even if you have a 0 balance HELOC because ultimately I'll be able to create more available balance in mine than someone who kept the mortgage and got a 2nd position HELOC.

Exactly.  There is an opportunity cost associated with paying additional to a mortgage. 

It’s funny because people will counter the strategy by saying just pay extra to the mortgage and then later say that there are better investments out there.  Both are true, but they can’t really be applied together.  

@Enrique Reyes

Whether or not a HELOC is interest only or not matters very little since you can always pull out whatever the additional required payment is right after you make your payment.

Wow!  What a well put together spreadsheet.  I ran the numbers and came up with pretty much the same results.

For those having trouble following Daniel's spreadsheet, I have a slightly simpler version here. My version, however, does not compare mortgage+additional to mortgage+additional using HELOC, but once you grasp the numbers you can take a look at Daniel's spreadsheet which shows they are pretty much the same. My spreadsheet also adds an additional strategy of substituting the mortgage for a HELOC. The concept is the same, but the results are different, depending on how much liquid cash you have on hand. No tricks here, just that you simply start off with a lower balance because you are able to dump that money in from the get go. The bank account column is very important, in my opinion, because it helps people see the full picture of what is going on financially. Without it, you might get lost in how much money you actually have on hand because you are only focusing on the savings and not realizing that the savings are being realized by re-allocating money towards the debt. Hope this helps.

If you're still following this - the HELOC and mortgage calculate the interest paid based on the balance of the loan. The only thing that muddies things from your view is that HELOC only charges you for the interest calculated and you decide how much extra to pay. The mortgage forces you to pay the same amount every month whether you owe $80K or $800K and pays the interest and whatever is left to principal. Another way to look at it is if you paid the same amount from your mortgage to a HELOC with the same balance and same APR, the result would be the same since the interest owed each month along the way would be same.

You made pretty much the exact point I was trying to get to. You don't want to completely pay off the HELOC, since then your money wouldn't be working for you. You want to keep utilizing the line of credit (which would maintain a higher balance). But that is not mutually exclusive to paying the debt off quicker with less interest (than someone else in the same situation).

So I guess now I'm starting to realize the potential misunderstanding going on here. The title of the forum is "pay mortgage faster" and critics immediately say there are better ways to invest money instead of paying off your mortgage faster without realizing that I am not saying to put your head down and only pay off the loan. Instead I'm saying that there's a way to use a HELOC that saves interest compared to paying off a mortgage (driving the principal down faster) and does not limit ones flexibility to use his/her money for future investments. It's the best of both worlds in my opinion. 100% utilization of income to maintain a lower average daily balance while allowing for instant refinancing (pulling out of the HELOC) whenever needed. Are we on the same page?

Joe, I'm not sure if you saw my other posts where I talk about substituting a first position HELOC for the mortgage but to prevent any miscommunication let's reiterate (I apologize in advance for the lengthy post):

1) I completely understand the math behind paying the same amount to the HELOC as to the mortgage. It yields similar results with the only difference being a greater total payment to the HELOC+mortgage and/or average daily balance manipulation based on when the payments are made to the HELOC.

2) My example is different in that instead of splitting the loan, it moves the whole balance into a HELOC which is revolving. What this allows me to do is to run all the finances through that LOC and utilize 100% of your income to affect the average daily balance in your favor (including whatever you have in savings). If you keep money in your bank account and pay only a portion of your excess income as an additional payment to the mortgage, it will quickly fall behind based on the difference in additional payments. A key distinction is the fact that the HELOC is revolving so the extra payments I have made are accessible to me immediately. Not so with the mortgage. This is why I like to refer to payments to the HELOC as stored money. It is stored there for as long as possible until you need it (bills), saving you the interest rate on your HELOC in the meantime. You can see an example of the results here.   Again, I reference #1, in that I know the savings is a result of putting extra money towards the principal, but essentially all you are doing is moving where you store your money (checking/savings vs HELOC).  

3) You can technically realize the same amount of savings while still keeping the mortgage by dumping 100% of your bank account and 100% of your excess income into the mortgage and use a LOC as a rainy day fund. A few people have pointed this out. However, there are 2 potential problems with this. One is that obtaining a second position HELOC large enough to use as a rainy day fund may be difficult (or not possible) without a decent amount of equity in the home. Secondly, there is an opportunity cost associated with only keeping your 2nd position LOC as your funds available. At no time will you have additional funds beyond the HELOC to put towards an investment if one presents itself (assuming you try and keep pace with the strategy I am suggesting). With the first position HELOC, everything you put in is accessible to take back out and utilize to make more money.

4) Yes, I understand there is a potential risk associated with HELOCs and the ability for banks to freeze them (or so I've heard). Admittedly, this doesn't make sense to me, since, as you pointed out, a HELOC is a loan with a different payment method than a mortgage. Assuming you've been paying your share on time, I don't see why the bank would freeze your LOC if it is getting its money. But if this is a risk, then you would have to weigh this out as you form your plan for paying off your debt. You can always sacrifice some of the savings to mitigate some of the risk.

I've tried to explain that the way I view this whole argument is from the standpoint of a competition where we are given the same scenario and and use these numbers to go back and forth with the ultimate goal of ending in the best possible financial situation.  Once we nail down the difference in the numbers, then we can discuss the risks associated with each scenario.  An easy example would be to compare making only minimum payments to your mortgage vs making additional payments of $X.  You could run the numbers until the mortgages are paid off and look at each persons financial situation.  Obviously making additional payments will put you better off from a money perspective since you saved a chunk of interest, but depending on the starting numbers you could argue a person putting additional payments to the mortgage may not leave themselves enough of an emergency fund in the event they need to use it.  Each scenario could have merit given certain starting financial situations and ones risk tolerance.    

Since Brent doesn't seem to want to work with me, I'll ask you the same question - what kinds of investments are we talking about when you say that "you would be better off to invest your money versus paying off low interest debt"?  (From my post to Brent) Are you taking half of your bank account and throwing it into the stock market and averaging X% ROI? Are you waiting 3 years and then putting $X down payment on investment property since you want $X for a rainy day fund?  The scenario I was using was $200K principal remaining @ 4%, $1K mortgage payment, $20K bank account and $1K monthly cash flow after paying the mortgage.  

Honestly, I don't follow very many topics on BP, but I don't think that should matter. I understand there is a large population out there looking to "get rich quick", but I don't think anyone here is directing what they're saying to them, yet I don't see you policing that. In fact, the whole premise behind using the HELOC is to use your additional income to pay down the balance.  So your continuous re-direction towards people with no income and no savings is extremely confusing.  

Like I said before, it’s easy to throw the blanket statement of “invest your money elsewhere”.  But this is easier said than done.  Say you tell me investing in property is better than paying my “low” percentage mortgage.  Well, with a $20K bank account and $1K/mo excess income, when is that going to happen while maintaining a rainy day fund?  This is why I’m asking for numbers.  To run out a scenario side by side and compare pros and cons.  But I can’t force you to come up with some numbers for me to use and anything I say you immediately shoot down as unreasonable.  

I only have an issue because I don’t see what I’m saying is any less applicable to anyone who you folks are directing your information to and I don’t see you folks saying their income needs to far exceed their expenses.   Yes, the strategy needs cash flow and some cash on the side, but do your investments not  require that?  If so, the same caveat would apply to anything you say as well.

The second part of what you said is what I'm trying to get at. Give me an example of what kind of "investment" you are talking about and we can get started. It's easy to throw around the generic "invest the money instead of paying down the mortgage" but I'm asking for something with numbers. Are you taking half of your bank account and throwing it into the stock market and averaging X% ROI? Are you waiting 3 years and then putting $X down payment on investment property since you want $X for a rainy day fund? What kind of investments are you saying are better. I believe you would say both of those are better. So throw out some hypothetical numbers and we can compare results.

And in no example have I given a HELOC interest rate lower than the mortgage. I've even modeled the interest rate climbing to 12%. So I'm not sure why the need to continuously point that out.

@Brent Coombs - I guess I don’t understand where you’re coming at this from.  I’m not preaching this as a bullet proof strategy for everyone.  I understand the limitations if someone doesn’t have money in their bank account or doesn’t have a decent monthly cash flow.  But I’m assuming most people here on this site aren’t scraping by living paycheck to paycheck.   

What I am trying to do is highlight the benefits in relation to other strategies out there.  As I mentioned multiple times, the scenarios I’m providing are in comparison to someone in the exact same starting position.  So maybe you do or maybe you don’t have $1000/mo cash flow and $20K in savings.  But if you did, what strategy would you employ in that exact situation.  It sure doesn’t sound like you would do what I’m doing so our paths would diverge from the start.

In your most recent post it sounds like you would invest at least some of that money (although I’m not sure where the $51/mo comes from).  But hey, in my example so can I.  So ultimately there is no advantage gained relative to my scenario.  

You hit it right on the head when you said you would come out much better financially at the end of that example, but I’m not getting that when you respond to me.  So far all I’ve gotten from you is that my example is invalid because it only applies to some people.