[Flawed?] Paying off mortgage in 5 years

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pepperz
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[Flawed?] Paying off mortgage in 5 years

Post by pepperz » Sat Feb 03, 2018 8:50 pm

A friend referred me to this article. He himself is executing this strategy and swears by it.

http://www.claytonmorris.com/blog/2015/ ... nja-tricks

Curious on the Boglehead POV about this strategy for someone who wants to make paying off their house a priority.

Is this a sound approach?

My initial thought is the risk of your HELOC debt getting “called in” if there’s another 2008 crash... but according to this article that would only be $10,000 at one time.

Curious to hear your thoughts.

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Alexa9
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Re: [Flawed?] Paying off mortgage in 5 years

Post by Alexa9 » Sat Feb 03, 2018 8:56 pm

A mortgage is a necessary evil. You pay for your house nearly twice over 30 years. It is a diversifier and it's not bad to have debt. Especially the people that locked in fixed interest rates below 3%. You have to have a roof over your head. Investing as much as possible is important when you're young but so is home ownership. I don't think paying off your mortgage super early is a good strategy but it may provide peace of mind. If you can max out your tax advantaged accounts and pay your mortgage early then go for it. This is possible if you make a good income and/or live in a starter house.

madbrain
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Re: [Flawed?] Paying off mortgage in 5 years

Post by madbrain » Sat Feb 03, 2018 9:00 pm

pepperz wrote:
Sat Feb 03, 2018 8:50 pm
A friend referred me to this article. He himself is executing this strategy and swears by it.

http://www.claytonmorris.com/blog/2015/ ... nja-tricks

Curious on the Boglehead POV about this strategy for someone who wants to make paying off their house a priority.

Is this a sound approach?

My initial thought is the risk of your HELOC debt getting “called in” if there’s another 2008 crash... but according to this article that would only be $10,000 at one time.

Curious to hear your thoughts.
I stopped reading at 1.99% HELOC. Have never seen one of those, certainly not anywhere near the amount of our mortgage.

Actually got a solicitation in the mail from Third federal for prime minus .76%, which would be 3.74% today. My current untapped HELOC is at prime (4.5%). Called them and it turns out the max they can do in California is $150,000 HELOC. My current HELOC is at $190,000 . I have over one million in equity, but they said they would only go in second position, not third position. Also, our first mortgage is at 3.375% fixed, so 3.74% would still be a higher rate, so this wouldn't help pay it off quicker.

Most HELOCs that have zero closing costs also have some kind of penalty if you close it within the first few years.

That said, if 1.99% HELOCs are really out there, I'm all ears. But note that the article is from 2015 and rates have gone up since, so I doubt it.

Nate79
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Re: [Flawed?] Paying off mortgage in 5 years

Post by Nate79 » Sat Feb 03, 2018 9:05 pm

This is one of those old scams to supposedly pay off your mortgage faster. All it does is move the balance from one loan to another. The loan only pays down when you actually lay off principle, no matter how many times you move it around. The old scam was you had to buy in to learn the strategy.

This scam appears to be coming back as it has been on a number of recent financial podcasts warning people about it.

Mr.Wu
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Re: [Flawed?] Paying off mortgage in 5 years

Post by Mr.Wu » Sat Feb 03, 2018 9:08 pm

So what’s the difference between this and saving every single penny and pay down mortgage balance? Swap the high mortgage rate with a low heloc rate? I may be wrong but I thought heloc rates are usually no lower.

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Watty
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Re: [Flawed?] Paying off mortgage in 5 years

Post by Watty » Sat Feb 03, 2018 9:25 pm

It is all smoke and mirrors and ignores that without the HELOC you would just quickly save up $10,000 in the checking account that you could use to pay down the loan.

If you substitute a 0% interest credit card with a $10,000 balance instead of the HELOC and you have a mortgage that is at 4% then the maximum savings would be $400 a year.

Nutmeg
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Re: [Flawed?] Paying off mortgage in 5 years

Post by Nutmeg » Sat Feb 03, 2018 9:25 pm

The primary flaw in the Clayton Morris example is that it assumes an outstanding mortgage loan of $100,000, a monthly after-tax paycheck of $3,000, and total monthly expenses including the mortgage payment of only $250, an impossible combination.

Well, sure, if I had an extra $2,750 per month to spend, I could pay off my $100,000 mortgage in fewer than 5 years, and I wouldn't have to get a HELOC to do it!

The monthly expense assumption occurs in the 11th paragraph. The assumption must include the mortgage payment because the entire paycheck was deposited in this account so there are no other funds to make the payment. The $10,000 payment toward the mortgage loan was specified to go toward principal. However, this assumption is unreasonable because the mortgage payment on a $100,000 30-year loan at 3.92 percent interest (the example that popped up on a google search) is $473.

Furthermore, the example doesn't account for paying the interest on the HELOC.

Also, the article misspells "amortization."

Yes, this idea is deeply flawed.

raisinsaregrapes
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Re: [Flawed?] Paying off mortgage in 5 years

Post by raisinsaregrapes » Sat Feb 03, 2018 11:47 pm

The only way to pay off the mortgage faster is to pay off the principle on top of your mortgage payments. If you can't do it the simple way, you wont be able to do it with smoke and mirrors either.

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BolderBoy
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Re: [Flawed?] Paying off mortgage in 5 years

Post by BolderBoy » Sun Feb 04, 2018 12:05 am

pepperz wrote:
Sat Feb 03, 2018 8:50 pm
A friend referred me to this article. He himself is executing this strategy and swears by it.

http://www.claytonmorris.com/blog/2015/ ... nja-tricks

Curious on the Boglehead POV about this strategy for someone who wants to make paying off their house a priority.
Rule: "You can't borrow your way out of debt."
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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ray.james
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Re: [Flawed?] Paying off mortgage in 5 years

Post by ray.james » Sun Feb 04, 2018 1:59 am

This is no different than rotating balances on credit cards to pay off education loans or something similar. However while that/this would save interest, the pay off date does not move that much lower(often in few months than years due to lower interest). However the risk adds up on cash flow.

Let me show an example:
50K education at 5% interest 10 year term. Person A applies for 1/2 credit cards with 0% apr but 2% balance transfer for 10K limit.(Let us use 2 for our example.)

CASE 1:

Loan payment every month: 530.33

Case 2:
New payment schedule:
Loan payment 520.33
CC1: 416.33 (10000 / 24 )
CC2: 416.33 (10000/24)

Loan pay off time: ~ 4 years 8 months (2* 9800 payment applies early at month number two. $200 goes for balance transfer fee)
Total payment per month: 1353.

Alternate result:
Extra payment per month = 1353 - 520.33 = 832.66 (*** but this applies only until 24 months to keep with above example)
Loan payoff time: 5 years and 4 month

So with out doing the credit card trick, the user would pay off he loan in 6 additional months, He does need to assume, credit card closing risk, surplus cash flow risk etc.,
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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Re: [Flawed?] Paying off mortgage in 5 years

Post by Lafder » Sun Feb 04, 2018 2:02 pm

The example is ridiculously impossible.

HELOC payments go to mortgage.

HELOC gets paid off with paychecks.

No explanation as to how bills and expenses of living are paid when all paychecks are going to pay off the HELOC.

DO you have extra $ that can go towards your mortgage? After maxing retirement accounts, paying off mortgage can be a good thing to do with extra $ depending on if you have any other debt.

lafder

chevca
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Re: [Flawed?] Paying off mortgage in 5 years

Post by chevca » Sun Feb 04, 2018 2:22 pm

Lafder wrote:
Sun Feb 04, 2018 2:02 pm
No explanation as to how bills and expenses of living are paid when all paychecks are going to pay off the HELOC.
Well, from the article....
Again for the sake of argument let's say the bank gave you $24,000 to work with. Most banks will give you a checkbook and debit card associated with this new account. You're going to need this checkbook for step three.

Step Two: Treat this new bank account as your primary bank account. That means you're going to do everything with this account. You'll use this account to set up your direct deposit at work, pay for groceries, pay for gas, everything. Forget about your old bank account. Pretend it longer exists.
:wink:

Basically you're living off the HELOC and what's left over pays down the balance. I.E. what you could have saved or paid down the mortgage with on your own.

Someone at work was telling me about this tactic years ago and I was like, what?? :confused

SimonJester
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Re: [Flawed?] Paying off mortgage in 5 years

Post by SimonJester » Sun Feb 04, 2018 4:19 pm

Its all smoke and mirrors, just budget extra payments to principal on your mortgage and forget the HELOC. The HELOC likely comes with fees and perhaps a variable APR. the HELOC is completely unnecessary...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

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Re: [Flawed?] Paying off mortgage in 5 years

Post by ThePrince » Sun Feb 04, 2018 4:46 pm

BolderBoy wrote:
Sun Feb 04, 2018 12:05 am
pepperz wrote:
Sat Feb 03, 2018 8:50 pm
A friend referred me to this article. He himself is executing this strategy and swears by it.

http://www.claytonmorris.com/blog/2015/ ... nja-tricks

Curious on the Boglehead POV about this strategy for someone who wants to make paying off their house a priority.
Rule: "You can't borrow your way out of debt."
+1

LateStarter1975
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Re: [Flawed?] Paying off mortgage in 5 years

Post by LateStarter1975 » Sun Feb 04, 2018 5:10 pm

raisinsaregrapes wrote:
Sat Feb 03, 2018 11:47 pm
The only way to pay off the mortgage faster is to pay off the principle on top of your mortgage payments. If you can't do it the simple way, you wont be able to do it with smoke and mirrors either.
+1
KISS (Keep it Simple Sweetheart)
Debt is dangerous...simple is beautiful

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Re: [Flawed?] Paying off mortgage in 5 years

Post by cherijoh » Sun Feb 04, 2018 7:53 pm

pepperz wrote:
Sat Feb 03, 2018 8:50 pm
A friend referred me to this article. He himself is executing this strategy and swears by it.

http://www.claytonmorris.com/blog/2015/ ... nja-tricks

Curious on the Boglehead POV about this strategy for someone who wants to make paying off their house a priority.

Is this a sound approach?

My initial thought is the risk of your HELOC debt getting “called in” if there’s another 2008 crash... but according to this article that would only be $10,000 at one time.

Curious to hear your thoughts.
I never heard of using a HELOC as your primary checking account. I think it would only work if their was a decent differential between your mortgage rate and what you were offered as a HELOC. Also, you would need to have spare cash floating around in your checking account. If you immediately spend your paycheck to pay bills without much left over before the next paycheck I don't think it would have the desired effect.

However, I do think a HELOC will work to finish off a mortgage when it is a small proportion of the home value but it doesn't make sense to refinance. My brother bought a house in 2006 and wanted to pay it off fairly quickly after he sold his previous townhouse. He lives in a state where it is quite expensive to refinance (with lots of fixed $$ fees), so he was bemoaning that he really couldn't take advantage of the drop in interest rates after the recession - too much of the potential savings would have been eaten up by closing costs on a refi. Since by that time he had quite a bit more equity in the house than his remaining balance, I suggested getting a HELOC and using that to retire the mortgage. That worked like a charm since the HELOC was at a much lower interest rate and the only cost associated with getting it was an appraisal on the house. (Had interest rates done something crazy, he could have sold taxable investments to retire the HELOC).

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Earl Lemongrab
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Re: [Flawed?] Paying off mortgage in 5 years

Post by Earl Lemongrab » Sun Feb 04, 2018 9:37 pm

The even better strategy would be to pay off the mortgage on schedule, investing the extra.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Lyonsguy
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Re: [Flawed?] Paying off mortgage in 5 years

Post by Lyonsguy » Sun Feb 04, 2018 9:54 pm

Alexa9 wrote:
Sat Feb 03, 2018 8:56 pm
Investing as much as possible is important when you're young but so is home ownership. I don't think paying off your mortgage super early is a good strategy but it may provide peace of mind.
.

This exactly. Peace of mind vs. higher historical returns. I really wanted to pay off my mortgage early and loved seeing the interest I saved each month paying the next month’s extra principal. But now that my mortgage is paid off lookin back I Would have been better off investing for the last 10 years. But in a different decade that might have been a different story. In an expensive market that we appear to be in right now, who knows putting money in the mortgage might better - again, who knows?

pepperz
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Using HELOC to pay off mortgage in 7 years?

Post by pepperz » Mon Jun 18, 2018 2:27 pm

[Thread merged into here, see below. --admin LadyGeek]

I have a friend who is doing this now and the idea is interesting.

Here’s the gist:

1) Take out a HELOC on the equity in your home

2) Write a check for $10K to your mortgage (100% of that goes to principle)

3) Make your paycheck / income direct deposit into your HELOC account

4) Charge all monthly expense to the HELOC account (using a credit card to float the balance first is even better)

5) When your HELOC account balance gets down to zero, pay another $10K to your mortgage.

Repeat steps until mortgage is paid off.

Assumptions:

You have at least 10% equity in your home.

Your monthly income is more than your expenses. (The more the better.)

The Question:

Is this a valid solution assuming your goal is to pay your mortgage principle down as fast as possible and pay the least amount of interest within that time?

Obviously life can get in the way... ie the economy tanks and bank calls in your HELOC... that’s why you make sure you don’t borrow over $10K at a time. (So you can pay it all off from emergency funds if necessary.)

This is obviously using further debt (credit cards + HELOC) to arbitrage however considering the way mortgages are amortized, seems like a super smart thing to do if your goal is paying off mortgage as fast as possible.

Thoughts here?

BackOfTheNet
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Re: Using HELOC to pay off mortgage in 7 years?

Post by BackOfTheNet » Mon Jun 18, 2018 2:42 pm

I guess I don't follow how this is any better than just occasionally paying an additional $10k towards your mortgage.

HELOC interest rate is around 5.5%. Mortgage interest rate is ~4.0%.

Why would someone borrow $10k at 5.5% to pay down 4.0%? Is the idea that your paycheck starts "earning" 5.5% as soon as it is deposited in your HELOC?

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Re: Using HELOC to pay off mortgage in 7 years?

Post by Dottie57 » Mon Jun 18, 2018 2:47 pm

BackOfTheNet wrote:
Mon Jun 18, 2018 2:42 pm
I guess I don't follow how this is any better than just occasionally paying an additional $10k towards your mortgage.

HELOC interest rate is around 5.5%. Mortgage interest rate is ~4.0%.

Why would someone borrow $10k at 5.5% to pay down 4.0%? Is the idea that your paycheck starts "earning" 5.5% as soon as it is deposited in your HELOC?
+1

Pay down the money with extra dollars each month. It really works to payoff the mortgage sooner.

FlyAF
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Re: Using HELOC to pay off mortgage in 7 years?

Post by FlyAF » Mon Jun 18, 2018 2:49 pm

It doesn't even make sense, much less seem like a super smart way to pay off your mortgage as fast as possible.

riverguy
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Re: Using HELOC to pay off mortgage in 7 years?

Post by riverguy » Mon Jun 18, 2018 2:52 pm

Makes no sense. You are actually probably paying more interest this way. Lack of understanding on how interest is calculated on a mortgage and why you pay a lot of interest in the early years.

BackOfTheNet
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Re: Using HELOC to pay off mortgage in 7 years?

Post by BackOfTheNet » Mon Jun 18, 2018 3:13 pm

Instead of making it more complicated with a HELOC, here is a comparison between paying an extra $30,000 per year vs $2,500 per month on a mortgage. This is a $200,000 loan with a 4% rate.

Pretty close to the same, and as you would think, paying the $30,000 in one lump sum does save some interest. BUT this ignores the cost of borrowing the $30,000 from a HELOC.

Image

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Nate79
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Re: Using HELOC to pay off mortgage in 7 years?

Post by Nate79 » Mon Jun 18, 2018 3:13 pm

This is a long known scam where you pay someone to teach you this idea which played on the average persons inability to do basic math and their ignorance about how a mortgage and helix works.

No it is not a good idea.....

ResearchMed
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Re: Using HELOC to pay off mortgage in 7 years?

Post by ResearchMed » Mon Jun 18, 2018 3:27 pm

Nate79 wrote:
Mon Jun 18, 2018 3:13 pm
This is a long known scam where you pay someone to teach you this idea which played on the average persons inability to do basic math and their ignorance about how a mortgage and helix works.

No it is not a good idea.....
I'm still scratching my head about why this is even supposed to work!?

Unless the HELOC is no-interest, or perhaps ultra-low interest, why would someone think this even "might" this work?

And if the HELOC is higher interest rate, then... what is the presumed (albeit incorrect) logic that would "suggest" this could save money?

I'm lost.

RM
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Halicar
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Re: Using HELOC to pay off mortgage in 7 years?

Post by Halicar » Mon Jun 18, 2018 3:40 pm

OP posted the same thing a couple of months ago and everyone said it was a scam. I suspect that OP isn't really asking in good faith, and is actually trying to scam people.

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Re: Using HELOC to pay off mortgage in 7 years?

Post by Nate79 » Mon Jun 18, 2018 3:58 pm

Halicar wrote:
Mon Jun 18, 2018 3:40 pm
OP posted the same thing a couple of months ago and everyone said it was a scam. I suspect that OP isn't really asking in good faith, and is actually trying to scam people.
Strange coincidence?

viewtopic.php?f=2&t=240441&p=3761190#p3761190

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Re: Using HELOC to pay off mortgage in 7 years?

Post by delamer » Mon Jun 18, 2018 4:04 pm

ResearchMed wrote:
Mon Jun 18, 2018 3:27 pm
Nate79 wrote:
Mon Jun 18, 2018 3:13 pm
This is a long known scam where you pay someone to teach you this idea which played on the average persons inability to do basic math and their ignorance about how a mortgage and helix works.

No it is not a good idea.....
I'm still scratching my head about why this is even supposed to work!?

Unless the HELOC is no-interest, or perhaps ultra-low interest, why would someone think this even "might" this work?

And if the HELOC is higher interest rate, then... what is the presumed (albeit incorrect) logic that would "suggest" this could save money?

I'm lost.

RM
Seconded.

Somehow this is ignoring that you pay interest on the HELOC balances.

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Re: Using HELOC to pay off mortgage in 7 years?

Post by alex_686 » Mon Jun 18, 2018 4:08 pm

BackOfTheNet wrote:
Mon Jun 18, 2018 2:42 pm
I guess I don't follow how this is any better than just occasionally paying an additional $10k towards your mortgage.
It is a behavioral trick to trick yourself into saving more.

It is a little like that old trick where you pay for everything using dollar bills. Even if you buy a five cent package of chewing gum, use the dollar bill. Save all of the change until the end of the year, and then marvel at the large lump sum you get to put into savings.

It is not optimal but if it trick you need to trick yourself into savings then it works.

ResearchMed
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Re: Using HELOC to pay off mortgage in 7 years?

Post by ResearchMed » Mon Jun 18, 2018 4:10 pm

delamer wrote:
Mon Jun 18, 2018 4:04 pm
ResearchMed wrote:
Mon Jun 18, 2018 3:27 pm
Nate79 wrote:
Mon Jun 18, 2018 3:13 pm
This is a long known scam where you pay someone to teach you this idea which played on the average persons inability to do basic math and their ignorance about how a mortgage and helix works.

No it is not a good idea.....
I'm still scratching my head about why this is even supposed to work!?

Unless the HELOC is no-interest, or perhaps ultra-low interest, why would someone think this even "might" this work?

And if the HELOC is higher interest rate, then... what is the presumed (albeit incorrect) logic that would "suggest" this could save money?

I'm lost.

RM
Seconded.

Somehow this is ignoring that you pay interest on the HELOC balances.
Also, IF we made an extra payment (on any loan, mortgage, HELOC etc.), that wouldn't stop the need for the regular monthly payments.

So... one would continue to make regular mortgage payments, and ALSO be paying off the HELOC (so one could rinse and repeat)??

Well, in that case, SURE... because one is making TWO payments each month: The regular mortgage payment, and then paying down the HELOC.
In that case, just double the payments for the regular mortgage, and Voila! It's paid off sooner.
That's some magic :annoyed

Or did I miss something (again) about this scam plan?

RM
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Re: [Flawed?] Paying off mortgage in 5 years

Post by LadyGeek » Mon Jun 18, 2018 6:51 pm

pepperz - It's best to keep all the information in one spot. I merged your update back into the original thread. Same topic, different payoff end date.
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pepperz
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Re: Using HELOC to pay off mortgage in 7 years?

Post by pepperz » Mon Jun 18, 2018 7:03 pm

The way I understand it, your Mortgage interest is amortized over the term of the loan but your HELOC interest is not.

That means anything you pay into principle sooner on your mortgage has a huge difference... even if you are temporarily borrowing at a higher percentage for a short time on your HELOC.

That's my explanation for it at least.
BackOfTheNet wrote:
Mon Jun 18, 2018 2:42 pm
I guess I don't follow how this is any better than just occasionally paying an additional $10k towards your mortgage.

HELOC interest rate is around 5.5%. Mortgage interest rate is ~4.0%.

Why would someone borrow $10k at 5.5% to pay down 4.0%? Is the idea that your paycheck starts "earning" 5.5% as soon as it is deposited in your HELOC?

pepperz
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Re: Using HELOC to pay off mortgage in 7 years?

Post by pepperz » Mon Jun 18, 2018 7:05 pm

LOL your post cracked me up.

The only reason I repeat myself by posting again is because I remain curious, especially as I continue to speak with my friend who is in the middle of implementing this and sharing his experience with me.
Halicar wrote:
Mon Jun 18, 2018 3:40 pm
OP posted the same thing a couple of months ago and everyone said it was a scam. I suspect that OP isn't really asking in good faith, and is actually trying to scam people.

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Re: Using HELOC to pay off mortgage in 7 years?

Post by pepperz » Mon Jun 18, 2018 7:09 pm

I think your mortgage being amortized is what makes the difference. Even if your HELOC rate is higher than your mortgage, your principle is being reduced way faster and the amount you borrowed from HELOC is getting paid back faster.

That's how I think it would be explained at least.
delamer wrote:
Mon Jun 18, 2018 4:04 pm
ResearchMed wrote:
Mon Jun 18, 2018 3:27 pm
Nate79 wrote:
Mon Jun 18, 2018 3:13 pm
This is a long known scam where you pay someone to teach you this idea which played on the average persons inability to do basic math and their ignorance about how a mortgage and helix works.

No it is not a good idea.....
I'm still scratching my head about why this is even supposed to work!?

Unless the HELOC is no-interest, or perhaps ultra-low interest, why would someone think this even "might" this work?

And if the HELOC is higher interest rate, then... what is the presumed (albeit incorrect) logic that would "suggest" this could save money?

I'm lost.

RM
Seconded.

Somehow this is ignoring that you pay interest on the HELOC balances.

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Re: Using HELOC to pay off mortgage in 7 years?

Post by Nate79 » Mon Jun 18, 2018 7:50 pm

pepperz wrote:
Mon Jun 18, 2018 7:09 pm
I think your mortgage being amortized is what makes the difference. Even if your HELOC rate is higher than your mortgage, your principle is being reduced way faster and the amount you borrowed from HELOC is getting paid back faster.

That's how I think it would be explained at least.
delamer wrote:
Mon Jun 18, 2018 4:04 pm
ResearchMed wrote:
Mon Jun 18, 2018 3:27 pm
Nate79 wrote:
Mon Jun 18, 2018 3:13 pm
This is a long known scam where you pay someone to teach you this idea which played on the average persons inability to do basic math and their ignorance about how a mortgage and helix works.

No it is not a good idea.....
I'm still scratching my head about why this is even supposed to work!?

Unless the HELOC is no-interest, or perhaps ultra-low interest, why would someone think this even "might" this work?

And if the HELOC is higher interest rate, then... what is the presumed (albeit incorrect) logic that would "suggest" this could save money?

I'm lost.

RM
Seconded.

Somehow this is ignoring that you pay interest on the HELOC balances.
Why do you think a HELOC is not amortized? This discussion hinges around understanding the very basics of how a loan payment is calculated and how interest on each loan is calculated.

This age old scam relies on the fact that most people, unfortunately have no clue how a basic mortgage (or HELOC) even works.

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Re: [Flawed?] Paying off mortgage in 5 years

Post by ConcernedKid » Mon Jun 18, 2018 8:20 pm

This method works, but there's no magic behind it. A HELOC allows you to put the money you would normally keeps as cash reserves (as an EF, etc.) towards your mortgage. This method works the exact same way as putting all of your extra monthly income towards your mortgage. Most of us wouldn't do that because we need a cushion. The HELOC serves as the cushion you need to enable you to put every extra dollar towards the mortgage. You can also use a large chunk of the HELOC to recast your mortgage but continue making the original payment to pay down the mortgage quicker.

At the end of the day, you only pay off your debt by the amount of money you apply to the principal. At the end of the day, the only non-debt money available to pay down the principal (without raiding investments) is from your income. This method just allows you to use a HELOC as the safety net to replace your emergency fund while you are throwing all extra money towards your mortgage and/or HELOC. There's nothing magic about it. You certainly shouldn't pay anyone to set this up for you.

If you're interested in this method, scout your local credit unions for the best HELOC rates. Intro rates for the first year can be found in the 1.99% to 3% range in most areas. After that, you're looking at prime rates just under 5% (for now). This method only makes sense if you've decided you want to pay off your mortgage as soon as possible and you wouldn't throw all of your extra money at your mortgage without the reserve liquidity of a HELOC.

BackOfTheNet
Posts: 179
Joined: Mon Nov 30, 2009 9:24 pm

Re: Using HELOC to pay off mortgage in 7 years?

Post by BackOfTheNet » Tue Jun 19, 2018 8:35 am

pepperz wrote:
Mon Jun 18, 2018 7:09 pm
I think your mortgage being amortized is what makes the difference. Even if your HELOC rate is higher than your mortgage, your principle is being reduced way faster and the amount you borrowed from HELOC is getting paid back faster.
Beating a dead horse at this point but ... what? So you are claiming one could take out a HELOC at 20% interest to pay off a mortgage at 4%.....and SAVE money???

How does this even begin to sound reasonable?

pepperz
Posts: 222
Joined: Sun Jan 24, 2016 7:13 pm

Re: Using HELOC to pay off mortgage in 7 years?

Post by pepperz » Tue Jun 19, 2018 9:14 am

No, that’s not what I’m claiming. That was a response to someone who mentioned HELOC rates may even be slightly higher than a fixed mortgage at the moment.
BackOfTheNet wrote:
Tue Jun 19, 2018 8:35 am
Beating a dead horse at this point but ... what? So you are claiming one could take out a HELOC at 20% interest to pay off a mortgage at 4%.....and SAVE money???

How does this even begin to sound reasonable?

pepperz
Posts: 222
Joined: Sun Jan 24, 2016 7:13 pm

Re: Using HELOC to pay off mortgage in 7 years?

Post by pepperz » Tue Jun 19, 2018 9:17 am

I agree there is no magic behind this, especially if you are going to pay someone to teach you how to do it, which is not a consideration for me.

I was just curious behind whether the math works out to your advantage at end of the day.
Nate79 wrote:
Mon Jun 18, 2018 7:50 pm
pepperz wrote:
Mon Jun 18, 2018 7:09 pm
I think your mortgage being amortized is what makes the difference. Even if your HELOC rate is higher than your mortgage, your principle is being reduced way faster and the amount you borrowed from HELOC is getting paid back faster.

That's how I think it would be explained at least.
delamer wrote:
Mon Jun 18, 2018 4:04 pm
ResearchMed wrote:
Mon Jun 18, 2018 3:27 pm
Nate79 wrote:
Mon Jun 18, 2018 3:13 pm
This is a long known scam where you pay someone to teach you this idea which played on the average persons inability to do basic math and their ignorance about how a mortgage and helix works.

No it is not a good idea.....
I'm still scratching my head about why this is even supposed to work!?

Unless the HELOC is no-interest, or perhaps ultra-low interest, why would someone think this even "might" this work?

And if the HELOC is higher interest rate, then... what is the presumed (albeit incorrect) logic that would "suggest" this could save money?

I'm lost.

RM
Seconded.

Somehow this is ignoring that you pay interest on the HELOC balances.
Why do you think a HELOC is not amortized? This discussion hinges around understanding the very basics of how a loan payment is calculated and how interest on each loan is calculated.

This age old scam relies on the fact that most people, unfortunately have no clue how a basic mortgage (or HELOC) even works.

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