[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

Lafder
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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

ThePrince
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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

cherijoh
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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?

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