HELOC to Pay off Mortgage

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raamakoti
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HELOC to Pay off Mortgage

Post by raamakoti » Thu Sep 27, 2018 8:24 am

I do have leftover money after monthly expenses say close to $2,000 a month. 29 years $322k mortgage left on original 30 year 340k mortgage.

There is a lot of chatter these days to payoff the 30 year mortgage faster with HELOC. Yes I know HELOC is a variable interest rate loan.
I ran some numbers through mortgage amortization spreadsheet and found that by the time the principle comes to 50% one would have paid 85% of the interest rate. I would be paying $235k in interest alone over 30 year time frame on a 340k mortgage @ 3.875% interest rate.

So I am planning to pay at faster rate until the principle comes down below 50% after that I want to make regular payments only because there is no interest advantage on that.

The plan I am thinking theoretically now is -
1. Open HELOC
2. Write 15k check to mortgage and pay this off in 8 months with excess cash

Alternatively I can pay $16k in 8 months as well. but higher principle payment will give better interest saving advantage over the time because of compounding effect. I am thinking of playing with 15k only- should the strategy go bad, I can take it out of my emergency reserve and pay this off without much of an hassle.

I would appreciate your feedback and greatly appreciate if you can point the loopholes in the strategy.

mortfree
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Re: HELOC to Pay off Mortgage

Post by mortfree » Thu Sep 27, 2018 8:27 am

what about a refinance to 15-year term?

sjt
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Re: HELOC to Pay off Mortgage

Post by sjt » Thu Sep 27, 2018 8:31 am

Not enough info about your current situation to make a call on this. Do you have a substantial emergency fund? Are you maxing out tax advantaged accounts? What is the rate of the HELOC (google tells me it's 5.52%)

Why not dump this extra money into VTSAX until you have enough to pay off the mortgage? This gives you the advantage of liquidity and you have a good chance of making more than 3.8% over the long term.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

Topic Author
raamakoti
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Re: HELOC to Pay off Mortgage

Post by raamakoti » Thu Sep 27, 2018 8:51 am

sjt wrote:
Thu Sep 27, 2018 8:31 am
Not enough info about your current situation to make a call on this. Do you have a substantial emergency fund? Are you maxing out tax advantaged accounts? What is the rate of the HELOC (google tells me it's 5.52%)

Why not dump this extra money into VTSAX until you have enough to pay off the mortgage? This gives you the advantage of liquidity and you have a good chance of making more than 3.8% over the long term.
Yes I do have $40k in emergency funds.
Net worth excluding house is close to 1M. Yearly salary 198k and maxing out on 401k and Roth as well.
HELOC rate I got was close to 5.5%
Thanks for sharing, I would definitely look into VTSAX

Topic Author
raamakoti
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Re: HELOC to Pay off Mortgage

Post by raamakoti » Thu Sep 27, 2018 8:54 am

mortfree wrote:
Thu Sep 27, 2018 8:27 am
what about a refinance to 15-year term?
I did not see any advantage of 15 year mortgage, the interest amount was more or less same.
30 year was lower payment and I do not get brownie points to paying bigger. penalty is same for missed payment.
In my situation paying additional $841 would convert my 30 year to 15 year mortgage. The months I can pay extra payment I do and the months with higher expenses I skip the extra. Its a cheap insurance for me for the unknown future hardships. so far I have the discipline to reduce my mortgage by 19 months with extras I paid.

Therefore I do not want to re-fi to 15 year.
Last edited by raamakoti on Thu Sep 27, 2018 10:04 am, edited 1 time in total.

JGoneRiding
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Re: HELOC to Pay off Mortgage

Post by JGoneRiding » Thu Sep 27, 2018 9:09 am

You need to separate put the 15k in yourmind. It doesn't care if it is on a mortgage or a heloc. If you look at it as a 1 yr loan and not a 30 yr loan you will pay more money by moving it to a higher rate then you would leaving the 15k on the mortgage and paying it off over the course of 1 yr.

I might consider moving it to a 0 int rate credit card but you will pay a fee with min spread. Or consider a 0% on purchases CC part of your emergency fund for just 1 yr and pay off 15k of the mortgage with your emergency fund and then re pay over 1 yr to your emergency fund

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Nate79
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Re: HELOC to Pay off Mortgage

Post by Nate79 » Thu Sep 27, 2018 9:28 am

This is a common kind of scam that is resurfacing. Was common to hear about it years ago and has started to make the rounds again. Seems to be a post on BH about every couple of weeks on this topic.

No, this doesn't work. It flunks basic math.

riverguy
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Re: HELOC to Pay off Mortgage

Post by riverguy » Thu Sep 27, 2018 9:40 am

All that matters is the difference in loan rates. Nothing else. Highly likely the HELOC is a higher rate so this makes zero sense...

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FlyAF
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Re: HELOC to Pay off Mortgage

Post by FlyAF » Thu Sep 27, 2018 9:50 am

riverguy wrote:
Thu Sep 27, 2018 9:40 am
All that matters is the difference in loan rates. Nothing else. Highly likely the HELOC is a higher rate so this makes zero sense...
Exactly. It's odd to me that OP is highly compensated, so I assume smart and good at his/her job, but can't see through this?

Admiral
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Re: HELOC to Pay off Mortgage

Post by Admiral » Thu Sep 27, 2018 10:33 am

FlyAF wrote:
Thu Sep 27, 2018 9:50 am
riverguy wrote:
Thu Sep 27, 2018 9:40 am
All that matters is the difference in loan rates. Nothing else. Highly likely the HELOC is a higher rate so this makes zero sense...
Exactly. It's odd to me that OP is highly compensated, so I assume smart and good at his/her job, but can't see through this?
What does one thing have to do with the other?

OP: If you want to pay off faster AND save money on interest, refinance to a 15 year loan at a lower rate. A 5.5% HELOC (which will vary) will not help you in any way.

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sunny_socal
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Re: HELOC to Pay off Mortgage

Post by sunny_socal » Thu Sep 27, 2018 10:35 am

If the mortgage bothers you, spend the extra $2k/month to pay it off. Don't get a HELOC since the rate floats.

Most here will say invest the money instead. Mortgage rates are rising and no doubt you have a relatively cheap loan.

afan
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Re: HELOC to Pay off Mortgage

Post by afan » Thu Sep 27, 2018 12:21 pm

At that interest rate I wouldn't be in any hurry to pay down the mortgage. But if you do want to get rid of it faster, just make extra principal payments any month that you have the money. Skip the extra payments when you have high other bills. Every time you do this you reduce the total interest you will pay.

It does not make sense to save up for many months, then make a large principal payment. By doing this you are continuing to pay extra interest that you would have avoided by making the extra payments each time you had the money.

The only way this would make sense is if the after tax return on your safe investment were higher than the after tax interest rate on your mortgage. If this is the case, then you should put your extra money into the investment instead of into the mortgage.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

delamer
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Re: HELOC to Pay off Mortgage

Post by delamer » Thu Sep 27, 2018 12:50 pm

How long would that $40,000 emergency fund last if you lost your job? How secure is your job?

Having a paid off mortgage is a benefit in times of unemployment or illness.

Just having a lower balance on your mortgage does you no good in the same circumstances. You still have to make the monthly payment.

There is a high likelihood that you’d be better off investing that $2,000/month and then paying off the mortgage when you have enough savings. It keeps you more liquid.

The HELOC plan doesn’t make sense. As others have said, why would you shift debt to a higher rate loan?

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raamakoti
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Re: HELOC to Pay off Mortgage

Post by raamakoti » Thu Sep 27, 2018 2:39 pm

delamer wrote:
Thu Sep 27, 2018 12:50 pm
How long would that $40,000 emergency fund last if you lost your job? How secure is your job?

Having a paid off mortgage is a benefit in times of unemployment or illness.

Just having a lower balance on your mortgage does you no good in the same circumstances. You still have to make the monthly payment.

There is a high likelihood that you’d be better off investing that $2,000/month and then paying off the mortgage when you have enough savings. It keeps you more liquid.

The HELOC plan doesn’t make sense. As others have said, why would you shift debt to a higher rate loan?
$40k emergency funds should last about 10 months.
I am not shifting entire mortgage to a higher variable interest rate HELOC. I am planning to transfer manageable chunk of money say $10k from HELOC to mortgage, pay it off and repeat the cycle. Bigger payments on the initial 8 years of 30 year mortgage cycle has huge impact on the interest savings. This advantage disappears in the later year of mortgage cycle because the later cycle is big on principle Whereas initial cycle of mortgage is heavy on interest. 15 year or 30 does not make any difference w.r.t interest amount.
Its still at theory level and I am gathering numbers at this stage.
2k extra payment for 12 monthly will reduce 43 payments where as 24k payment on Jan-01 will reduce 44 payments.

delamer
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Re: HELOC to Pay off Mortgage

Post by delamer » Thu Sep 27, 2018 2:55 pm

raamakoti wrote:
Thu Sep 27, 2018 2:39 pm
delamer wrote:
Thu Sep 27, 2018 12:50 pm
How long would that $40,000 emergency fund last if you lost your job? How secure is your job?

Having a paid off mortgage is a benefit in times of unemployment or illness.

Just having a lower balance on your mortgage does you no good in the same circumstances. You still have to make the monthly payment.

There is a high likelihood that you’d be better off investing that $2,000/month and then paying off the mortgage when you have enough savings. It keeps you more liquid.

The HELOC plan doesn’t make sense. As others have said, why would you shift debt to a higher rate loan?
$40k emergency funds should last about 10 months.
I am not shifting entire mortgage to a higher variable interest rate HELOC. I am planning to transfer manageable chunk of money say $10k from HELOC to mortgage, pay it off and repeat the cycle. Bigger payments on the initial 8 years of 30 year mortgage cycle has huge impact on the interest savings. This advantage disappears in the later year of mortgage cycle because the later cycle is big on principle Whereas initial cycle of mortgage is heavy on interest. 15 year or 30 does not make any difference w.r.t interest amount.
Its still at theory level and I am gathering numbers at this stage.
2k extra payment for 12 monthly will reduce 43 payments where as 24k payment on Jan-01 will reduce 44 payments.
And how much interest will you pay on the HELOC withdrawal?

You may have savings on the mortgage interest but you have costs of the HELOC interest.

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raamakoti
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Re: HELOC to Pay off Mortgage

Post by raamakoti » Thu Sep 27, 2018 2:57 pm

HELOC interest for the first year is 3.4% APR
after the 12 month promo offer it is prime + 0.9%

delamer
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Re: HELOC to Pay off Mortgage

Post by delamer » Thu Sep 27, 2018 3:05 pm

raamakoti wrote:
Thu Sep 27, 2018 2:57 pm
HELOC interest for the first year is 3.4% APR
after the 12 month promo offer it is prime + 0.9%
I was pointing out that you can’t just count what you save on the mortgage. That is offset by what you pay on the HELOC.

riverguy
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Re: HELOC to Pay off Mortgage

Post by riverguy » Thu Sep 27, 2018 3:22 pm

raamakoti wrote:
Thu Sep 27, 2018 2:57 pm
HELOC interest for the first year is 3.4% APR
after the 12 month promo offer it is prime + 0.9%
So you save 0.375% in the first year on whatever you put on the HELOC. Prime rate is 5 going to 5.25% and higher as the Fed keeps raising. So you'll be paying over 6% on the HELOC after the first year. Getting close to 7% by this time next year.

You pay a bunch of interest early in a mortgage because your balance in the largest at that time...

nolesrule
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Re: HELOC to Pay off Mortgage

Post by nolesrule » Thu Sep 27, 2018 4:05 pm

raamakoti wrote:
Thu Sep 27, 2018 2:57 pm
HELOC interest for the first year is 3.4% APR
after the 12 month promo offer it is prime + 0.9%
So, you won't want to use it past the first year.

Have you actually calculated how much interest you'll save making a $15000 lump sum payment on your mortgage from the HELOC and paying back the 3.4% HELOC with monthly payments vs. just making extra monthly payments toward the mortgage?

At a 0.375% spread on $15000, it's not going to be much. The average balance over the course of the year will be $7500, so you'll save about $28 (back of the envelope math).

Loik098
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Re: HELOC to Pay off Mortgage

Post by Loik098 » Thu Sep 27, 2018 4:22 pm

FlyAF wrote:
Thu Sep 27, 2018 9:50 am
riverguy wrote:
Thu Sep 27, 2018 9:40 am
All that matters is the difference in loan rates. Nothing else. Highly likely the HELOC is a higher rate so this makes zero sense...
Exactly. It's odd to me that OP is highly compensated, so I assume smart and good at his/her job, but can't see through this?
Personally, I set the standard for "God status" at >$1 million/year and just won't tolerate any mistakes or oversights by those people whatsoever. But for some reason, they don't seem to care about my opinion.

lotusflower
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Re: HELOC to Pay off Mortgage

Post by lotusflower » Thu Sep 27, 2018 8:48 pm

riverguy wrote:
Thu Sep 27, 2018 9:40 am
All that matters is the difference in loan rates. Nothing else. Highly likely the HELOC is a higher rate so this makes zero sense...
+1 The way mortgages work is that at the end of each month, you are charged at the loan interest rate for your entire principal. It's the inverse of a savings bank where you get the interest added at the end of the month.

Theoretically, if you took out a $1MM mortgage, and invested it in a risk-free savings account bearing interest at the same rate, you could pay off the mortgage from the savings account and have exactly $0.00 left in the savings account at the end of 30 years. Aside from being pointless, it doesn't work because
a) there are no risk-free accounts paying as much interest as a mortgage
b) taxes vs tax deductions are not equivalent
c) slight difference from mortgages compounding monthly and savings compounded daily (not a big deal)
d) you are obligated to spend the mortgage on the house, you can't just put it in the bank

Similarly if your HELOC were at the exact same interest rate as the mortgage and has the same tax treatment your plan would save or cost exactly $0. If you find a crazy-attractive teaser rate for the HELOC you could perhaps make a few bucks, but hard to imagine that would be worth it.

A lot of people get confused by amortization since the interest is front-loaded, but that is just done to create the convenience of equal payments even as the interest amount keeps falling as you pay off the loan.

Now since you can't get risk free savings at your mortgage rate, it is a good deal to pay extra principal early in the loan. Every time you pay an extra $100 principal on your loan, you save ( $100 * int%/12 * #remainingpayments ) of interest. But again if you save that extra payment instead and got a good rate, you would earn that interest.

So paying extra is great but is only a good deal since you can't save risk-free at your mortgage rate. There is no magic or trickery hidden in the amortization tables that is waiting to be exploited. Of course if you would waste the money instead of building equity, or if you improve your tax situation (doubtful), and you don't mind losing the liquidity (a big deal IMO) it could be a good or great idea but as far as interest payments there's nothing to see, keep moving along.

Prepaying is fine if you don't need the liquidity of the cash, but the HELOC part of your plan adds nothing at all.

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raamakoti
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Re: HELOC to Pay off Mortgage

Post by raamakoti » Fri Sep 28, 2018 5:27 am

Thank you all for your feedback

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raamakoti
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Re: HELOC to Pay off Mortgage

Post by raamakoti » Tue Oct 02, 2018 10:24 am

sjt wrote:
Thu Sep 27, 2018 8:31 am
Not enough info about your current situation to make a call on this. Do you have a substantial emergency fund? Are you maxing out tax advantaged accounts? What is the rate of the HELOC (google tells me it's 5.52%)

Why not dump this extra money into VTSAX until you have enough to pay off the mortgage? This gives you the advantage of liquidity and you have a good chance of making more than 3.8% over the long term.
I looked through VTSAX but it is available for purchase through E-trade. Any ideas how I can buy this?

sjt
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Re: HELOC to Pay off Mortgage

Post by sjt » Tue Oct 02, 2018 10:45 am

raamakoti wrote:
Tue Oct 02, 2018 10:24 am

I looked through VTSAX but it is available for purchase through E-trade. Any ideas how I can buy this?
VTSAX is simply Vanguards low fee mutual fund for total stock market. VTI is the ETF version. Maybe there are other offerings available at etrade?
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

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willthrill81
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Re: HELOC to Pay off Mortgage

Post by willthrill81 » Tue Oct 02, 2018 3:46 pm

raamakoti wrote:
Thu Sep 27, 2018 8:54 am
mortfree wrote:
Thu Sep 27, 2018 8:27 am
what about a refinance to 15-year term?
I did not see any advantage of 15 year mortgage, the interest amount was more or less same.
This is false. You will pay many more dollars in interest by paying off a 30 year mortgage in 30 years rather than 15 years on a 15 year mortgage. This is due primarily to carrying the mortgage for twice as long and partially due to the higher interest rate on a 30 year mortgage (assuming either could be taken out at the same time).
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mortfree
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Re: HELOC to Pay off Mortgage

Post by mortfree » Tue Oct 02, 2018 7:17 pm

willthrill81 wrote:
Tue Oct 02, 2018 3:46 pm
raamakoti wrote:
Thu Sep 27, 2018 8:54 am
mortfree wrote:
Thu Sep 27, 2018 8:27 am
what about a refinance to 15-year term?
I did not see any advantage of 15 year mortgage, the interest amount was more or less same.
This is false. You will pay many more dollars in interest by paying off a 30 year mortgage in 30 years rather than 15 years on a 15 year mortgage. This is due primarily to carrying the mortgage for twice as long and partially due to the higher interest rate on a 30 year mortgage (assuming either could be taken out at the same time).
I was initially going to respond the same a few days ago.

However the math here was the accelerated payments on the 30-year (pay it like a 15) versus the refinance to a 15-year.

The difference in interest IF every extra payment was made was negligible. That is what I believe was the OP’s position.

Your statement rings true for other cases where no extra payments are made.

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tennisplyr
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Re: HELOC to Pay off Mortgage

Post by tennisplyr » Wed Oct 03, 2018 7:14 am

Not to hijack this, but does anyone know of a good HELOC calculator?
Those who move forward with a happy spirit will find that things always work out.

delamer
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Re: HELOC to Pay off Mortgage

Post by delamer » Wed Oct 03, 2018 11:17 am

tennisplyr wrote:
Wed Oct 03, 2018 7:14 am
Not to hijack this, but does anyone know of a good HELOC calculator?
Are you looking for something unique to HELOCs that a regular mortgage calculator does not do?

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tennisplyr
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Re: HELOC to Pay off Mortgage

Post by tennisplyr » Thu Oct 04, 2018 8:02 am

delamer wrote:
Wed Oct 03, 2018 11:17 am
tennisplyr wrote:
Wed Oct 03, 2018 7:14 am
Not to hijack this, but does anyone know of a good HELOC calculator?
Are you looking for something unique to HELOCs that a regular mortgage calculator does not do?
Just a tool that shows my monthly payment for a certain amount of HELOC use, let's say I owe $10,000 with a $100,000 line.
Those who move forward with a happy spirit will find that things always work out.

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jimb_fromATL
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Re: HELOC to Pay off Mortgage

Post by jimb_fromATL » Thu Oct 04, 2018 9:27 am

tennisplyr wrote:
Thu Oct 04, 2018 8:02 am
delamer wrote:
Wed Oct 03, 2018 11:17 am
tennisplyr wrote:
Wed Oct 03, 2018 7:14 am
Not to hijack this, but does anyone know of a good HELOC calculator?
Are you looking for something unique to HELOCs that a regular mortgage calculator does not do?
Just a tool that shows my monthly payment for a certain amount of HELOC use, let's say I owe $10,000 with a $100,000 line.
You can use virtually any online mortgage calculator that allows you to enter the balance and rate and time as variables. You can use the number of years you want to take to pay off the loan, or calculate the minimum payment for the maximum number of years the HELOC terms allow for a new balance when you borrow more money from the line of credit.

If you can use a spreadsheet at all, there are lots of templates and examples built in to Excel and other spreadsheets. You can use Excel or open-source spreadsheets in your own PC or use Microsoft or Google spreadsheets online to use the template/examples or adapt them with your own code for your specific needs.

Here is a link to another thread discussing calculations and calculators and how to use some of the common spreadsheet functions.
Analytical solution for annual mortgage interest?

Here is another thread where I and several other folks have suggestions about how to do the calculations and where to find calculators.
Help with Amortization Schedule with Extra Payments

Here is a link to a sample rudimentatry spreadsheet I uploaded to GoogleSheets that you might want to use as a starting point to write your own if you don't have access to the Excel template. You can download this one or copy it to your own ID to work on in GoogleSheets online, too.

https://docs.google.com/spreadsheets/d/ ... sp=sharing

Here's some more about how mortgages, HELOCs, and other loans work:
  • On virtually all normal mortgages, the interest is calculated at 1/12 of the yearly rate per month on the unpaid balance, as of the scheduled posting date (usually the 1st) regardless of when the payment is received. On mortgages, usually the only time interest is calculated on a daily basis is at closing to prepay the interest from the closing date until the first normal payment date. It's also calculated daily when you want to pay off a mortgage balance on any day other than the normal closing date.

    Incidentally this means that there is no savings in interest on mortgages for paying the normal payment a little early or even a little late as long as the payment is received within the grace period, which is typically something like 5 or 10 days after the 1st.

    HELOCs and other lines of credit calculate the interest on newly borrowed money on a daily basis too, but do not require prepayment. Many HELOCs (and lines-of-credit like credit cards) and most student loans calculate the monthly interest on a daily basis and as of the actual date received and processed -- instead of waiting until the 1st. So you can save a small amount of interest by making the normal payment early.

    However, over the long term the amortized interest still averages out at 1/12 of the yearly rate on the unpaid balance. Since there's no way to know exactly when every payment will be received and posted, student loans, HELOCs etc still calculate the minimum payment based on the average of 1/12 of the yearly rate per month ... as calculated for other amortized loans.
If you want to do it yourself in a spreadsheet here are some notes extracted from another thread to give you some more ideas of what to research to learn how to do it yourself.
  • The math functions most often needed are:
    • PMT() to find the monthly payment when you know the loan balance, rate, and time.
      • (Or use it to to find out how much you need to invest to reach a goal when you know the rate and time and goal, or to find how much you can withdraw per month from an existing lump sum investment .)
      FV() -- Future Value-- to find the Future Value of an investment when you know the current balance, monthly payment, rate and time.
      • You can use FV to find the balance of a mortgage at any given month when you know the balance, rate and payment, instead of having to buil the entire monthly amortization table and looking it up.

      NPER() --number of periods-- required to pay off a loan when you know the Balance, Rate, and Payment.
      • (Or to find how long it takes for an investment to grow to a given amount.)
      RATE() to find the rate required to earn a given amount when you know the beginning balance and/or monthly payment, and the time and goal.
      • This also finds the rate of a mortgage when you know the balance, payment and time;
        ... or the annual rate of return when you know how much you invested for how long, and how much you have at the end of given time period;
        ...or the APR of a loan with closing costs included.

      PV() -- PresentValue -- for finance, to show the present value of a future lump sum and/or series of equal payments.
    Excel also has a lot of other financial functions that go into more complicated calcluations ... but most folks can get buy with the above basic building blocks for comparing mortgages, savings, and investments.

    Google has a free online spreadsheet package, and I think Microsoft does too. Plus there are open-source spreadsheets that you can download for free. However, very few if any of the freebies provide nearly as many features such as charting, graphing, problem solving, goal seeking, etc, or as much online help for programming as Excel does.

    -- examples --

    First, solving for the payment:
    • Suppose you know the balance, rate and time for a loan. You can use the PMT function in a cell to find out the monthly payment.

      For example, if you put the annual Rate in one cell, the number of months for the loan in another, and the starting Balance in another, then the pmt formula might look like this, but using the cell addresses for the factors:
      • =PMT(newRate/12,newmonths,-newBalance)


    In Excel you can name individual cells to make the easier to reference. For instance, you could put the rate in cell A3 and name cell A3 “newRate” and use the actual name instead of “A3” … and do the same for the other factors.

    Finding the time remaining when you know the current balance, rate and payment.
    • You could put those factors in cells for oldBalance, oldRate, and oldPayment. Then using the addresses of the factors, find out how long you'll owe on it with the NPER function:

      =NPER(oldRate/12,oldPayment,-oldBalance)
      … gives the remaining months.
      Multiply that by the payment to get the total cost in another cell.
    To compare another loan, or the effect of rolling in closing costs
    • You might add the closing costs to get your new balance, and put your new rate and new mortgage length in cells, and solve for the new payment.
      • =PMT(newRate/12,newmonths,-newBalance)
        ... gives the new payment. Multiply it by the number of payments to get the total cost of the new mortgage.
      You can then use simple math in other cells to calculate the differences for the numbers that show up in the cells that contain the function calls.
      Once you have a row of factors and the calculation for one loan, it's easy to copy and paste the data and formulas to other rows to build a comparison table.
    To find out how long it would take to pay off the present balance with the old payment:
    • =NPER(newrate/12,oldPayment,-newbalance)
      … give the new number of months. Multiply it by the newPayment to get the total cost.
    Comparing two mortgages or the break-even point for refinancing :
    • IMO the true break even point is when for exactly the same money out of pocket up front and in monthly payments, you will owe no more on the new mortgage than you would have on the old one. That's when your net worth has recovered from the extra closing costs.

      To find the break even point, I create a new cell for the break even month.

      Then create two new functions using the Future Value function to find out how much you'd owe after a given number of months for a known rate, payment, and current balance.
      • =FV( oldRate/12, breakEvenMonth, oldPayment, -oldBalance)

        =FV(newRate/12, breakEvenMonth, newPayment,-newBalance)
      Notice that both formulas use the same cell for the breakEvenMonth.

      In another cell, I subtract the oldBalance from the newBalance. Then I use goalseek to make that difference between them equal to 0 by changing the value of the cell containing the breakEvenMonth.

      In spreadsheets that don't support fancy stuff like goalseek, you can enter different numbers in the cell for the breakEvenMonth and narrow it down. That’s what goalseek does for you anyway.

      If you enter a too large number, then a too small number, and cut the difference by half with each new entry, you can get very close within about 8 to 10 tries. Divide and conquer.

jimb

Atgard
Posts: 420
Joined: Wed Apr 09, 2014 2:02 pm

Re: HELOC to Pay off Mortgage

Post by Atgard » Thu Oct 04, 2018 9:56 am

I have seen otherwise-smart people falling for high-pressure sales of these HELOCs that are supposed to magically let you pay off your mortgage earlier, or save interest because the mortgage interest is "amortized" (which most people just don't know what it means, they think they're somehow paying a higher interest rate in the beginning because they're told that most of their initial payments go to interest).

I once spent over an hour trying to explain that really the only thing to look at is the interest rate of the mortgage vs. HELOC (which is almost always higher, unless a teaser or variable rate which I don't want while rates are going up!). They were sold on the idea that because the mortgage is amortized but a HELOC is not, that somehow they avoid paying the "high interest of the initial years, where most of your mortgage payment is wasted on interest."

They were even sold on the idea that you can get a HELOC, deposit your entire paycheck into it, then pay bills from the HELOC, which might help a little by having a lower average daily balance (vs. making a lump-sum mortgage payment at the end of the month). But what is this going to save you? Maybe interest on $1,000 per month... I told them forget all this crap, and take the $5,000+ fee they're charging and just send an extra $1,000 check to pay down your mortgage and you'll get the same benefit in terms of saved interest, forever. Yet financial advisors are out there selling this kind of hackery, charging fees and knowing MOST people will end up behind if they look at their monthly mortgage payment as optional since it's all just a floating HELOC anyway... ("I'm a little behind this month, that's OK, I really want the new iPhone so I'll just pull that out of my HELOC like I do all my other bills...")

delamer
Posts: 9481
Joined: Tue Feb 08, 2011 6:13 pm

Re: HELOC to Pay off Mortgage

Post by delamer » Thu Oct 04, 2018 10:50 am

tennisplyr wrote:
Thu Oct 04, 2018 8:02 am
delamer wrote:
Wed Oct 03, 2018 11:17 am
tennisplyr wrote:
Wed Oct 03, 2018 7:14 am
Not to hijack this, but does anyone know of a good HELOC calculator?
Are you looking for something unique to HELOCs that a regular mortgage calculator does not do?
Just a tool that shows my monthly payment for a certain amount of HELOC use, let's say I owe $10,000 with a $100,000 line.
If the payment is for interest only — in other words you aren’t paying down any principal — then do a search for an interest-only loan calculator.

Otherwise, a regular mortgage calculator will work fine.

User avatar
jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: HELOC to Pay off Mortgage

Post by jimb_fromATL » Thu Oct 04, 2018 12:57 pm

Atgard wrote:
Thu Oct 04, 2018 9:56 am
I have seen otherwise-smart people falling for high-pressure sales of these HELOCs that are supposed to magically let you pay off your mortgage earlier, or save interest because the mortgage interest is "amortized" (which most people just don't know what it means, they think they're somehow paying a higher interest rate in the beginning because they're told that most of their initial payments go to interest).

I once spent over an hour trying to explain that really the only thing to look at is the interest rate of the mortgage vs. HELOC (which is almost always higher, unless a teaser or variable rate which I don't want while rates are going up!). They were sold on the idea that because the mortgage is amortized but a HELOC is not, that somehow they avoid paying the "high interest of the initial years, where most of your mortgage payment is wasted on interest."

They were even sold on the idea that you can get a HELOC, deposit your entire paycheck into it, then pay bills from the HELOC, which might help a little by having a lower average daily balance (vs. making a lump-sum mortgage payment at the end of the month). But what is this going to save you? Maybe interest on $1,000 per month... I told them forget all this crap, and take the $5,000+ fee they're charging and just send an extra $1,000 check to pay down your mortgage and you'll get the same benefit in terms of saved interest, forever. Yet financial advisors are out there selling this kind of hackery, charging fees and knowing MOST people will end up behind if they look at their monthly mortgage payment as optional since it's all just a floating HELOC anyway... ("I'm a little behind this month, that's OK, I really want the new iPhone so I'll just pull that out of my HELOC like I do all my other bills...")
The ways that compound interest and prepayments work so well to reduce interest and time in debt are so misunderstood that there are entire industries of gimmicky schemes for other people to rake off some profit by taking advantage of our collective lack of knowledge.

The myriads of "Australian mortgages" and other "mortgage accelerator" software packages claim to help you magically reduce your mortgage interest, when all they're really doing is tricking you into paying a little extra on the principal to save some interest while giving some of your money to them for their benefit instead of yours. They typically have sometimes incredibly well-done video presentations and complicated explanations about “daily interest” and “re-amortizing” to make it sound like magic.

In the past there have been many kinds of biweekly payment schemes, including coupons that were sold at "Tupperware-like parties" that you sent to a third party who raked off their cut and sent the rest to your mortgage lender. There have been insurance sales gimmicks that pay for term life insurance with some of your extra payment and send the rest to your mortgage company.

Before the advent of PCs and spreadsheets, there were best-selling books that were mostly showing how much you'd save by paying extra on a mortgage, or other gimmicks to trick yourself into paying extra on the principal. (Another that comes to mind is the "Latte factor")

For years now even the mortgage companies have gotten into the act by charging an up front fee and often an extra payment processing fee for biweekly payments. But biweekly payments are nothing but a gimmicky way to trick yourself into paying a little extra on the mortgage principal every year, which you can accomplish for free merely by adding 1/12 of the payment extra to the regular monthly payment. (Or by adding 1/2 an extra payment every 6 months, or 1 extra payment per year.)

Ironically, the “Australian mortgage” schemes have not even been legal to advertise in Australia for many years. Link to 2004 Sydney news article. These schemes apparently survive in the US because there are so many people who fervently want to believe that there is some magical secret way math works that nobody else ever knows about -- and the US is not as strict about requiring products to actually deliver what they promise in their advertisements.

Furthermore, since the crash of the housing market and the economy in 2008 most second mortgage lenders (who survived) do not even allow the numerous transactions per month that would be required for schemes that advocate using a HELOC as a bank account.

While most of the gimmicks can help you trick yourself into paying a little extra on your mortgage every month and thus save time and interest, they cannot possibly work as well as just paying down the mortgage as fast as you can with all the spare money you have after all the bills are paid every month -- and NOT giving some of it to somebody else for their magic software or seminars or to have them manage it for you.

I still have several boiler-plate spreadsheetsthat I've used since the early 2000s on several consumer forums to prove with real math that schemes like the Australian Mortgages, “mortgage accelerators”, “money merge accounts”, “freedom mortgages”, United First Financial, Truth-in-Equity, and John Commuta’s “Transforming Debt Into (his) Wealth" plans cannot really work as well as their outlandish claims.

And despite their claims of paying off mortgages in a few years, they gloss over that if you don't have any spare money in your budget, they cannot save anything -- and that borrowing money to shift the debt around may often cost you more and put you in deeper debt.

Another thing they don't mention is that if you really do have spare money in your budget, you'll virtually always come out better in the long run to contribute the maximum allowed to any available tax-advantage retirement accounts like 401(k)s and IRAs before you pay any extra on any debts like mortgages and student loans to pay them down faster.

Here are some other threads on the topic:

Reducing Monthly Interest Payments with a HELOC?
Pay off mortgage in 7 years using HELOC?
Timing of paying off extra mortgage principal

Here are the names of some other similar ripoff schemes, which have been discussed in the past on the Clark Howard consumer forums:
NoMoreMortgage
Term Reducer
Financial 101
Truth In Equity
No-More-Mortgage
Uinited First FInancial

Here's an excerpt from one of my old posts about how misleading a lot of those schemes can be:
  • The most misleading claim for virtually all of those schemes is that you can pay off your mortgage a lot faster with no change to your budget.

    The fact is that you cannot possibly pay off any mortgage faster without paying more than the minimum scheduled payment. And it does come out of your budget. You must pay all the principal plus all the monthly interest on the unpaid balance for whatever time period it takes. In fact if you don’t have a lot of discretionary income left to apply to your mortgage every month, those plans won’t work at all, and can get you into deeper debt.

    For example, one website for one of these schemes promises that their plan will help you magically pay off your mortgage in 5 to 7 years. As an example of how unrealistic that is:
    • If you owed $150,000 at 5.5% for 29 more years on your mortgage, the payment is $863 per month. In order to pay off a debt of $150,000 at 5.5% in 5. years, the required payment is $2,865 per month. If you don't have an average of $2002 per month extra to spare out of your budget to spare to pay on the mortgage every month, you cannot possibly pay it off in that time.

      If the mortgage payment of $863 were 30% of your take-home pay, then your required payment would be around $2878 per month. The amount required to pay down the mortgage in 5. years would be 99.6% of your entire income. Unless you can live comfortably on 4/10 of one percent of your income, it ain't gonna work.

    As another example, one of John Commuta’s radio advertisements features someone claiming they paid off their mortgage in 2½ years. Not very likely for most people. If the normal payments were within the normal guidelines of about 25% of your take-home pay, then it would require 155% of your entire income to pay it off in 2½ years.

jimb

batpot
Posts: 865
Joined: Thu Jul 11, 2013 8:48 pm

Re: HELOC to Pay off Mortgage

Post by batpot » Thu Oct 04, 2018 2:26 pm

There's a few Credit Unions still offering <3% HELOC rates for 12 months.
And when the 12 months expire, roll into another HELOC at another institution as a similar rate.
Rinse, repeat, until those promo rates expire. Hopefully you've paid it in full before they do.

TropikThunder
Posts: 1948
Joined: Sun Apr 03, 2016 5:41 pm

Re: HELOC to Pay off Mortgage

Post by TropikThunder » Thu Oct 04, 2018 3:48 pm

batpot wrote:
Thu Oct 04, 2018 2:26 pm
There's a few Credit Unions still offering <3% HELOC rates for 12 months.
And when the 12 months expire, roll into another HELOC at another institution as a similar rate.
Rinse, repeat, until those promo rates expire. Hopefully you've paid it in full before they do.
Right, because how hard can it be to keep finding <3% HELOCs two, three, four years from now ......

bling
Posts: 371
Joined: Sat Jan 21, 2012 12:49 pm

Re: HELOC to Pay off Mortgage

Post by bling » Thu Oct 04, 2018 6:03 pm

batpot wrote:
Thu Oct 04, 2018 2:26 pm
There's a few Credit Unions still offering <3% HELOC rates for 12 months.
And when the 12 months expire, roll into another HELOC at another institution as a similar rate.
Rinse, repeat, until those promo rates expire. Hopefully you've paid it in full before they do.
i recently shopped for a HELOC and pretty much all of them had some sort of early closing fee which would render this useless.

Topic Author
raamakoti
Posts: 138
Joined: Mon Jul 31, 2017 10:20 am

Re: HELOC to Pay off Mortgage

Post by raamakoti » Fri Oct 05, 2018 8:19 am

[/quote]
i recently shopped for a HELOC and pretty much all of them had some sort of early closing fee which would render this useless.
[/quote]

Thank you guys, lot of worthy info to read here. There is no magic wand that can pay it off sooner. Most is common sense, but once in a while its good to get dose of common sense.
There is typically a early termination fee if the HELOC was closed before 3 years. You have to leave it open even if you do not use it for anything.
there is an annual fee of $50 to $65 to leave the line open.
In all its complications its not worth going through this route. If people really want to go through any major expenses then its worth thinking about it because most of HELOC are much cheaper than credit cards. I think one should make yearly cashflow statement and see how much excess cash is left and decide what to do with it. in my case I have excess cash close to $24k per year after maxing out all my savings. With that either mortgage can be paid off or that cash can be invested in higher yielding vehicles. I will evaluate both options and pick one as necessary.
Once again thanks a lot for your help.

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