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How to Actually Save Thousands on Your Mortgage

 

Adam Carroll joins us to discuss how to actually save thousands on your mortgage with home equity lines of credit.

When we interviewed Adam for our new Rich Tips series, he mentioned how he is paying off his mortgage years ahead of schedule and saving thousands of dollars in interest. We were intrigued and asked him to join us to explain his strategy in greater detail.

What Is A Home Equity Line Of Credit?

A home equity line of credit, HELOC, is “An open ended line of credit extended to a homeowner that uses the borrower’s home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates.” Most institutions will lend up to about 90% of loan to value.

Strategy

Adam has an ingenious use for his HELOC and you can use his strategy too. The HELOC is used like a checking account. All of your income is deposited into it and all of your expenses are paid out of it. Depositing your paycheck into the HELOC acts like a payment so you aren’t adding a monthly payment. The money left over at the end of the month gets sent to the mortgage. What this does is send a massive payment to your mortgage each month.

The trick to make this work though, is that you have to make more than you spend. Let’s look at an example: You bought a home for $100,000 with a $20,000 down payment. You can immediately take out a HELOC for $10,000. You then put that toward your mortgage.

In order for this to work though, you must make more than you spend. You make $5,000, spend $4,000 and have $1,000 left. That $1,000 goes into the HELOC until it’s paid off, so for ten months. Let’s say your interest rate is 5%. So that’s $500 over 12 months, $41.33 the first month in interest but when the income goes in, you’re paying a little less each month because you’re slowly paying the loan down with that $1,000 a month.

Rather than taking ten months to pay off, it takes around 7. And because your mortgage went from $80,000 to $70,000, you will pay less interest not just over ten months but over the entire life of the loan.

What If You Don’t Own A Home?

You can still use a similar strategy if you don’t own a home. You can get a personal line of credit, PLOC. A PLOC is “A loan that you use like a credit card account that you access without using a card. Instead, you write special checks or request a transfer to your checking account by phone or online. You have a credit limit, receive a monthly bill, make at least a minimum payment, pay interest based on your outstanding balance, and possibly pay a fee each time you use the account. 

PLOC are unsecured, unlike HELOCs, which are backed by a mortgage on your home. PLOCs are offered by banks and credit unions and usually require that you also have a checking account with the same institution.”

PLOCs have their draw backs. The interest rate is higher than a HELOC and the interest is not tax deductible. But if you have high interest debt and don’t own a home, they can be beneficial.

What Keeps Us In Debt

It’s the way we bank and borrow. Taking out a 30 year mortgage is just SOP in the United States. Amortization is the process of paying off a debt, like a mortgage over time with regular payments. An amortization schedule is a table detailing each periodic payment on an that loan.

We borrowed $80,000 to buy our home above. With a 30 year mortgage at 3.5%, you will pay $50,000 in interest when it’s all over! Your first mortgage payment will be $359, of that, $233 will go to pay the interest. It won’t be until year 19 than more of that payment is going to the principle than the interest.

Getting rid of that interest is the power of the HELOC strategy. It pays off a huge chunk of principle to offset the interest over the entire length of the loan. Think of a mortgage like a one way street; you can pay in but you can’t pull out. A HELOC is a two way street; you can pay in and pull out.

Adam has a $250,000 mortgage with 20% down. He started using this strategy in October 2012. He now owes less than $100,000 on the home and his savings to date on interest are $160,000! He started this by borrowing just $5,000.

Keys To Make This Work

The keys to make this work are having the discipline to stick to budget and spending less than you earn. If you have money left over each month and you’re wondering what to do with it, this is a good use for it.

These are three principles to financial success, a HELOC incorporates them all:

Lean: Keep your monthly payments as low as possible on everything. This way more of your income can go towards debt.

Liquid: In a HELOC you can access the money at any time.

Independent: You don’t need approval to take money out, you can go on-line and transfer money wherever it needs to go.

Your Income Should Have Impact

Every dollar you earn should have a purpose and a positive impact. Income should do four things;

Cancel Interest: If you have high interest debt, this is what your income should be doing first. Once that is gone, it can focus on other kinds of interest, like mortgage interest.

Make Interest: Your income should be earning you more income through investments.

Pay Expenses: Of course, you have to pay your bills.

Build Wealth: Your money should build your wealth via things like rental properties.

The problem is, for most people, income is only doing one of these, paying expenses.

Worst Case Scenario

What if the worst happens and we have another housing crash like 2008? Will your entire HELOC come due at once? Your lending institution is unlikely to call in its entire marker. They will probably just freeze the HELOC so that you can no longer pull money out, only pay money in. So you’ll have to go back to the old system, but you’ve still saved a big chunk of interest.

What To Pay Off?

High interest debt like credit card should be the first to go. After that, if you can get rid of things like car and student loan payments with your HELOC, it will free up even more money to funnel back into the strategy of paying off the mortgage.

How Hard Is It to Get One?

Qualifying for a HELOC is just like qualifying for a regular mortgage. The bank or credit union will want to see a good credit score and enough income to justify the loan amount. You don’t have to get a HELOC through whatever institution you have your mortgage through. The HELOC lender will become the second lien holder on your property.

Mortgage Interest Deduction

We pay 34% of the money we make over our lives to interest. Some people argue against the strategy outlined here because they enjoy the mortgage deduction they get on their tax return.

But what if you took the money you saved with this strategy and used it to buy rental property? Then you could deduct the mortgage interest from that home and a lot of other things too including employees, independent contractors, utilities, taxes, repairs, travel, insurance premiums, legal and professional services.

Kind of makes the mortgage deduction look measly in comparison.

A New System

We have to rewire our thinking when it comes to home ownership. It’s not necessarily the best thing for everyone but for those who choose to do it, you don’t have to be a slave to a mortgage and a job you hate for thirty years. More than anything else, that mortgage and the interest that comes with it, will be the thing that keeps you in a job you hate.

You can use the HELOC strategy to save thousands on your mortgage and free yourself from that trap.

Build Meaningful Wealth

Manage your cash and optimize your investments in one place. With Personal Capital you can analyze your 401k to better diversify your holdings and reduce fees. I had no idea I was paying over 1% of my assets in fees every year but with there help I was able to get it down below 0.3%.

Once you have all of your accounts linked you can also leverage their Retirement Planner to plot out exactly what your retirement would look like. Using a Monte Carlo simulation they determine how likely it is that you’ll reach the level of income in retirement that you’re hoping for.

I’ve been using Personal Capital since 2013 and I haven’t found a better free online tool for building and managing wealth.

Personal Capital Retirement Planner

Show Notes

Punkless Dunkel: A pumpkin wheat ale.

Dragon’s Milk Bourbon Barrel Stout: A stout with the taste of dark chocolate.

Adam Carroll: Build a bigger life, not a bigger lifestyle.

Bankrate Mortgage Calculator: See how much interest you will pay.

LMM Community: If you have questions for Adam, you can ask in the Community.

Featured Image Photo Credit: “Picture Bennette House” by Vonsky87 on Wikipedia

In-Post Image Photo Credit: “Net Neutrality for Dummies” by Joeri Poesen on Flickr

In-Post Image Photo Credit: “Lack of money is the root of all evil – George Bernard Shaw” by Miran Rijavec on Flickr

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169 responses to “How to Actually Save Thousands on Your Mortgage”

  1. Nick says:

    You guys have seriously been ramping up the quality and depth in your podcasts. This episode was great. I must admit that I am going to have to listen to it again just to grasp and begin to dissect, and try to poke holes in the strategy presented, but seriously, wow!

    I great appreciate the different money/investment strategies you guys explore and present to your audience. And perhaps more importantly, allow them to debate and discuss in the comments sections to hear about people’s experiences and concerns. A tip of the hat to you guys.

    • Wow, thanks Nick, that comment seriously made my day!

      We’ve been trying to step it up lately as we’ve heard the grumblings from our less than spectacular episodes.

      I’d love it if you poked holes and got the conversation going here – I think this topics phenomenally important. Email me!

      • Ryan says:

        It seems to me like this is a method for putting all of your extra cash into your house. Which is great if you are trying to pay down a mortgage… but a theme I have gotten from LMM and others has been to invest that extra cash, not dump it into your illiquid home.

        Is this something you personally would do? I think I would rather pay my mortgage/taxes and invest the rest in Betterment/Vanguard.

        • Ryan, no, not really. You could use this approach to maintain the same level of payments and still get to the finish line faster.

          The HELOC also allows you to tap that home equity you have which effectively frees the cash you have in your home so should you need the money, it’s there.

          I still wont put all my wealth or even most of my wealth into my home but I will race to 50% equity so that I can ditch the mortgage for a much cheaper payment based on my balance not how far along I am in the mortgage term.

          • Bongo says:

            I don’t think you “maintain the same level of payments” if you are making your mortgage payment as before, and ALSO making a HELOC payment. I know that Adam said you didn’t have to make a HELOC payment, but you do, he just used his paycheck to do so. With this strategy 99% of the benefits come from making additional payments on your mortgage and 1% of the benefits come from the “float” of using the HELOC as a checking account. I have a HELOC. They are useful, and can be used to pay down your mortgage as well as some of the liquidity stuff Adam says, but the benefits are being hugely overstated here. I like your podcast but you guys got a little bit sideways on this one.

          • Daniel says:

            There needs to be an answer. This is math, not political science. Who is in charge? Haha.

      • Donna Kays says:

        Try them !!

  2. Andrew M says:

    This is one of those episodes where you both need to listen to it more than once and need to read the notes. While I’m not comfortable in doing the POLC, this is something I would certainly be doing when I get a home!

    • Candice Elliott says:

      You should always be reading my awesome show notes!

    • Dave says:

      Do the math and read the majority of these other posts. You will see this is nothing more than smoke and mirrors and unfortunately they are pitching you sign up for shread my mortgage .com and pay $500 to use their system/software.

      Just pay off your mortgage straight to principal the same way you are looking at doing here, without needing a HELOC to be a middle man at a higher interest rate.

      Just doesn’t add up! Sorry!

      If it is too good to be true… it usually is. If this really worked, don’t you think there would be articles about this all over the internet? Just google it and you will see there isn’t much out there about it.

  3. Jessica Taylor says:

    I’m about to restart this podcast for the THIRD time. Holy cow! There is A TON of good stuff in this audio! Way beyond my usual light morning commute educational material. Now you’ve got my mind really cranking. Thanks, guys!

  4. Jessica Taylor says:

    What software did Adam use to manage this process?

    • Laura Fiebert says:

      Hey Jessica! It’s called Shred My Mortgage. The link is at the bottom of the show notes. Rumor has it that Adam and Andrew will be working on improving it soon ;)

    • What @laurafiebert:disqus said ;)

      Also, it’s not so much that the math is complicated as executing on the strategy could be a bit confusing like knowing where to send your money when. Shred My Mortgage basically spells it out for you.

      And yes, there is a weird rumor going around. I’ll have to ask Adam what he thinks about it on Friday when we discuss plans of our super secret project together.

  5. Alex says:

    I’m a bit skeptical, this sounds a bit like a shell game. You might want to just make a spreadsheet real quick to see how this pans out, or post over on the MMM forums where their smart community would be able to explain better why this is not viable. I’m fairly certain the HELOC only makes any sense at all if it is a lower interest rate than the mortgage. Otherwise you are better off sending that extra money straight to the mortgage. Unless this is only meant to be some kind of psychological trick to force someone to pay off quicker who wouldn’t otherwise put the money toward their mortgage or investments, but I don’t see how this is the case because people without that kind of discipline aren’t likely to be disciplined with a HELOC loan. The higher interest rate HELOC in your example is actually costing you more interest.
    Also highly skeptical of banking through your HELOC, taking out a collateralized loan to pay bills based on the assumption everything will keep going up and up…? Sounds like the kind of credit games people were buying as “smart” in the run-up to the last crash. Regarding the point about 100% of foreclosures happening on homes with mortgages… a HELOC is effectively a mortgage and can be used to foreclose on a home. If you pay off your mortgage only to borrow on a HELOC to invest, you’ve have traded a low fixed interest loan for a higher interest variable loan that can be cancelled at any time. You would have been better off investing all along and keeping the mortgage. If your goal is home security the HELOC has gained you nothing.
    I think there are also some misconceptions presented about interest rates. If you pay off your mortgage more quickly you haven’t exactly “saved” interest, you’ve paid off a loan and transferred your money into home equity. There isn’t a new effective interest rate of “0.7%”, you can’t compare the total interest paid on a 5 year mortgage as if it was the interest paid on a 30 year mortgage because you’ve borrowed the money for 25 less years. Also amortization isn’t a form of interest, it is a schedule to pay off a loan in a determined period of time by adding principle into the payment. A mortgage is also a simple interest loan. Paying off $10k of 3.5% loan with a 5% loan is not mathematically wise, there isn’t some higher interest rate on the top $10k of a $80k mortgage, you are paying the mortgage rate on every dollar of the loan.
    That’s about all I have time for now, but some further research and outside analysis would be good.

    • Nick says:

      I certainly have to crunch the numbers on my own. However as for the foreclosure concern you posted above, I think taking out a HELOC that is below a person’s emergency fund would probably be prudent. That way if the note is ever called you can simply pay it off in one hit. Also having a large note suddenly call for constitutes as an emergency in my book.

      I am also not quite grasping how the overall loan is paid off quicker vs just increasing the payment toward the mortgage. It seems like its just a mind trick of moving around the money to a different place but I’ll have to research further.

      • Nick, it comes down to the real interest you pay over the course of a mortgage (amortized) vs the interest you would pay with a HELOC (simple interest).

        Simply put, all of your interest is front loaded in an amortized loan so if you bought a home, lived there for 5 years and then moved you would have made almost no progress on the actual principle of the loan. However, if you leverage a HELOC you can build real equity quickly and dramatically reduce the amount of interest you’d pay on your mortgage.

        You’ll certainly see more on this (and the math) but on my current mortgage of 3%, a $5k payment through a HELOC once would save me aprox $15k in interest under the assumption that I don’t contribute even a single extra dollar to the mortgage than I would have otherwise. This includes the interest of the HELOC. It’s basically debt arbitrage – not so different from refinancing expensive debt with cheaper debt.

        • Dave says:

          Andrew you continue to not think about the fact that you are not switching out for a “cheaper debt”. Interest is interest is interest. The HELOC typically is actually more expensive, as Adam even said here (5% today). You are forgetting that when you use your HELOC to pay a chunk of your mortgage you then have that new “loan” out (the HELOC). You then have to pay that down or you incur a higher interest rate than mortgage. You aren’t realizing that a mortgage is NOT arbitrarily trying to screw you over. The high interest up front is ONLY cuz mathematically you sign up for a 30 year mortgage which means you say to the bank, “I need 30 years to pay you back, how much each month do I need to pay EXACTLY to pay you 4% (mortgage rate locked in) interest on it.” So mathematically over 30 years you HAVE to pay small principal and high interest to start, otherwise your mortgage wouldn’t go 30 years… It would pay off too quickly if the payments were setup with higher principal early on. That is something people don’t always understand.

          So when you take the HELOC out, this strategy is just talking about paying HELOC off quicker by putting all your extra monthly income into it to minimize interest on the HELOC. Instead you could have just used that extra monthly income to go straight to mortgage without a HELOC! A HELOC rates/interest would be exactly the same as your mortgage if you were going to take 30 years to pay it back. That is the misconception and what was overlooked when talking about this strategy.

          Please put together a spreadsheet calculating out the examples you gave on the spreadsheet. I did one myself and the math shows you are actually worst off with the HELOC because you have a higher interest rate (you used 5% on the show) as well as more risk because the rates are typically variable on a HELOC. You need to calculate an exact example of payment schedules (i.e. Extra income paid to HELOC) for your startegy scenario and then calculate a regular mortgage by making principal payments to it with these exact same HELOC payment schedules and then see what ends up being less.

          Sorry but to me the math doesn’t work and this is one of those strategies similar to the companies that try to get you to sign up for their services to make payments to your mortgage every 2 weeks instead of once a month. All those do is create 26 half month payments (52/2) instead of 12 monthly payments (24 half month payments). You don’t need to pay someone for this “system” you just need to make one extra payment a year to realize the same gain!

          Please do the math and think about adding a disclaimer or clearer definition on the podcast page because it seems that you are just trying to get us to 1) take this as valuable and trust into this system and your podcasts and 2) go look at that website you referenced (which I am sure you get kick backs from) that charges $500 to have access and get details of the system.

          I would love to hear your response to this but as you can see by the overwhelming majority of these comments, this system doesn’t add up.

          Also I wasn’t impressed with some of the over simplified comments like “HELOCs are great cuz they can go in and also out unlike a mortgage. For example, if I want to buy a new car I can just buy it with the HELOC and pay it off in a couple months.” That is such BS because that has nothing to do with the HELOC!! You are just saying you have a ton of cash on hand to pay off a $20k car for example in a couple months. And you still pay 5% interest on that $20k which most car manufacturers can give you a better rate with decent credit score. Like many people I know in Seattle get a 3% loan easy on a new car. So therefore the HELOC would be worst. Just take a 3% loan from Toyota and pay it off “in a couple months” if you have that much disposable income.

          The other problem is that most of your listeners are not going to have this kind of disposable income.

          Ok, that’s enough now haha. I appreciate the effort and message here, but I just think you need to vet the math better before producing a episode like this. You lose credibility when you say things like “I don’t know the exact numbers but we’ll let the math nerds do that.” Which you said multiple times in the podcast.

          Look forward to hearing your response, but very disappointed in the lack of research and understanding here. If 90% of your comments here agree you all are wrong here, then you need to own up to it and really check your math. WE ALL are not just “out to get you” and making stuff up. The math just doesn’t work.

          • Only4YouP says:

            You have to explain all your comment to Dave Ramsey and all the experts. The strategy to payoff mortgage with a LOC (HELOC, PLOC or Credit Card inclusive) works great. In the last month I’d save 25k of interest paying to the principal of the mortgage 20k and using Parking Check I paid only $535.00 in interest in my PLOC and my mortgage accelerated by 5 years. Simple math.

    • Andrew M says:

      I definitely will need some kind of tool/spreadsheet for me to play with to understand all of this myself.

      • Very soon you’ll start to see some stuff appear in the Community downloads section and ShredMyMortgage – Adam and I are going to try and revamp it and roll it into LMM. That’s a bit more long term project though.

    • Alex, you’ve got quite the epic comment here. I’m glad your skeptical, I try to keep that as my default disposition. Let me see if I can unpack what you wrote and explain.

      1. Your HELOC needs to be lower interest than your mortgage to make sense. False. Because your mortgage is amortized vs the HELOC being simple interest, your HELOC rate would have to be much much higher for this not to work. If you’re willing to do a little bit of work, a simple comparison using an “interest calculator” and a “mortgage calculator” with the full payment schedule should illustrate this.

      2. No psychological trick to get people to over pay. If you use the HELOC approach and pay *exactly* the same amount towards your home every month you will end your mortgage quicker than 30 years. Simply put it’s debt arbitrage, flipping more expensive debt for cheaper debt.

      3. “People wont be disciplined enough.” Possible but we’re hoping to fix that with automation. For now you can at least get a complete plan spelled out for you with Shred My Mortgage along with all the math and scenario calculation you could ever want.

      4. This actually has nothing to do with the value of your home increasing. The only way you’d be able to leverage more value is if you kept getting your home reassessed (through the mortgage company) and they increased the value of your home on paper. That’s a non trivial process that will cost you every time. It wouldn’t be remotely cost effective so likely you’ll do it once and then execute this strategy independent of whatever the market says. Max you can leverage yourself is 90% of home value which is less than what was possible pre-2008.

      5. “If you pay off your mortgage only to borrow on a HELOC to invest, you’ve have traded a low fixed interest loan for a higher interest variable loan that can be cancelled at any time.” This is true on the face but you’re implying quite a lot of subtext that’s incorrect. For example, if I have a mortgage of $100,000 and I take $10,000 out of my HELOC and put it into my mortgage, my total debt is still $100,000 only it’s $90,000 in amortized debt and $10,000 in simple interest. You don’t increase your debt load, just reduce the cost of that debt load. Can you dig yourself into a hole? Yes. But you can also do that with credit card debt, car loans, personal loans and a whole slew of other products. You of course need to be responsible and stick to the plan instead of buying a LCD TV with that money.

      6. “I think there are also some misconceptions presented about interest rates. If you pay off your mortgage more quickly you haven’t exactly “saved” interest, you’ve paid off a loan and transferred your money into home equity.” I disagree. You’ll shave technically speaking a fuck ton of interest. Perhaps better described as a metric super fuck ton in Europe ;)

      7. “Also amortization isn’t a form of interest, it is a schedule to pay off a loan in a determined period of time by adding principle into the payment. A mortgage is also a simple interest loan. Paying off $10k of 3.5% loan with a 5% loan is not mathematically wise.” This is correct if you’re comparing two simple interest calculations, here we are not. Also, amortization isn’t a form of interest, I agree, it’s a schedule that really really sucks. According to the National Association of Home Builders the average person stays in their home for 13 years. If that’s the case than you would make out like a bandit if you followed the HELOC approach. The reason is because the schedule of payments with an amortized loan front loads the interest. SO, if you overpay principle by leveraging a HELOC you slash the actual cost of the mortgage. Considering that the first month’s mortgage payment is well over 2/3rds interest, I find it hard to believe that anyone would be able to come up with math that shows paying this way is more effective than leveraging a HELOC. Interest rates are deceiving much like fund fees, that’s why banks make out so well. Logically I can see where you came up with your argument but mathematically it is incorrect.

      Keep an eye out on the article end of LMM. This was all excellent stuff in here and I will take it upon myself to refute it with iron clad math and oh-so-sexy graphs. You spoke what was on a lot of people’s minds and this will be a valuable launching point as we go deeper down the path and illustrate everything.

      • Steve Parker says:

        Mortgages are simple interest. Just look at the interest due at each payment. If you want to pay down a mortgage rather than invest, fine, that is a decision you can make.

        • True, perhaps you know a better phrase or term to describe the comparison? I was thinking simple interest as in simple vs complex, not Simple Interest vs Compound Interest.

          • Steve Parker says:

            I don’t really have a better term for it, sorry. It’s just that amortization is the way the payment is calculated in order to provide a fixed payment over the life of the loan. The interest for each payment is still just a simple interest calculation.

      • Alex says:

        Make sure you account for all the costs so it is apples to apples, maybe compare total costs for the HELOC method vs just paying off the mortgage faster. I think maybe you are comparing using a HELOC and paying if off quickly vs keeping a 30 year loan and coming to the conclusion that an orange is the best apple. Perhaps this just comes down to a common misrepresentation – that mortgages are somehow “front-loaded” with interest. They aren’t – you have just borrowed the most money at the beginning. The bank gets a return on their outstanding loan equal to the APR, so in the above example the first month they get a return in the form of interest of 0.29% (3.5/12) of the $80k you have borrowed. That’s what we mean by “simple” interest – you are only paying the interest rate on the outstanding principle. I guess the counter example would be like a credit card where you don’t have to pay off all your interest in a month and you can start owing interest on your interest, then your interest is compounding. I usually think of compounding as a growth thing, and I don’t know much about credit card debt, but I’m assuming that it is still called compounding when it works against you.

        I’ll try to explain the math briefly. If you owed $80k on your mortgage the total interest you pay the first month is 0.0029*80,000 = $233. If you had paid off 10k of the mortgage by taking a 10k HELOC at 5% your interest the first month would be 0.0029*70,000 + 0.0042*10,000 = $246. That is true completely irrespective of how much you pay towards principle. I’ll take this one month further and assume you end up with an extra 1k that month to either put toward your 80k mortgage (scenario 1) or your 10k HELOC (scenario 2). Under a 30 year amortization your first mortgage payment (a constant $359) and the 1k extra took $1126 off your 80k loan, or $155 off your 70k loan + 1k off your 10k HELOC. Now under scenario 1 your interest payment is 0.0029*78,874 = 230. Under scenario 2 your interest payment is 0.0029*69,845+0.0041*9,000 = $241. The interest in scenario 2 never is lower than scenario 1. I’m hesitant to post the tables in the comment section, but if you want I will.

    • Steve Parker says:

      That was an excellent post. Pretty much what I was thinking the whole time. The only thing I would add is that the only way this remotely makes sense is if the rate on the HELOC is lower than the mortgage. Even then, can you invest elsewhere at a better rate? If so, why not invest for growth and let the mortgage ride?

      Thanks for laying it all out there.

      • Steve, math speaks louder than words. Please demonstrate if you are so certain.

        • Steve Parker says:

          Aww, man, you want me to do math? No time right now, . Gotta run to volunteer at Scouts. If I get the time to crunch the numbers in my head, I will get back to you. In my case, my 15yr fixed is at 3.25%, and my CU’s lowest HELOC rate is 3%. I’ll try to work with those numbers and provide the data.

        • Steve Parker says:

          OK, Back with numbers. Based on a $80k/30yr/4% mortgage I did some math with the following assumptions: You could take out a $10K HELOC at the same 4% rate. You could squeeze $500 a month from your budget.

          Method 1, you borrow $10K and apply it with your first mortgage payment, your total interest over the life of the loan is $38,428. You are paid off in 284 months. You have to pay that back, and you can pay $500 a month. Takes about 21 months and costs you $366.

          Total cost for this method is $38,794.

          Method 2, you just pay $500 extra on your first 20 mortgage payments (20*$500=$10,000) Total interest over the life of the loan is $$39,255, in 286 months

          The difference is $461 and 2 months. So not zero, and of course, and if you do it again and again you can save a bit more. I would argue that the savings decreases as you get further into the loan. Of course changing the interest rates will change the result.

          Obviously this is a huge savings over just making no extra principal payments, in that case you pay $57,496 in interest. We could argue that investing extra cash rather than paying off the mortgage early makes more sense anyway, but that is another topic all together.

          It is interesting to think about if you want to pay off your mortgage early. Hopefully I didn’t screw up the math

    • jb1907 says:

      HELOCs are rarely if ever lower than the original mortgage.

  6. Hey guys, thanks for the super informative podcast. I’m about to buy a home in one of the most expensive markets in the country and it’s great to know there’s a strategy to accelerate paying it off and build wealth at the same time.

    For me, 45% (!) of my overall loan amount is going to be interest, so if I can reduce this amount by paying down the principal faster, I’ll be able to put my hard earned cash towards something else. Definitely going to be looking into a HILOC soon and any additional resources you could provide would be appreciated.

    • Glad you found it useful Meagan, I selfishly did this episode because I wanted to flesh out the whole idea so I can accelerate my own mortgage. Just an FYI, it’s a HELOC if you’re trying to google it :)

  7. David Lowe says:

    Say you did start a HELOC, and the “extra cash” that you deposited into the HELOC is sent towards the mortgage, how in the “[email protected]” is that any different than just sending the “extra cash” towards your mortgage? BTW, you guys are awesome!

    • Allen says:

      It’s not really. I think it’s just a method to ensure that your extra money is used for that purpose. Since any excess cash is, by default, paying down the HELOC, it’s not just sitting idly in a checking account. Mentally, it can be difficult to spend a checking account down to zero if you don’t have to.

      • Agreed and as Laura and I gear up to execute this on our own mortgage we’re discussing things like that. We’re going to keep cash outside of the mortgage/HELOC and outside of our emergency account for flexibility and the ability to jump on opportunities quickly. That said, even without additional cash in this makes a whole lot of sense.

    • Hah, “[email protected]” eh? Did you mean fuck? ;)

      An extra payment always wins but this strategy is more about debt optimization than finding free principle. In the simplest terms it’s similar to a debt refinance in that you take out your expensive debt by replacing it with cheaper debt of the same dollar value. Why pay more when you don’t have to? Only reason I see is because nobody talks about this stuff – especially the banks. It makes your mortgage much less profitable.

    • Daniel says:

      It’s not the same. It took me a while to figure this out. I hope I can explain it well here. So, if you take an extra 1000/month and send it to principal, it would take you 10 months to get to an additional 10k of mortgage reduction. Using this HELOC gives you the advantage of the 10k in interest earning principal going away instantaneously vice waiting ten months to get there. Sure the cost of the HELOC interest will be somewhere between 500-1000/year in interest, but that pales in comparison to the 8k in interest over 30 years at 3.25% in your mortgage. Add this to the fact that the interest on the HELOC is actually lower if you use it like a checking account and avoid paying interest on cash held in there. It is confusing and it helps me to see the savings when I compare the cost of HELOC borrowing vs the cost of the money in the mortgage over the long haul. The big bonus of the HELOC is that you can knock off big chunks from the interest accruing balance early on in your mortgage when it has more of an impact on how much you ultimately pay.

      • Dave says:

        This is just wrong… do the math over the entire 30 years. You will see you are wrong. You are comparing paying back 10k in one year to the HELOC vs paying back 10k over a 30 year mortgage. This is just so wrong! compare apples to apples.

        Mortgages are NOT compounding interest. If you take 10 months to pay down 10k to mortgage, the extra interest you paid will be less than the 500 you paid on the 10k in a 5% HELOC over the same 10 months (like your example). Just look at an amortization schedule and you will see!!

    • Dave says:

      Agree completely. It isn’t any better. It is actually worst because then you have to re-pay the HELOC at a higher rate than your mortgage.

      These guys seem to be trying to pitch this shreadmymortgage website which is unfortunate. If you just do the math, it does NOT make sense.

      • Dave, it actually DOES pay off because large principle payments early on ARE beneficial. It is not however magical. A simple amortization schedule like a spreadsheet on Vertex will show you that even with the cost of the HELOC, it is more effective to lump sum early than to pay the same amount spread over X months.

        It is however measures in hundreds of dollars in savings, not thousands. I know this because I’ve spent hours doing the math. Instead out trolling and shitting on is, do the math and share it. Attach a spreadsheet. Contribute to the conversation, don’t degrade it. It’s about education, not being right.

        • Dave says:

          Just to be clear here based off what you just said “…however measures in hundreds of dollars in savings, not thousands”… You are saying the HELOC doesn’t gain you that much?

          Cuz in the podcast it was implied and even called out that you would be saving 10’s of thousands… Not just hundreds.

          Also the HELOC is variable so there is good risk (especially now with the fed reserve state today) that it can go up.

          Thoughts?

  8. mclaughlindw4 says:

    Having saved 160,000 in interest in three years doesn’t make sense. On a 250,000 mortgage, his interest rate would have to have been absurdly high to have payed that much just with regular payments.
    Lets say he got a crappy interest rate of %5. That’s 36,000 in interest over the first three years.
    Other than that. It’s gonna take me the rest of the week to wrap my head around this.

  9. Allison says:

    I really enjoyed this episode, it has me thinking of ways to use this on my rental property mortgages. Good questions Andrew and Thomas! I will have to check out the “shred my mortgage” site for more information.

    • Thanks Allison! We’ve been trying to find an expert on this for awhile – if only we spoke to Adam sooner ;)

      ShredMyMortgage is going to be a new side project for us and hopefully (eventually) rolled into LMM. As a developer I’m obsessed with putting effort towards making all of this more accessible for those who hate spreadsheets.

  10. kirsten says:

    Very interesting (and good) episode. One question, hypothetically, if I just sent all the leftover money in my checking account to my principal each month I could achieve the same thing without having to get a HELOC or pay any interest on the HELOC?

    • Thanks Kirsten!

      Nothing replaces making additional cash payments, those are the best. It’s perhaps best to consider this along the same lines as a debt refinance. You’re swapping more expensive debt for cheaper debt. So, if you have an extra $2k, put it towards principle but you may be able to leverage $60k and pull that out of the HELOC and put it into the mortgage dramatically reducing the sum total interest you’d pay.

      • kirsten says:

        makes sense, thank you!

        • Dave says:

          No, it does NOT make sense. Just make payments straight to the principal of your mortgage… it does the same thing accept without paying a higher interest (HELOC is higher) on the money your borrowed to just go straight back into your mortgage anyways. This is super disappointing because 1) LMM didn’t fully vet this out 2) they were a little cloudy on their math throughout the entire podcast and 3) they continue to reference and pitch Shred My Mortgage .com which they want you to pay $500 to use their system.

          This is EXACTLY like those damn letters i get in the mail telling me I can save xx years and xxx dollar on my mortgage if I buy into their system to pay my mortgage every 2 weeks instead of every month, which effectively just makes 26 two week payments a year (52 weeks / 2) versus only 24 two week payments worth if you pay monthly (12 months * 2). So you are just paying an extra payment a month, thats it. No magic! These folks try to get you to sign up for something that you don’t need to!! So disappointing.

          I really need a response here from LMM because i am super frustrated right now with this.

      • Daniel says:

        Is it really better? Will paying it down using this HELOC method end the loan faster than making extra payments oh master of the spreadsheets? I am not sure it will. Using the HELOC is leveraging someone else’s money to pay your debt down. Isn’t that more effective than using your own?

  11. dw says:

    Is it more beneficial to take out 10K on a HELOC (if it’s available as equity) than 5K? Or is it equal?

    • Daniel says:

      I think the more the better, so long as you are staying ahead of it. I think. This topic has me reeling!

    • I agree with @disqus_sRFfQdOAWc:disqus but you shouldn’t just go foot to the floor and max what’s possible. Be reasonable and only do what you’re comfortable with. Yes it’s more effective to pay down a HELOC than a mortgage but you want to keep the HELOC balance within a few months of paydown.

  12. Steve Parker says:

    The effectiveness of this strategy greatly depends on your mortgage rates. In this low interest environment, not sure how much I’d even want to pay off my mortgage early vs invest for long term growth.

    Good episode, but remember, there is no magic. You still need the extra money to pay off the HELOC, and unless there is a big rate difference, it doesn’t matter.

    Could be useful for people that need a simplified way to squeeze every penny out of their monthly budget. Sort of like paying yourself first, except in this case you are paying your mortgage first. Still the question remains, is that a smart thing to do?

    • Steve, agreed. There is no magic in personal finance in general – I see it more as an optimization problem. Getting the most work out of each dollar through tax/fee/debt interest avoidance.

      However, are you suggesting that pumping the exact same dollar value in year #1 through a HELOC on a rolling basis vs straight up mortgage payments would be equal? The numbers look like it would reduce quite a lot of interest using the HELOC over the term of the mortgage. I’d love to see an example in year 1 for the contrary. It still works well beyond year 1 but the difference will be less extreme.

      • Daniel says:

        I love the idea of my own cash serving as reserve capital in an effort to avoid interest fees! You can become your own FED!

        • jb1907 says:

          What interest fees? Either you pay interest based on the principle or somewhere you pay fees for something.

          • Daniel says:

            The 5% interest for a year of borrowing in the HELOC is lower than the 3.25% interest over 30 in the mortgage, right?

          • jb1907 says:

            I don’t know. What is the loan balance on the mortgage, what is the amount borrowed on the HELOC. you can’t just compare two interest rates.

          • jb1907 says:

            Show me your amortization schedule for your mortgage and your HELOC schedule, then show me how using the HELOC to pay down the mortgage saves money.

          • Dave says:

            Guys you aren’t understanding this!! This example makes a poor assumption that somehow you are paying compounding interest (interest on top of interest) on your mortgage. You are not paying 3.25% over 30 years versus 5% over one year. Unless you are assuming you pay your ENTIRE mortgage in one year from a HELOC which you aren’t… and even if you are, just pay your entire mortgage in one year straight into your mortgage! You are not comparing apples to apples. You can’t look at interest over a one year HELOC payment vs interest over a 30 year mortgage!!!! You have a 30 year mortgage in order to spread your payment of debt over 30 years! So you don’t have to pay it back quickly. So if you want to compare HELOC vs Mortgage then also calculate what it would cost if you paid the HELOC back over 30 years! It is more expensive.

            And then your response may be, “well we are talking about paying back early and putting extra income into the HELOC each month which is the point of this strategy, so we won’t take 30 years to pay it back.”… well duh! No shit.. but the problem is, YOU DON’T NEED A HELOC to do this. Just pay that same extra amount you plan to straight into your mortgage principal and it will save you even more money because you dont pay this extra interest on the higher HELOC rates.

            Money is money is money and interest is interest is interest. 4% is better than 5% regardless of what dollar value lump sum you are looking at. Do the math please… i beg you all!

          • Daniel says:

            I think I am now onboard with the whole thing not making sense. If I was able to to pay off my entire home today, I would take the money and invest it instead of saving the interest cost. Why would this be any different?

  13. jb1907 says:

    I don’t agree with this solution. Just pay extra on the mortgage after you save for retirement. It is just a shell game at some point.

    • Daniel says:

      Prove it.

      • jb1907 says:

        I paid off our mortgage early without having to open a HELOC.

        • Daniel says:

          More specifically, can you prove that simply paying extra on your mortgage is the same as doing this method discussed here. For example:

          So, if you take an extra 1000/month and send it to principal, it would take you 10 months to get to an additional 10k of mortgage reduction. Using this HELOC gives you the advantage of the 10k in interest earning principal going away instantaneously vice waiting ten months to get there. Sure the cost of the HELOC interest will be somewhere between 500-1000/year in interest, but that pales in comparison to the 8k in interest over 30 years at 3.25% in your mortgage. Add this to the fact that the interest on the HELOC is actually lower if you use it like a checking account and avoid paying interest on cash held in there. It is confusing and it helps me to see the savings when I compare the cost of HELOC borrowing vs the cost of the money in the mortgage over the long haul. The big bonus of the HELOC is that you can knock off big chunks from the interest accruing balance early on in your mortgage when it has more of an impact on how much you ultimately pay.

          • jb1907 says:

            Your interest gets less and less each year you pay off your principle. I don’t have time to set up a hypothetical interest payment schedule and compare it to a theoretical HELOC. It is just more complicated moving money around to save a few hundred dollars.

          • Daniel says:

            Let’s say I just do it once. My mortgage costs me 175k in interest right now. 323k at 3.25%. If I do this and just drop 5k on it, I will save 8k in interest. If I pay the HELOC back over the full year, I will pay 225 dollars in interest. I see it as choosing to pay 225 dollars in interest vice 8k. Is this not the case? Am I missing a big major point?

          • jb1907 says:

            you need to set up an amortization schedule and see how extra payments reduce the interest. I 100% agree with you that you pay a ton more in interest when you have a 30 year mortgage and you pay exactly what you owe. a mortgage isn’t simple interest but the interest gets lower as the principle gets lower. How big is the loan outstanding? Simply saying you are going to pay 175K isn’t correct until you run the amortization schedule showing the extra payments. Then you can run the HELOC payment schedule borrowing money from it to pay down the mortgage.

          • Good, then check out ShredMyMortgage.com and run some sample numbers. The proof is in the pudding.

          • Dave says:

            WOW!! Ofcourse you would say this. Go to our website we are promoting and pay $500 to sign up! Unbelievable!

          • jb1907 says:

            What interest on cash in a checking account? The rates are .01%. I get .07 cents in my checking account.

          • jb1907 says:

            You can use the same chunks of money to pay down the loan balance. Why funnel the money through a HELOC? You aren’t saving any money unless there is a large spread, which again, until you have an actual mortgage and an actual HELOC with a fixed interest rate, which none are that I know of, it is a moot point. Feel free to move the money around and save a few dollars. It is easier to just pay down the principle. A HELOC is probably going to be lower interest than a mortgage, but not more than 1%.

          • Daniel says:

            It’s actually more. I can get one at 4.5% and my loan is 3.25%.

    • Dave says:

      I agree 100%

  14. Bongo says:

    The benefits of this are hugely overstated. Here’s some quick math:

    If you go to shredmymortgage and put in the example of an 80k mortgage, 30 year term, 5% interest rate, $3k in income and $1.5k in expenses, it says you pay off your mortgage in 5 years, save $63.9k in interest with and effective interest rate of 0.853%! Wow! But this
    example is making additional payments on their mortgage of $1.5k each month. If you run the numbers and compare that to someone using regular banking and making those same additional principle payments of $1.5k each month then you ALSO pay off your mortgage in 5 years, save $63.9k in interest and that interest rate of 0.853% is just plain wrong. It’s the same thing.

    Here’s the benefit you are getting if you don’t prepay your mortgage: Assume your HELOC is 4%, your mortgage is 5%, you average $2k in your checking account earning 1%, and you take out a $10k HELOC and bank off of that. Then your savings is $10k * (5% – 4%) = $100 from the interest rate differential on your mortgage and HELOC, and $2k * (4% – 1%) = $60 from the interest rate differential on your HELOC v checking account. $160 pre-tax, after taxes about $100. It’s nice, but kind of a lot of work for $100, and not the bazillions of dollars they are claiming.

  15. Hintsa says:

    I like the idea because anything that saves you money is great. But doesn’t it make more sense to just save up $5K and then begin this process of paying down your mortgage then building up the $5K again? The HELOC method is only viable if you have a have extra money leftover anyway. Why add an extra step?

    The only counter argument I can think of is that, in the time spent saving up your $5K, your savings on your mortgage will drop by more than the interest on your HELOC. I haven’t done the math but surely there is a sweet spot in terms of initial starting amount and time to save said amount, to where it becomes more viable to just skip the HELOC all together.

  16. Randy Brenny says:

    I really enjoyed this episode! I think content that legitimately engages peoples own thought process and generates engaged discussion is awesome! Way to go on creating this guys!

    I own a 300K house and have really been looking for a GOOD way to pay down the principle. I haven’t decided whether I’m necessarily going to do this or not… I’ve read through all the comments and discussion and found all of it to be rather insightful! I would agree with people that the simplest and cheapest way to pay down your mortgage, if you just had the cash to do it, is to pay it down with straight cash. However, most people don’t…including myself. I’m married, have 3 kids, a dog, an SUV, and with all that can come un-expected expenses (as is the case with most people).

    I think you guys nailed it in the episode…but it got lost in this discussion a little bit…is the HELOC gives a solid way to pay down your mortgage while keeping the money liquid if you happen to need it back for the un-expected. Many of the individuals below are just saying to put the extra cash in without the HELOC. Well, what if the roof leaks? What if your furnace is shot? What if the 200K mile car decides to die? What if one of the kids decides to join dance (for those that are unaware…rediculous amount of money right there!)??? A HELOC gives you the liquidity to compensate for being a little over zealous on paying down principle. If you just use cash…you don’t get to call the mortgage company and ask for some of it back… Many of the people are going to bring up emergency fund now…but why tap into that if you don’t have to?

    In theory, I like this! I like this for, specifically, the liquidity part of it. Well done gentlemen!

    • Nathaniel says:

      Hi Randy, I am agreeing with you 100%! I am still to crunch the numbers on this but I Think the whole point of this system is not actually to reduce the overall interest as such (although it seems to be marketed that way). I think it is simply a safe way to pay your homeloan (sorry i’m European) without the anxiety that comes with not having any cushion money to fall back on.

      The way you are going to pay less interest is simply because you are paying your homeloan quicker….because you are paying off your Heloc which is making you pay money into your homeloan indirectly. Like you said, if you pay money into your homeloan it is gone forever, but on the other hand, if you pay money int your heloc, you could re-access it in case shit hits the fan.

      So yeah please let me know if i’m fucking up my analogy but I think I have pinned it down.

  17. Andy P says:

    I just listened to this yesterday and it was pretty intriguing at first. When you think about amortization and how crazy the interest payments are, etc. I guess I learned some advantages of helocs. So I did a little more research and found the ‘Shred Your Mortgage’ site which was oh-so-conveniently mentioned on the podcast and by the guest Adam. They have a little calculator: http://www.shredmymortgage.com/free_analysis I plugged in a scenario and here’s what I found.

    In their calculator I entered the following: $200,000 loan balance, 4% interest, 30 years to payoff, $1000 monthly mortgage payment, monthly income $5000, monthly expenses (excluding mortgage) $3000. Pretty standard.
    Result: you save $98,581 in interest and pay off your mortgage in 10 years with our program!! Wooohoo!! This is in line with what the guest Adam said, between 7-14 years…great

    Ok, now let’s cut all of the BS out of this and go straight through the smoke and mirrors: if you simply take an extra $1,000 per month, (no heloc’s, credit cards, moving money from this account to another, no $500 software etc.) and place it into a mutual fund every month for 10.5 years. Do absolutely nothing. With a 6% annual return (below market average return) and compounding interest, in 10.5 years you will have an account worth $167,507.57. You will also have approximately $45,000 in equity from making your regularly scheduled mortgage payments. Therefore you can pay off your house with no complicated system or software and have an extra $12,507.57 left over. Not to mention all of the tax deductions from mortgage interest. Simple enough???

    Oh and another HUGE thing in my opinion… When you open the calculator at Shred My Mortgage that I referenced above. There is a pull down menu that asks who your “agent” is, and wouldn’t you know it Adam Carroll, the guest, was listed. Looks like he has some skin in this game. If it looks like shit and smells like shit, its probably shit.

    Is this a method to quickly reduce your mortgage if you have disposable income? Yes
    Is it more effective than almost any other investments? No

    Please prove me wrong

    • Allen says:

      You’re right, but I think you’re being too harsh. The savings on the mortgage is guaranteed; the extra $12,507 is not in a 10 year period. Could be more or less. The market average is based on any 30 year period. There’s also taxes on the gain involved with withdrawing $155,000 to completely pay down the mortgage. Doing that is a good gamble, but it’s still a gamble.

      I went to my bank and got a HELOC quote lower than my mortgage rate and student loans. In my case, the strategy would take me 4.6 years to be out of debt. In that small of a window, the market is highly speculative. It’s not a bad strategy depending on your situation.

      • Andy P says:

        First, the S&P average since 1928 is 10%, so id say a 6% return on a mutual fund is very conservative. Even at a 4% return you would be to a level to payoff the remaining mortgage balance in this timeframe. Also you would pay around $9,000 in capital gains tax at the highest tax bracket with a 6% return. At 4.5% heloc you would pay $5,670 over the same period. The heloc part is the diversion. It’s completely irrelevant. Just make additional payments every month to your mortgage. Simplify things. No software or consulting fees required!

        • Allen says:

          That’s why it’s an average of 87 years. It doesn’t work in small time increments. Mutual and index strategies are for decades. In my example of 4.6 years, that is a real short-term return that’s attractive in an environment of likely federal interest rate raises.

          But the point of the strategy is using all your excess income to pay down debt. Doing that without any liquidity is scary. The HELOC provides that liquidity if necessary. And if the HELOC has a lower interest rate than the debt you’re paying off, it absolutely saves you money and is not irrelevant.

          • Andy P says:

            I think you are splitting hairs here. The point I’m trying to illustrate is that if you are the least bit savvy with your money, which I assume most listeners to this podcast are, you can average above 4% returns per year on your investments. If that happens to be in a mutual fund for the given market conditions or real estate, whatever. I just used mutual funds as an example because it is extremely, safe, easy and conservative. The most misleading thing is that the guest, who it appears has an interest in this software, says he doesn’t understand why everyone with a mortgage and extra income doesn’t do this. This is just nonsense. If you do decide to do this, please don’t use the software, this way you are forced to actually understand the numbers yourself.

          • Daniel says:

            Good point, Andy. The cost of 10 over 30 years at 3.25 is roughly 8k in interest. The cost of 10k for the year in the HELOC is roughly 500-1000. I am having a hard time not viewing it in this light. I see a 7k savings on my mortgage each year, roughly. 10k wouldn’t make 7k/year in the market, would it? I currently pay nothing extra on my mortgage because I am in the same school of thought as you here. Until I heard about this. Please help me see where I am wrong.

          • Daniel says:

            I also have no desire nor do I see the need to go to that shred my mortgage site.

  18. Lawrence Pham says:

    I understand how powerful the HELOC is by utilizing this strategy. My question is if I bought a 100k home and put 20% down, my mortgage would be starting off at 80k. If I took out a HELOC at 90% loan to value, I would get a 10k HELOC. Now if I took that HELOC and paid with the full 10k amount towards my student loans, which is at 6.55%, wouldn’t my new mortgage be effectively 90k now instead of 70k (80k originally + 10k HELOC)?

    • Well, yes and no. You would have $90k in debt on your home but your mortgage wouldn’t be $90k. That’s important because you’d be at 90% debt to equity but you wouldn’t trigger PMI payments.

      Should you throw the money towards your student loans? That’s up to you but if the interest rate is significantly higher, why not? Knock out the higher interest payment. It’s all about optimizing the effort of your dollar.

  19. Aaron B. says:

    I feel like I understand the difference very well internally but I wanted to put the numbers on paper to help illustrate the point. However when I did so, I couldn’t make it work with the math which I’ve outlined below. The math I used was “back of the envelope” with some super basic calculators online. I am incredibly intrigued and it made sense in the podcast but I can’t seem to recreate on paper. It’s only $14.95 to use the software for a month, I think I might try it though it would be really cool if there was a free trial. I genuinely feel like I am missing a big chunk of what’s happening here and it’s extremely hard to visualize it in practice, even with your awesome graphics. Love you guys

    Assumption 1: I have no extra money available for mortgage paydown after retirement, expenses, normal savings

    Assumption 2: I have $2,000 left on my car payment at $250 per month at 2.9%.

    Assumption 3: I’m buying a $100,000 house at 4% putting $20k down with my first payment due on Feb-1-2016 (closing in January).

    Option A, The Traditional Route:

    February’s 2016 expenses

    Payment 1 on mortgage is $381.93, $266.67 interest, $115.27 principal, $79,884 balance on mortgage

    $250 to Car, $1760 balance on car loan

    Total debt: $81,644

    Fastforward 8 months, I’ve paid off the car loan

    October’s 2016 expenses

    Payment 9 on mortgage is $381.93, $263.95 interest, $118.38 principal, $78,948 balance on mortgage

    $250 from car now goes to investment account earning 7%

    This continues indefinitely

    Fastforward to year 12 (Feb-1-2026)

    February’s 2026 expenses

    Payment 121 on mortgage is $381.93, $210 interest, $172 principal, $62,855 balance on mortgage

    $250 per month has turned into $51,972, You’ve stopped adding to this to align extra cashflow

    You have also payed a cumulative total of $50,030 to mortgage, $31,138 of which is interest on the mortgage. This also results in non-liquid equity of $37,000 (net worth of $80,523).

    Final numbers: You paid off your house on Feb-1-2046 having paid $57,495 total interest. As you’ll see, this is twice the amount as below.

    Option B, Cash Payoff Route:

    February’s 2016 expenses (It’s the same as option A)

    Payment 1 on mortgage is $381.93, $266.67 interest, $115.27 principal, $79,884 balance on mortgage

    $250 to Car, $1760 balance on car loan

    Total debt: $81,644

    Fastforward 8 months, I’ve paid off the car loan

    October’s 2016 expenses

    Payment 9 on mortgage is $381.93, $263.95 interest, $118.38 principal, $78,948 balance on mortgage

    $250 from car now goes to paying off the mortgage

    This continues indefinitely

    Fastforward to year 10 (Feb-1-2026)

    February’s 2026 expenses

    Payment 121 on mortgage is $381.93, $97 interest, $284 principal, $28,867 balance on mortgage (this is lower because you’ve been paying an additional $250 per month since October 2016)

    You have also payed a cumulative total of $73,200 to mortgage, $22,885 of which is interest on the mortgage. This results in a non-liquid equity of $71,000 (net worth of $71,000, you have a better net worth with Option A)

    You stop making extra payments in year 12 because it makes the cash out of pocket payments the same as the HELOC option below.

    Final numbers: Paid $250 per month for 12 months directly to principal of the mortgage. You pay off your loan in Sep-1-2031 haveing paid $26,000 in interest.

    Option C, HELOC route:

    February’s 2016 expenses

    In January, right after you close on home, you take out a $10,000 Home equity line of credit at 6%, because you blindly followed this episode. You immediately pay off your car loan of $2,000 and put $8,000 toward your mortgage. Your $250 car payment starts paying off your HELOC.

    Payment 1 on mortgage is $381.93, $239 interest, $143 principal, $71,742.42 balance on mortgage

    $250 to HELOC

    Total debt: $71,742 Mort + $10k HELOC

    Fastforward 4 years

    February’s 2020 expenses

    $250 per month on your HELOC pays off in 4 years. You do it again, $10,000 to keep it simple, $10,000 HELOC goes straight to Mortgage.

    Payment 49 on mortgage is $381.93, $182 interest, $199 principal, $54,500 balance on mortgage

    $250 to HELOC, you paid $2,021 in interest on your HELOC.

    Total debt: $63,842 Mort + $10k HELOC

    Fastforward 4 more years

    February’s 2024 expenses

    2nd HELOC paid off, you decide it’s going well and do it a third time, $10,000 for 3rd HELOC going directly to mortgage. You paid $2,021 in interest on your 2nd HELOC.

    Payment 97 on mortgage is $381.93, $114 to interest, $267 to principal, $34,000 balance on mortgage.

    Fastforward to year 10

    February’s 2026 expenses

    Payment 121 on mortgage is $381.93, $92 interest, $289 principal, $27,311 balance on mortgage

    You have also payed a cumulative total of $74,000 directly to mortgage, $21,000 of which is interest on the mortgage. You also have about $5,000 left on your HELOC. This results in a non-liquid equity of $73,000 (net worth of $68,000 minus HELOC, you have a better net worth with Option A)

    Final figures:

    HELOC three times, 8k, 10k, 10k respectively. Total of $6,063 in interest on your HELOC. Cash out of pocket was $250 for 12 years Paid off your mortgage on December-1-2032 paying a total of $25,463 in mortgage interest. This is 14 years early. This totals to $30,526 in interest over the life of the loan (Mortgage interest + HELOC interest)

    Here’s the other thing. On this date (Dec 2031), you would have $53,600 in a side account if you follow the traditional route. If you start investing your mortgage payment for the next 14 years (Feb 2046), you would have $97,300. Following the traditional route, you would have ~$147k in the side account. Not only is that $50k more, but your cash out of pocket is the exact same and you’ve been able to average your return over 30 years instead of 14 making it much more stable.

    Here’s how I can see this scenario working. You just got your mortgage, you’re committed to paying it off as fast as possible, your extra cash is somewhat variable but it’s all going to the mortgage payoff. That’s it. It’s automated mortgage payoff with money you didn’t spend in the month. For example, my grocery bill is $300 instead of $400 this month, I pay with my credit card. My credit card is paid off by my HELOC, which is paid off by my income. Since the HELOC paid $100 to my cc, and my income provided $100 more to HELOC, that $100 effectively goes to the mortgage. If you use software like YNAB, you could keep track of that and just pay that to the mortgage directly and skip the HELOC middle man? Am I missing something? Sure, the HELOC has liquidity, but why can’t I just then have a HELOC that doesn’t get used (like an unused credit card)?

    I personally use YNAB and all of my money every month is accounted for and I cannot budge until I pay off my car, then I only have an additional $250 to pay off and it seems like it would be better over time to just put that in an investment account! I’m not sure what I’m missing??

    • Meechity says:

      I love this post, Aaron, thank you for thinking out loud here. I certainly couldn’t have done it better if I was doing my own calculations. What return percentage did you assume on the investment over the life of the mortgage, and did you factor in taxes upon withdrawal?

    • Jake says:

      i know i’m beating a dead horse here, but did you account for depositing the entire paycheck into the HELOC and the reduced Average Daily Balance? I have not run the numbers but this is also part of the plot of saving on interest as well, probably not enough to make up the difference in investing tho.

  20. spiritrider says:

    This is nothing more than a rehash of “Money Merge Accounts” that were the front for massive scams by such companies such a United First Financial, etc.. This was all before the financial crisis. This must be the contrarian indicator that we are due for another mortgage crisis.
    If you want to pay down your mortgage, pay down your mortgage, but don’t get deluded by this shell game. The extra income for principal payments will dwarf any benefit of any interest rate arbitrage. Anything else will be smoke an mirrors.

  21. Jordan Chan says:

    Can someone explain the amortization schedule of his example with the $5,000 saving $28,000? I’m fiddling with numbers and it ain’t adding up….

  22. Daniel says:

    Let’s say I just do it once. My mortgage costs me 175k in interest right now. The loan is 323k at 3.25%. If I do this and just drop 5k on it, I will save 8k in interest for this 5k principal reduction. If I pay the HELOC back over the full year, I will pay 225 dollars in interest (4.5% at Navy Federal). I see it as choosing to pay 225 dollars in interest vice 8k. Is this not the case? Am I missing a big major point?

    • Nathaniel says:

      What you are doing is paying off your homeloan quicker. The 8K you are saving is real but only because you are putting an EXTRA 5k back into your account. if instead of taking out a heloc you simply put 5k into your homeloan it would probable be even better but the heloc lets you reuse those 5k if you need them for an emergency.

      I still need to properly check out this amortization schedule thingy though.

      • Daniel says:

        This is supposed to be better than just paying extra principal. The shredmy mortgage site tells me I will pay off my 29 years left in 5 years with no extra cash out of pocket. Except the cost of their site, I suppose. Those are snake oil type numbers. I want to believe this, but I will need some more convincing. LMM dosent support scammers, so there must be some validity to this.

        • Nathaniel says:

          I got excited for a few hours but then I started crunching numbers and I realized that….it is just a system to pay off the mortgage quicker while still having access to the funds in case of emergency – sorry but paying for software is bullshit!

        • Dave says:

          Yeah it is complete BS unfortunately. I am so dissappointed in LMM right now. Lets just think about it as simple as you possibly can… if you take $5k out and put into a HELOC so that you can throw it straight back into your mortgage to save 8k in interest, then you STILL HAVE TO PAY THE HELOC off. It is not just free money! So now you have to pay the higher interest on the HELOC and you have an extra monthly payment because your mortgage payment NEVER changes. So you need to throw extra money each month into the HELOC to pay it off.

          Instead of paying extra money into your HELOC each month to pay off a higher interest rate (5% vs 4% mortgage) you could just take that same extra money and put it into your principal of your mortgage. And actually you save more money that way because the difference between the 5% HELOC and 4% mortgage interest rate you could technically also invest monthly into your principal of your mortgage and pay it off even faster!

          Math doesnt add up and these guys are pitching this shred my mortgage website.

          • Jake says:

            Are you accounting for the “Average Daily Balance” and the effect of “depositing” your entire paycheck in the HELOC and therefore almost eliminating any interest owed?

      • Nathaniel, it seems this strategy is mostly about the time value of money and about accelerating your mortgage pay down while not leaving yourself with zero cash buffer.

        Unfortunately, like all other things in personal finance, there is no magic here. Perhaps part of the journey is constantly being reminded of that.

        • Dave says:

          As a point of feedback, you did make it sound like magic during the podcast. Just FYI.

        • Jake says:

          Andrew, what about the impact of “depositing” your entire paycheck into the HELOC and dramatically reducing the Average Daily Balance? does this not impact the interest calculated on the HELOC each month?

  23. Daniel says:

    OK, I just think I might have convinced myself out of this idea. Hear me out.

    USING THE HELOC:
    I took an Ammortization schedule for my loan and made payments of 10k each year for a decade. My total interest for my mortgage after that dropped to 93k from 183k and if you were to add the worst case interest on the HELOC itself (4.5% assuming no rate hike) for the new loans each year, it came to around 4500 total. This means the total interest cost in this scenario would be roughly 97500 to me.

    NOT USING THE HELOC:
    I took the same schedule and simply plugged in an extra monthly payment of 833.33 towards principal which is what this plan would cost me. I just wanted to compare that method to what we are discussing here. The total interest on the loan using this method came out to 95k. So, sure the HELOC plan would cost me less in interest by 2k over the life of the loan, it seems like that may not be worth the hassle in this scenario.

    HOW I THINK IT MIGHT STILL WORK:
    Take out a HELOC and just use 1000 dollars from it a month or something I can manage to pay back that same month so as to minimize any interest charge from it. In this case, I’d get the loan paid off in 14 years and my total interest would drop down to 79k. But really this is just me paying 1000 dollars extra a month on my mortgage. But even if I wanted to do this, I would be better off just refinancing to a 15 year loan because the rate would drop and my payment wouldn’t even go up 1000 and my total interest on this comes in at 75k.

    FINAL RECAP:
    I want so badly to believe in this idea, but I am still a little unclear. Please help.

    • Only4YouP says:

      Using HELOC (or any credit line) you are using banks money and the interest is very, but very low. Using your 2k towards principal you don’t need to use banks money but is your money not of your banks. I prefer use bank money with low, low total interest than my money. Simple math. I paid 19800k in using money banks from my PLOC (Personal Line of Credit with interest of 10.75%). My total interest was $585.00 using the trick of parking check with net flow cash of 2184.00 , so at the end of the day using money bank of 19800 paying 585.00 to take 19800 saved me 25k of interest in my mortgage. Simple math.

  24. Cooper says:

    Wow you can do this with credit card debt too. I have 100$ credit card due.

    I took out a HELOC for 100$ and BLASTED that credit card debt right off! I BLASTED IT! I wasn’t going to pay it off for 10 years which would have cost me 668.26!

    I took out a HELOC for 100$ and blasted my loan and saved 568.26!!! Aweseome!!! Now I just pay off the HELOC which I did in 1 month with 100 dollars I had. I have NO INTEREST PAYMENTS! Crazy!

    Saved 568.26. You may ask why I didn’t put the 100$ straight into the credit debt and it’s because if I did that I wouldn’t be able to marvel at contrasting the savings of a short term debt with not paying a long term one with money that I had. WHOOHOO.

    • Nathaniel says:

      Yeah…was kind of thinking that – but if you have a huge loan this system gives you the liquidity of having access to the money IF you need it. Otherwise I agree with you.

    • Dave says:

      AMEN! This frustrates me the LMM guys were this careless with vetting this all out.

  25. Meechity says:

    I think I can finally follow this in a very elementary-brain manner for someone wanting to stay in their house for 10 years or more… but how can this method benefit someone with 28 years left on a mortgage with a sweet 3.25% interest rate, who is also planning to move out in 2-4 years? This person can’t currently afford to overpay.

    I’ve listened to the Podcast twice and read every single comment, and while I’m enjoying it, I’m FRANTIC to make solid sense of the conflicting information.

    • @Meechity:disqus Good to see you’re still lurking around :)

      This really has nothing to do with how long your stay in your home, it has to do with maximizing the impact of every dollar you have access to in order to grow your wealth. You should listen to the Rich Tips episode with Natali Morris coming out soon – we speak on this concept in length.

      If anything it is MORE important for you to do it early on in your mortgage as you pay over 2/3rds of your mortgage payment towards interest and not principle. After 3 years paying the mortgage of our condo we’ve made over $55k in mortgage payments but only $16k went towards actual equity. So, we did little more than tread water. Now, if we were able to capture a larger percentage of that $55k that would be much more powerful, no?

      Granted your rate is 3.25%, all that means is that at the end of 30 years you’ll pay roughly 150% of what the purchase price of your home is. We think you can do better which is why we suggest using leverage against the bank to come out ahead. I’m actually working on a much better iteration of the tool with Adam that will be available to Community members sometime around Q2 of 2016 (hopefully).

      • Daniel says:

        I’ve spent a good three days so far trying to wrap my mind around this and am still at a loss. I’m not giving up, though.

      • Meechity says:

        Hey Andrew! I’ll be looking forward to that episode. What I’m trying to do is weigh the long AND short term monetary pros of initiating a HELOC to pay into a house that will be sold in 2-4 years. Would it be ultimately wiser to just stick with the mortgage payments as-is? The mortgage was also just re-financed from 2 to 1 person on the mortgage.

        For the record, the situation I described above is not my own… I’m still shuffling along steadily the LMM way, saving for a down-payment for my own home in 3-5 years, my Safety Net full and my hopes high. Thanks for everything.

  26. Nathaniel says:

    Here is a link to a site which explains amortization very simply – http://amortization.com/understanding2.htm

    Mortgage is a simple loan incurring normal interest – reducing it by making additional payments to it makes sense; only issue is if you need the money you put into the loan for whatever reason you may not be able to get it.

    Repaying more of it by taking another loan (Heloc) with especially if with lower interest makes sense as long as you are able to repay the mortgage plus make additional payments on the new loan to…as otherwise you start incurring compound interest…which simply means incurring interest on the unpaid interest of the new loan. What this does is give you the peace of mind of liquidity…that is if you need to take out the money you put in for emergency purposes, you may.

    The third option to consider, as others have mentioned, is to invest your extra money in a way that generates more interest than the interest rate you are incurring on your Mortgage. This pill of course net you the most profit.

  27. Jack says:

    So I listened to the episode and thought that this plan sounded great but I was skeptical that it would save you money. So I did some research and using this example found that services like shedmymorgage.com are not all that they are built up to be. Here is my example.
    Lets say you have a $100K mortgage at 5%.
    This give you a monthly payment on a 30 year loan of $537 (536.82 I rounded because the app I used to run this example does not like overpayments that are not whole numbers)
    Also I assumed a $1000 monthly excess before the mortgage is payed.
    This means we have $463 each month extra after paying the mortgage payment.

    So now we can compare Shred My Mortgage and typical overpayments to the mortgage.
    Using the shred my mortgage calculator we can pay off the mortgage in 10.92 years and save $63,496.31

    To compare I used an iPhone app called LoanCalc
    Plugging in the above information and selecting the $463 overpayment in the app we see that the mortgage will take 10.83 years and save $63,619.32.

    As we see just over paying the typical mortgage saves more money and pays off the loan a whole month earlier. Using Shred My Mortgage would also require a $500 payment upfront.

    Think this shows two points that if something sounds to good to be true it normally is and that the LMM team need to do better research. This example to me less than 20 minutes to create and I feel let down as to why this was not done by the moderators of the podcast.

    • Dave says:

      AGREE 100%! Very dissapointing especially if LMM is getting a kick back. To me unfortunately I just lost my faith in LMM to give unbiased financial advice.

      • This all makes me sad. First off, we don’t make anything from this and in general we’ve created maybe 3 max affiliate related episodes this year. Generally speaking most months Laura and I pay money into LMM to grow it to pay fans who work to build the site.

        We try really hard to create things that help people and answer hundreds of long detailed emails to help fans of the show every month.

        We explore concepts selfishly. Things that we want to learn about. If you don’t like it, don’t listen. We try to be perfect but that’s just not possible for us. Perhaps you can teach us how to be so great.

        Also, Merry Christmas. Sucks you’ve got nothing better to do.

        • Dave says:

          Andrew, I apologize for coming off harsh but I debated this with a friend for hours the last few days and I tried to make this work but I just couldn’t. And then you guys were so adamant in the comments defending it.

          Are you saying from the previous post above that you have done the math and now you agree this method actually does not save you money in the long wrong vs just paying straight to your mortgage principal?

          Merry Christmas as well and sorry if I made you feel like I was attacking you. My bad.

          • Dude, it’s fine. Just don’t flip on a dime like that. We actually care and never once portrayed ourselves as experts or as flawless. Often I’m learning right alongside the audience.

            The strategy DOES save over just overpaying and the math DOES indicate it. On a 300k mortgage it will save a few thousand over the entire term. Not like you’re going to create money out of thin air.

            If you have a 30k term that you reduce to 12 by overpaying month to month vs lumping with a HELOC, you will save a few thousand simply by being able to pay interest on a smaller amount of the mortgage. The HELOC capital turns over quickly by depositing your paycheck in there (dollars first in, first out) so interest there is negligible.

            It took me hours to get there and I will be posting something with my work soon, it’s just not magical which people seem to think it is.

          • Dave says:

            Ok I look forward to your math and example all calculated out. If I’m wrong and you are right then I’ll be the first to admit it! But looking at the overwhelming majority of these posts, people agree with me.

            Also you just said the HELOC will save you a few thousand over the life of the loan. In the podcast the numbers being thrown around were 10’s and even 100+ thousand. So it was a bit misleading and over zealous in my opinion.

            Lastly you have to look at investing in the same fashion as interest over time. If I invest year over year instead of pay off extra to my 4% mortgage you can put that through the investment calculators and at a modest 5% growth or so I believe the gain on that outweighs the interest saved. Have you done those calculations yet?

          • Nick says:

            Hi Andrew. Sorry to reply so late to this zombie thread but I am poking around the site and was wondering if you ever got around to creating the spreadsheet you were meaning to create. Math is certainly not my strong suite so I was hoping to walk through someone’s else work and see if I could get there too.

          • You know, I kind of did, at least enough so to convince me not to spend any more time on it. I didn’t bring the data down to the day grain but from what I could see there was money to save but nothing significant. Perhaps $10-$20 a month in savings but based on the amount of effort and tracking required, probably not worth it.

            In the end this strategy is geared much more towards people looking to reduce expenses for “freedom” or simply ditch the mortgage. The math in a vacuum shows that for optimal return money is much better placed in the market than your mortgage/home. In most cases leverage wins from a total return standpoint.

          • Christopher B says:

            I am really late to this party and found this chain of replies interesting to say the least. When I listened to the podcast a few days ago you guys definitely made it sound amazing and something we shouldn’t miss out on. I actually just signed up for the community in hopes of seeing some of these tools/articles that would better help understand this HELOC process and help me figure out if it really is as good as it sounds. It seems like it was too good to be true based on everything in this thread (it took awhile to get through all of it).

            A suggestion to you Andrew and staff: When something like this happens again and you guys discover something isn’t what it seemed in the original podcast, update the show notes to reflect this. That way, new listeners don’t have to wade through all of the comments to figure out if something was too good to be true. Also, I checked out shredmymortgage.com and as of today it appears the price jumped to $1495 and I didn’t even see an option to test it for a month. That in itself raised flags for me.

          • Christopher, good point. Often we’re moving pretty quick and forget that not everyone is up to date on the episodes/discussion.

            I’ve removed the link to shredmymortgage and I’ve queued this article up to get a facelift. We certainly don’t want to waste your time – whole point of the show is to save time!

    • Jack, this one slipped by us. I’ve spent hours on spreadsheets trying to see how it might work out and I also joined the call with Daniel.

      It’s hard not to get really down about all the hundreds of missed marks making LMM. For every 100 things we create, we’re lucky if 20 are awesome.

      As for making money, if we did there would be an LMM branded link – not just a straight domain name. We do very little income generating episodes, I’m lucky that my day job pays me well and that we’ve saved/invested responsibly.

      • Jack says:

        Andrew I am sorry if you felt that I was insinuating that LMM was making money from shred my mortgage I just used that service since it was the one discussed on the podcast. As for the math on when this method works I am looking forward to the comparison to see what if any circumstances this system is more effective that over paying directly to the mortgage.

        As to the work you guys put in I am appreciative of the product you produce and when I worked through the example above was saddened that it did not live up to how the podcast portrayed this method. One of my biggest worries is for people who listen to the podcast and and act on it and might never see the examples or comments found here. Having a corrections/modifications section on the podcast where maybe once a month a separate podcast is released that would not need to be more than 15 minutes but would cover any corrections I also think this might make it easier for listeners to see corrections rather then placing them inside of the next episode.

  28. Daniel says:

    I’ve gone back and forth on this topic several times since hearing the podcast. I have spent many hours thinking about this and have come to the final conclusion. While the message Adam is preaching is good and noble, it is really just one of paying down your mortgage in an accelerated manner whereby his site will help you utilize your cash in the most effective way possible. I don’t think there is a major earth shattering gem here that we have not realized before. He is showing a way for how to leverage capital we may not actually have to our advantage for a fee that is outweighed by the savings. This is a stellar method/product for people who do not know how to manage money and I’m sure is something that truly can help some people. Or perhaps if your number one priority is debt elimination. I don’t think that is something the average LMM follower will need.

    Even if I was able to manage my discretionary income in such a way as to pay off my entire mortgage next month, the 170k of saved interest would not compare to the million dollars of earned investment that same cash would yield assuming a 5% return in the market over those same 30 years.

    Investing your extra cash in income paying or growth related products has been and I believe still is the best use of your discretionary income unless you have some other severely money draining situation happening. Low interest debt doesn’t fall into the severe category, IMHO. @andrewfiebert:disqus , if you can refute this claim, please do.

  29. Dave says:

    Regardless of all the debate on whether this method with HELOC is any better than just paying extra income to mortgage principal every month, here is the answer that makes that discussion a mute point (as long as you are a believer in investing, which you should be).

    Check this site (or any) that calculates 1) the mortgage interest you save by paying $1,000 extra a month into mortgage VS 2) investing at $1,000 extra a month at 6% growth (which is pretty fair/conservative). Just look at the total stock market index fund over last 10 years (including the economic collapse of 2008). If you invested 10,000 in 2005 your money would have over doubled by now even with the collapse of 2008.

    http://www.bankrate.com/calculators/mortgages/mortgage-loan-payoff-calculator.aspx
    http://www.bankrate.com/calculators/retirement/investment-goal-calculator.aspx

    It is an astronomical difference in favor of investing. Here are the parameters I entered and it ended up being $217,783 more favorable to invest instead of paying off mortgage early for a simple $100,000 loan (FYI, for a $320,000 loan the difference is $337,135). So the moral of the story is, INVEST INSTEAD OF PAYING OFF MORTGAGE EARLY (with interest rates today).

    MATH FOR $100k LOAN WITH $1,000 A MONTH EXTRA TO PAY/INVEST

    Extra monthly money to invest: $1,000
    Mortgage monthly payment: $477.42
    Loan Balance: $100,000
    Mortgage Interest Rate: 4%
    Conservative stock investment annual return: 6%

    Investing $1,000 a month for 30 years (instead of paying off mortgage):
    Total invested: $360,000
    Ending balance: $974,513
    Interest on mortgage: $71,868
    Total GAIN (974,513 – 360,000 – 71,868): $542,645

    Pay off mortgage early (~6.5 years) and then invest $1,000 a month for next 24 years (total of 30.5 years):
    Total Invested (24 years): $288,000
    Ending Investment Balance: $626,380
    Interest on mortgage: $13,518
    Total GAIN (626,380 – 288,000 – 13,518): $324,862

    FINAL advantage investing vs extra mortgage payments: $217,783

    NOTE: These calculations:

    *do NOT take into account taxes that need to be paid on capital gains
    *do NOT take into account the money you save from keeping mortgage and being able to deduct interest each year from taxes.
    *do NOT take into account inflation

  30. uristra says:

    looks like i’m late to the party. i listened to half the episode and i’m skeptical. looks like my fellow skeptics have won the day on this forum.

    i’m wondering about the whole topic of whether it’s wise to prepay your mortgage. seems to me that if you believe in stocks for the long run, you should do the opposite of prepaying your mortgage: put those extra dollars in the market at 7% or 10% or whatever the figure is these days, instead of paying down your 3.5% or whatever the low number is mortgage. and moreover, you should borrow against your home equity at the current low rates to invest even more in the market (get a home equity loan or a fixed rate HELOC – i believe there are such things – to protect against interest rate increases). make that home equity wealth work for you by lowering your interest rates. if you qualify, you might get a reverse mortgage for the same purpose.

    prepaying the mortgage could also be a waste if property values collapse and you get foreclosed. you won’t get to count those extra past payments as monthly payments, so you’ve basically thrown them away.

    • Jake says:

      explain how you get foreclosed on because your property value collapses? They are not related unless you think because your property values drops you should stop paying your mortgage…

      • uristra says:

        not sure what i was thinking when i wrote that. i agree that property value collapses do not cause foreclosure. maybe what i meant is that if your property value goes up, you more likely recover money sunk into your home if the home gets foreclosed.

  31. Eric Declerck says:

    I’m also just getting my head around this podcast, and I pretty came to the same conclusion as everyone else…that this is basically just a plan to prepaid your mortgage – using the HELOC isn’t saving you much if anything….

    But like, Daniel I sort of kept banging my head against he wall trying to see some trick or magic to it that isn’t immediately obivous. Adam Caroll seems to making some claims in this podcast that just don’t seem to add up to be. LIke, “You make $5,000, spend $4,000 and have $1,000 left. That $1,000 goes into the HELOC until it’s paid off, so for ten months. Let’s say your interest rate is 5%. So that’s $500 over 12 months, $41.33 the first month in interest but when the income goes in, you’re paying a little less each month because you’re slowly paying the loan down with that $1,000 a month.
    Rather than taking ten months to pay off, it takes around 7.” – please explain how paying 1000 a month for 7 months pays off a 10,000 loan?
    He also claimed in the podcast that his effective APR was .7% .. please explain that?
    I want to believe there is some trick to keeping hte average daily balance of HELOC near 0%, but that still doesn’t mean the APR your mortgage is reduced…

    • Jake says:

      because he is applying his paycheck of $4,000 immediately paying down the balance of the HELOC which means there is no/very little interest charged to the account because he paid so much against the balance… then over the next several weeks he eventually takes it back out to pay household expenses. This reduces the “Average Daily Balance” which can shave off that extra 3 mos to get to 7 mos instead of 10

  32. Eric Cumming says:

    I know I’m late to the party, but I think what everyone is missing here is the “float” that you are riding when you use the HELOC as your checking account. I dont think its hugely significant, but it does make a difference.

    When your paycheck goes into your checking account, it sits there for however long until it then comes out to pay bills. While it sits there, it earns you jack squat.

    When your paycheck goes into the HELOC, it reduces your debt for however long it says there before going out to pay other bills. That reduces the interest you accrue over that period of time.

    Lets say you have 10k HELOC which you apply towards your mortgage. Mortgage rate is 3% and HELOC is 4%. Your bills are all due on the 31st. On Jan 1st you get paid and $2500 goes into your HELOC. The same happens on Jan 15th. Even with the higher rate, you are no longer paying interest on that money sitting in your HELOC waiting to go pay bills. By the end of the month, that $10K would have produced …

    $25.51 in interest without the HELOC
    $20.84 in interest with the HELOC

    Not alot, but it could add up. Couple that with making extra payments while keeping the liquidity, and it can be a good strategy.

    • Boom, thank you @ericcumming:disqus

      After a bit of digging it seems they use something called Average Daily Balance. Here is a quote from mtgprofessor.com:

      “On a 6% HELOC, interest for a day is .06 divided by 365 or .000164, which is multiplied by the average daily balance during the month. If this is $100,000, the daily interest is $16.44, and over a 30-day month interest amounts to $493.15; over a 31 day month, it is $509.59”

      So, it seems as you suggested that parking your cash in the HELOC even temporarily earns you significantly more than just letting it sit in your checking account by reducing your Average Daily Balance.

  33. K-ice says:

    I’ve done the Excel and it does work.

    But:
    “you have to spend less than you earn.”

    Also you should consider 3 scenarios.

    1) 30 mtg do nothing

    2) 30 mtg make an extra 10K pmt at the END of the year

    3) 30 mtg + Heloc, make extra 10K pmt at the START of the year

    Assume 100K borrowed, 3.5% interest, pmt 447$

    HELOC also 3.5% interest, paycheque $4000, expenses $3000 (including the mtg pmt)

    Assume paycheque on 1st of month and expenses due on 15th. (results would be slightly better if you can push your bill pmts to the 30th)

    So here are my results

    1) total interest paid $61000, paid off in 30 years

    2) total interest paid $14800, paid off in 8 years

    3) total interest paid $12900, paid off in 7y 1 month

    The $12900 includes about $12200 for the mortgage PLUS $700 from the HELOC

    Every year the HELOC does this crazy sign wave where it starts at -10000, jumps up to -6000, crashes down to -9000 and repeats every month slowly climbing and there is a bit of interest too.

    The HELOC balance actually becomes positive at month 7, but then falls below zero again. +ve -ve for months 7,8,9 and is finally totally positive at month 10.

    So if you plan to pay an extra 10K every year there is only about a $2000 advantage. Is this worth it? If you can’t figure it out, don’t do anything financially you don’t understand.
    I think the extra 10K HELOC is hair on fire debt that would keep me focused on paying it off and therefore paying my mtg of faster.

    The HELOC generally has much better advantages to a checking account. (Again do your own research and understand the difference.) Close your checking account especially if it charges you fees every month and makes you keep a minimum balance and charges you for cheques. Also if you ever use overdraft the HELOC is much better, usually pennies interest vs ~$50 in fees and interest.

  34. Jake Gibson says:

    Candice, I love your point about over payments on your mortgage. My wife and I are first time buyers & loan borrowers. We love the idea of paying off our home as soon as possible. We’re going to look into getting the best rate possible. We both have great credit scores.

  35. HK says:

    Just stumbled across this discussion. Most of the examples used here are home loans that are 30 year fixed. How would this strategy play out against a 5/5 ARM for example with a lower interest rate than a 30 year fixed?

    I’m definitely intrigued, but I’m not sure if this strategy only applies to 30 year fixed mortgages.

  36. Duan says:

    I’m totally sold on this idea and put $10k from my HELOC towards the principle on my mortgage! Shortly after that I got the end of year report from my bank summarizing what I paid in interest vs. principle for each payment over the past year and was amazed how much more was going to principle! The small amount I’m paying in interest for my HELOC, which is a higher interest rate than my mortgage, is nothing compared to what I was paying extra per month in interest on my mortgage! Thanks for the great tip!

  37. Kyle D says:

    So the argument here is not that this is some miracle way to change your life, but a we shed a (just) few bucks off your interest payment over 30 years?

    I ran some numbers (3/15/2016):
    Mortgage balance: $165,573 @ 3.5% APR, 325 pay periods remaining
    HELOC Loan of $12,000 @ 4.5% APR, 5 years interest only then 10 years interest+principal

    If I use the HELOC and make 1 lump sum payment of $12,000 to my mortgage my mortgage interest after the life of the loan will be reduced by $17,240. I will pay $306 in interest on the HELOC. My mortgage term would be reduced by 31 months.

    If I just pay directly to my mortgage principal $1,000 per month for 12 months my mortgage interest after the life of the loan will be reduced by $16,800. My mortgage term would be reduced by 36 months.

    So doing the HELOC method just once vs just overpaying saved me (17,240-306-16,800=) $134
    AFTER 30 years (or 27 or whatever).

    Did I figure this correctly? Or am I missing something? Is there a significant time value somewhere that I haven’t considered (aside investing that $1,000 in the market)?

    • Only4YouP says:

      In the HELOC or PLOC the money is from banks is not your money versus pay 1k monthly from your money, that’s the difference. Using money from the banks you are saving moeny in your mortgage versus to use moeny from your pocket you are saving money on your mortgage buy again s your money is not money from your bank. The strategy shown in the article is very easy to use and improve your credit score by far.

    • Jake says:

      I’m wondering if you are ignoring the “Average Daily Balance?” Let’s say you are paying the same money towards the Mortgage that you pay towards the HELOC. BUT, you DEPOSIT your entire paycheck into the HELOC – let’s say you get paid every two weeks… You would immediately pay down the balance on the HELOC and pay way more than the required payment. This should dramatically reduce the Average Daily Balance which is what the HELOC interest you owe is calculated. You pull out and pay your bills, invest the difference etc and then your next two-week paycheck goes into it… an interest only, simple interest loan’s payoff balance is recalculated when the payment is made… not so on Amortized mortgages… you could pay early and they will hold your payment and apply the payment on the day it is due… at least that’s how mine always worked…

      If you take out an Amortized mortgage vs simple interest mortgage and were to compare a biweekly mortgage of both – the true simple interest loan will pay off sooner because Amortized loans will still “hold” and apply money based on the monthly payment- sure you still get an extra payment in, but the simple interest loan’s balance gets recalculated each time a payment is applied and this racks up a lot of savings (I’m assuming the same % and same payment for both loans)

  38. Adam Way says:

    Great tips here! To save thousands of dollars, you have a choice of whether to have your own house or rent – and it really isn;t an easy choice because the house market is constantly changing. but in the end you should be the one controlling your finances with a stress free budget. Our approach to sourcing property options for you is to find properties that suit your needs and that fit within your borrowing capacity. Feel free to visit our website at http://www.equityfactory.com.au/

  39. Lee Jones says:

    bit misleading. what pays the mortgage down fast is paying large extra principal payments. the efficiency aspect only goes so far. you cant FINAGLE the math.

  40. Jennifer says:

    I think people are not understanding this method because they don’t understand the difference between Simple Interest and Amortized interest. Hopefully this quick definition of each might help people understand how the savings works!! It’s pretty simple math once you understand the difference and have a calculator for each! Google Docs has a great calculator for the Amortized mortgage.
    Play with this spread sheet and put 5K – in the (One Time Extra Payment) and you will see your amortized interest savings!!
    https://drive.google.com/previewtemplate?id=0At9qMtP84R5KdGF2NWJLZU92TWdqbzNQUURBVzU5ZWc&mode=publica

    Now find a Simple interest calculator, plug in your 5K (HELOC loan AKA simple interest loan) and make your payment your disposable income. (How Long does it take your pay off that 5K and how much interest did you pay in the simple interest calculator?

    Take your interest saved and from your Amortized loan (Google Docs) minus what you actually pay in interest on the simple loan and that is your total overall interest savings!!

    LOL……….I hope that’s not too confusing!

    An amortized mortgage is a loan where payments are made on a periodic basis (usually a month) over the term of the loan (in most cases 30 years). Interest is calculated on a monthly basis

    A simple mortgage is a loan where payments are made on a periodic basis and interest is calculated on the average daily balance.

  41. What was the software that Adam mentioned….that calculated the perfect ammount to save on the most interest possible?

    • Jason Seegmiller says:

      If you figure it out, let me know! :)

      • Jason Seegmiller says:

        They actually talk about it around 58:30, it’s http://www.shredmymortgage.com/ – $495.

        • Jake says:

          Also, he mentioned he uses Truthinequity.com which is a system that includes software as well as consultant. This is from the website:

          Option 1 – Qualify Here

          Before you Replace Your Mortgage see if you qualify for the program.
          You may not need to refinance. IF you do this option will determine
          what you qualify for. Submit a full profile and get qualified now.

          Do you need to refinance into a HELOC?
          Maybe not. “Equity Optimization” is about
          Getting more out of what you own and what
          you earn. Anyone can get a HELOC. Our services
          extend beyond HELOC shopping.

          A detailed analysis will be provided.
          All pricing information and program options are on the
          Summary Analysis Page.
          Complete a profile and receive details aiding in a
          comprehensive analysis.

          Available Solutions
          Buy a $17.00 report

          After your free live demo you can choose from:

          Did It My Self Program available $377.00
          Full Consulting Available. $2,995.00 lifetime
          contract with 6 month money back guarantee.

          6 month option $595.00

          12 month option $1,595.00

          This is the software Adam is using… the Shred My Mortgage I think was from LMM

  42. Tony says:

    After initially paying the mortgage with the HELOC, are you then just paying the minimum monthly mortgage until your HELOC is paid off and then using the HELOC again?

  43. Ben Allen says:

    I appreciate the tips on saving a lot of money of your mortgage, it was super helpful. I had no idea that so much money would be going to interest rather than to the actual payment of the home and paying it off, I would have thought that you would be paying for more of a piece of the actual home. My brother is looking to buy a home for the first time and he isn’t sure which loan to go for, I will be sure to share this information with him. https://www.frandsenbank.com/personal/mortgage-loans

  44. Tim Rose says:

    Adam mentions a piece of software that tells him when to withdrawal from HELOC. WHAT IS THE SOFTWARE? Please!!!

  45. Jake says:

    Maybe this is a dead subject by now, but what about this @andrewfiebert:disqus – what if instead of a 2nd HELOC, you refied your entire 1st into a HELOC… interest only… and with a bank/Credit Union that would allow direct deposit of your paychecks (suppose the HELOC has it’s own bank routing number), had a 30 year draw period and was tied to the LIBOR (not prime) – Would doing the same application but not having a traditional mortgage (no pmi) and simple interest. What would be the downside of doing it this way?

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