Equity Optimization/Mortgage Acceleration?

[sallazar]

What about paying your monthly cash flow after expenses and opening a 30-40k HELOC that you don't touch as an emergency fund to give you the liquidity back from the large cash flow dumps your putting into the mortgage?  This way your paying down your principle fast but you got the money dumped into the mortgage in backup credit that you won't need to access unless for emergencies.  I have been researching this topic for the last few weeks.  There seems to be 3 major companies that do this:

TruthinEquity:  offers do it your self kit with software for 337, lifetime consultation for about 2 grand

Speed Equity: offers a software program for about 1000 dollars.  CEO has a book on the subject.

MagicMortgageSystem:  offers software and support for software for 40 dollars per month or lifetime fee of $475

The proponents of the these systems claim you will save a lot more interest and pay down your mortgage faster than just applying monthly cashflow to mortgage b/c whole paycheck is applied to HELOC then expenses come out of HELOC instead of checking.  This makes sense in theory, however, when I run the numbers of applying my leftover monthly cash flow into a mortgage amortization calculator, I get a very similar payoff period of my 30 year fixed mortgage paid off in about 8 years.  I am interested to hear from others who would dispute or support my though process.

[Overlap12]

I was going to give Truth in Equity a call just to have them try to explain how this works.  It seems like it they just help you manage your cash flow to make extra payments on the loan, which I can do on my own.  What I'd rather see is an analysis where they compare their "system" to simply making extra mortgage principal payments, and see if that somehow saves you interest.  Notice in the materials they say "at the current level of income" but they don't mean "at your current mortgage payment".

To me, substituting one debt for another (probably @ a higher interest rate) doesn't work unless you're able to "cash float" up front, meaning you use cash to pay down the primary mortgage, while deferring interest owed on the loan you used to pay it down.  They seem to ignore the fact you have this other loan accruing interest on a daily basis.

[barelybarefoot]

I always got to mortgage professor for all my mortgage questions and he's chimed in on these accelerated mortgage payoff programs as well. Again, you not only need a HELOC but also excess cash flow (so making larger monthly payments) to make it work as well as it seems.

We have a 1 MM mortgage so am always looking for a way to pay down faster so was checking out and researching this 'scheme' as well. If anyone is successful on their own (without needing to purchase these kits) please share your excel spreadsheet!!!!!

[DMFA]

...can someone please tell me why I want to pay off my mortgage aggressively in the first place? And once you do that, please tell me why I can't just, you know, like, pay it?

[Zaphod]

It must have some small benefit, which I think was done thoroughly by Wall Street Physician on his site (havent read it). If you take into account the company costs its probably makes little cents.

 

[LizOB]

mmorris1986 wrote:

I’m interested to hear WCI chime in on this as I just learned about this method from a podcast and I was intrigued.  They claim you can pay off your mortgage in 5-7 years, using their HELOC (of course).  I agree with the lot here that it would only make sense if you get a really low rate on the HELOC – I have a doctor mortgage with 3.7% fixed interest rate with no PMI and no HELOC rates I could find in a quick search come even close to that…  Also, why bother with the fuss, why not just make additional principal payments?  Lastly, I can find other places to throw my money at the current time, like my 6 figure 4% variable rate refinanced student loans on which I can’t deduct the interest (at least they aren’t 6%! thanks WCI!!) So I guess I’m not paying off my mortgage until thats gone. Overall it seems like a sales pitch for them to sell their HELOC product…

This is my first post!  I can’t end it without leaving a huge thank you to Jim Dahle.  WCI has been a godsend to me since I found it in residency: I scour the website all the time, I’ve read your book and many you’ve recommended, I listen to the podcast- I can’t get enough!

I’ve recommended WCI to everyone I know. Thanks so much!!!

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Welcome!

[barelybarefoot]

Seemed like there might be a way to game the system. The late dr. Wisemoney was able to graduate with 0 student loans gaming system with 0% credit cards so my thought was this was something similar.

Yes, there's leverage to keeping a mortgage, but there's also being too comfortable with debt. I could keep accumulating debt at 'low interest' but it's still debt and we all have our ceilings (I hope). Being in a VHCOL area, I have plenty of coworkers who have > 2+ MM in debt, but hey, it's low interest and some are 'good' debt so it's ok. Not my mentality.

[Sajimone]

I've brought this up before a year or so ago.. but I believe I backed away from the idea just due to the hassle factor and I wasn't completely convinced.   Plus I'd rather use the HELOC on standby to find a good real estate property deal if I needed to do a quick cash purchase without traditional financing.  The last podcast has reignited my interest?!

If you're early in paying the traditional 30year mortgage.. then mortgage interest is amortized where you're paying nearly all interest upfront and very little principal.  Yeah.. you can pay a extra each month but you can accelerate your mortgage by a couple of years of payments with a large HELOC payment.   Now.. your same monthly mortgage is paying more principal and less interest.   You'll argue about paying the interest on the HELOC.. but that's simple interest payments as oppose to amortized interest.  Then make your extra payments each month against the HELOC which is a simple interest only loan until its paid off along with your monthly mortgage.  Then do it again.  You're still paying interest on the simple loan but I imagine the simple interest payments are going to be less than the interest paid on the mortgage especially in the first half of the amortization schedule???

You have to have positive cash flow each month.   You have to make extra payments each.   Do we have a math wiz that could run some numbers and make an apple to apple comparison of PAYING EXTRA TO THE MORTGAGE PRINCIPAL- Amortized interest VS PAYING EXTRA TO THE HELOC - Simple interest... what would be the interest saved with either scenario be?

[DMFA]

Sajimone wrote:

I’ve brought this up before a year or so ago.. but I believe I backed away from the idea just due to the hassle factor and I wasn’t completely convinced.   Plus I’d rather use the HELOC on standby to find a good real estate property deal if I needed to do a quick cash purchase without traditional financing.  The last podcast has reignited my interest?!

If you’re early in paying the traditional 30year mortgage.. then mortgage interest is amortized where you’re paying nearly all interest upfront and very little principal.  Yeah.. you can pay a extra each month but you can accelerate your mortgage by a couple of years of payments with a large HELOC payment.   Now.. your same monthly mortgage is paying more principal and less interest.   You’ll argue about paying the interest on the HELOC.. but that’s simple interest payments as oppose to amortized interest.  Then make your extra payments each month against the HELOC which is a simple interest only loan until its paid off along with your monthly mortgage.  Then do it again.  You’re still paying interest on the simple loan but I imagine the simple interest payments are going to be less than the interest paid on the mortgage especially in the first half of the amortization schedule???

You have to have positive cash flow each month.   You have to make extra payments each.   Do we have a math wiz that could run some numbers and make an apple to apple comparison of PAYING EXTRA TO THE MORTGAGE PRINCIPAL- Amortized interest VS PAYING EXTRA TO THE HELOC – Simple interest… what would be the interest saved with either scenario be?

Click to expand...

Sure.

Over how long do you need to pay what you take out of the HELOC?

[Sajimone]

Same amount of time you take to make extra payments on a traditional mortgage principal? again I’m playing devils advocate here.. but what’s the difference between simple interest payments vs amortized interest payments? If it takes 5 years to pay off the heloc vs paying down the mortgage principal... what’s the difference in interest paid with either approach?

[Ryan]

 

I didn't really get it until reading this article by mortgage professor.

Basically, it's similar to floating interest, you have to decide for yourself if it's worth the hassle--

Assume the borrower’s monthly paycheck is $8,000, and on the first day of the month he does the following: a) Draws $8,000 on his HELOC which is used immediately to reduce his mortgage balance, and b) applies his paycheck of $8,000 to pay down the HELOC. On day 2, therefore, his HELOC balance is zero and his mortgage balance is lower by $8,000.

As the month progresses, he pays his expenses by drawing on the HELOC, and the HELOC balance gradually rises to $8,000. However, the average balance will only be about $4,000. For the month as a whole, therefore, he has saved interest on $8,000 of the mortgage while incurring interest on $4,000 of the HELOC. Assuming both are priced at 6%, he has saved $4,000 x .06/12, or $20. Over a year, that adds to $240. Of course, if the paycheck is $16,000 instead of $8,000, the number will be $480, and if the paycheck is $4,000 the number will be $120.

[Overlap12]

I think I know how to do this.  Logically, the only benefit I can see is when you make HELOC payments (assuming you knock down some principal), it lowers your required interest payment the next month and therefore your cash flow.  With a standard mortgage, whether you pay extra or not does not change your required monthly payment.  So when you make an extra payment against the standard mortgage, it accelerates your payoff by lowering the interest accrued.  I don't think there is a difference in the way the interest is calculated on a HELOC or a mortgage (at least not something substantial to offset the higher interest rate on the HELOC), but I could be wrong.  Most calculators I see take prior month end loan balance x annualized interest rate and then divide that by the number of days in the month.

[Sajimone]

That’s my point.. that’s simple interest payments. Now look at your mortgage amortization schedule and see how much amortized interest you’re paying with your monthly mortgage payments. It’s not the same as simple interest payments. Most of your amortized interest is paid in the first half of the traditional 30 year amortization schedule.

I can’t wrapped my brain around the differences between these two approaches of making extra payments to the heloc or mortgage with respect to all the variables (heloc interest paid, extra payments, mortgage interest saved with mortgage acceleration, etc) involved to determine if there’s a difference in interest paid? And is it really possible to pay off a mortgage in 7-8 years? That’s what these websites are proposing? That’s what the wci guest stated is possible on a recent podcast?

[Lithium]

Never mind.  I keep thinking I understand how this works, but I still don't think I've figured it out.

[Overlap12]

I went to the Truth in equity website and ran my numbers. My payoff was 22 years.