Equity Optimization/Mortgage Acceleration?

[q-school]

SwanSong wrote:

I agree, Sajimone. In my eyes and mathematically, it makes much more sense to invest extra payments into a taxable account, particularly as my mortgage interest is tax deductible with an effective interest rate of 2.125%–barely above inflation. It makes far more sense to me to invest in a taxable account until I have enoigh to just pay it off.

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mortgage interest still going to be deductible next year?   if i didn't have significant charitable giving, my mortgage would not be enough to push me into itemized deductions next year.

remember taxable accounts can go down too.  they just haven't in some time.

 

[barelybarefoot]

I signed in at Truth in Equity like previous poster.  My payoff went from 27 years to 17 years but this was applying my calculated Profit/Loss (extra cash flow) of $2200/month to the mortgage payments.  If I plug in extra $2200 per month on Mortgage Professor, got nearly the same thing.  Okay, lesson learned: if it's too good to be true....

So, will continue as I have been.

[SwanSong]

I agree, Sajimone. In my eyes and mathematically, it makes much more sense to invest extra payments into a taxable account, particularly as my mortgage interest is tax deductible with an effective interest rate of 2.125%--barely above inflation. It makes far more sense to me to invest in a taxable account until I have enoigh to just pay it off.

[MaxPower]

I don’t quite get the allure to this. The only way it makes sense to me is if your HELOC rate is quite a bit lower than your mortgage interest rate. I have a 2.875% fifteen year mortgage (refinanced about a year ago 2.5 years into a 15 year 3.625% mortgage). I took the difference in mortgage payments between the 2, about $400, and pay that much extra per month to keep my same mortgage payoff date. I realize this may not be the wisest financial move mathematically, but it will coincide nicely to when my children are in college so the extra cash flow from a paid off mortgage might help cover costs in case the 529 balances aren’t large enough.

[Sajimone]

the mortgage professor had some nice spreadsheets to understand the numbers better...  extra payments to the principal in small chunks appears equivalent to paying a large chunk of the mortgage principal with a heloc and then paying extra payments to the heloc.  I didn't appreciate much of a large difference in amortize interest saved nor a difference in accelerating the mortage paydown as I was originally hoping for?   there might be small difference if you're going to apply your whole monthly paycheck to the heloc as this would save on the interest accrued... heloc simple interest is accrued daily.

besides the hassle factor... perhaps the only difference between paying extra to the principal vs a heloc may be psychological?  As dave ramsey says... its psychologically feels better to pay off a small debt.. and that might be motivating factor to pay off your mortgage one large heloc-chunk at a time.

Im going to stick with my current approach of paying extra funds to a taxable mutual index fund instead of the mortage and perhaps do a large payoff once its equivalent to the mortage which is mathematically better than paying extra to the principal (8-10% interest gained in a good market vs 2-3% interest saved).  For now.. I don't think there's a better way.

[Ways To Build Wealth]

I literally came to the forum to start a thread and ask what peoples thoughts were after I just listened to WCIs podcast. Happy to see someone beat me to it and I can spend some time hearing others thoughts.

[DMFA]

sallazar wrote:

The more I look into this, I think the link to the Mortgage professor states it best.  The savings from the differences in the interests from HELOC vs traditional mortgage is small.  The real savings comes from applying all your monthly cash flow toward the mortgage.  I have decided I may take our left over monthly cash flow (about 3000-4000) and split it up – 2/3 taxable investment account (already taking out max 401k, Roth IRA) and 1/3 toward mortgage.  If Market tanks I at least have some of it paid into Mortgage but have enough of the money working harder for me than the 4.125 my mortgage is costing.  Putting into a mortgage calculator program if I average 1000 dollars extra toward mortgage per month, I pay it off in 17 years.  If I average 1500 extra per month, I pay it off in 14 years.  I also am putting 1000 dollars to remaining student loan of 47,000 dollars (required payment is 750), rate is 3.2 percent but is variable.  Any thoughts?

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Hmmmm. Yeah, that's prob fine. But yes, the HELOC-for-mortgage advantage is minimal, p much just flattens the monthly interest accrual curve, unless the HELOC had far better interest than the mortgage (unlikely). The biggest advantage is forcing yourself to put all your money towards your mortgage since you now have a HELOC to pay off every month or face the interest. Less mortgage principal = less mortgage interest and, assuming same monthly payment, shorter term. Doesn't matter how the principal decreases, whether it comes from a HELOC or your bank account.

Truth is, there is likely better use for your money anyway...but if you *really* want to pay your mortgage, just pay your darn mortgage. No use for all this extraneous silliness, and *especially* zero utility for you to give anyone money for it.

[sallazar]

The more I look into this, I think the link to the Mortgage professor states it best.  The savings from the differences in the interests from HELOC vs traditional mortgage is small.  The real savings comes from applying all your monthly cash flow toward the mortgage.  I have decided I may take our left over monthly cash flow (about 3000-4000) and split it up - 2/3 taxable investment account (already taking out max 401k, Roth IRA) and 1/3 toward mortgage.  If Market tanks I at least have some of it paid into Mortgage but have enough of the money working harder for me than the 4.125 my mortgage is costing.  Putting into a mortgage calculator program if I average 1000 dollars extra toward mortgage per month, I pay it off in 17 years.  If I average 1500 extra per month, I pay it off in 14 years.  I also am putting 1000 dollars to remaining student loan of 47,000 dollars (required payment is 750), rate is 3.2 percent but is variable.  Any thoughts?

[Overlap12]

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

[Lithium]

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

[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?

[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.

[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.

[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?

[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?

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Sure.

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