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I don't know what he's saying or if it's true. If it is true, it might be worth doing. Please interpret, and advise regarding the value of, this advice:

Pay your mortgage down faster by opening a HELOC @ 6% or more. Print out your loan amortization, add the interest for the next 5 payments and divide that by how much you paid on the principal during that time; it will probably come out to 20% or 30% or more. Better to pay 20+% or 6%?



Edit: Then in the comments, he adds: "Doubling up you payments is no where as effective as this approch. . . do the math."

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another comment he has is "One of the keys to this is have all your income go directly to the HELOC and pay your bills from it." which basically means borrow money at 6% to pay your bills. I think we all wasted enough time over that statement. – Vitalik Mar 10 '11 at 13:21
If you want to make paying as much of your mortgage as possible as soon as possible your number one financial priority, just do that. You don't need the HELOC. Whether that's smart depends on what you'd do with the money otherwise. If you'd blow it on things you don't need, it's a great idea. If you'd put it towards your kid's college funds or your retirement, maybe not so much. Any extra money you pay towards your mortgage goes 100% towards the principle, and that's principle your later payments don't have to go to paying interest on, so more of them go to principle as well -- a double win. – David Schwartz Aug 24 '11 at 14:26
After all this time, I was drawn back to this question. I went back to the site you linked to and commented. The writer who wrote "do the math" has no idea how mortgages work. This isn't a matter of opinion, his numbers are simply wrong. – JoeTaxpayer Jan 25 '13 at 18:28

7 Answers 7

up vote 40 down vote accepted

"add the interest for the next 5 payments and divide that by how much you paid on the principal during that time"

Let's see - on a $200K 6% loan, the first 5 months is $4869. Principal reduction is $1127. I get 4.32 or 432%. But this is nonsense, you divide the interest over the mortgage balance, and get 6%. You only get those crazy numbers by dividing meaningless ratios.

The fact that early on in a mortgage most of the payment goes to interest is a simple fact of the the 30 year nature of amortizing. You are in control, just add extra principal to the payment, if you wish.

This idea sounds like the Money Merge Account peddled by UFirst. It's a scam if ever there was one. I wrote about it extensively on my site and have links to others as well. Once you get to this page, the first link is for a free spreadsheet to download, it beats MMA every time and shows how prepaying works, no smoke, no mirrors. The second link is a 65 page PDF that compiles nearly all my writing on this topic as I was one of the finance bloggers doing what I could to expose this scam. I admit it became a crusade, I went as far as buying key word ads on google to attract the search for "money merge account" only to help those looking to buy it find the truth. In the end, I spent a few hundred dollars but saved every visitor the $3500 loss of this program. No agent who dialoged with me in public could answer my questions in full, as they fell back on "you need to believe in it." I have no issue with faith-based religion, it actually stands to reason, but mortgages are numbers and there's order to them. If you want my $3500, you should know how your system works. Not one does, or they would know it was a scam.

Nassim Taleb, author of "The Black Swan" offered up a wonderful quote, "if you see fraud, and do not say 'fraud,' you are a fraud."

The site you link to isn't selling a product, but a fraudulent idea. What's most disturbing to me is that the math to disprove his assertion is not complex, not beyond grade school arithmetic.

Update 2015 - The linked "rule of thumb" is still there. Still wrong of course. Another scam selling software to do this is now promoted by a spin off of UFirst, called Worth Unlimited. Same scam, new name.

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a lot of the ways that people get caught by these things are to do with them not wanting to do a little maths or seeing that the maths is to do with finance and believing that it must be complex. That really needs to change! – MD-Tech Nov 18 at 10:31

Sounds like baloney to me. HELOCs are variable rate, so you are paying down the principal of a fixed rate loan with a variable rate loan.

If you want to pay the mortgage down faster, make two half payments per month, and/or add a little extra to each payment (make sure with the bank that any extra will automatically go to principal).

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and DON'T pay the bank for the privilege. – MrChrister Mar 10 '11 at 2:05

Jack "The Mortgage Professor" Guttentag provides a thorough analysis of a similar-sounding system:

In addition, I had the feeling that customers of Mortgage Relief should have gotten a spreadsheet for their $45, and wondered why they hadn’t? So I set out to develop a spreadsheet of my own that could quantify the benefits – if there were any.

The major question I wanted the spreadsheet to answer was, how large is the benefit of using the Mortgage Relief scheme if you don’t have any surplus income but only just enough to make the scheduled payment? This is the critical question because we know that if you use surplus income to make extra payments to principal, you pay down the mortgage more quickly. This is so whether you apply the income directly to the mortgage, as most borrowers do, or whether you follow the Mortgage Relief procedure where you use a credit line to pay down the mortgage and current income to pay down the credit line.

I spent much of my air time between Philadelphia and San Francisco on this project, and finally gave it up. Once I removed surplus income from the equation, I could not find a way to make the Mortgage Relief scheme work.

You may also want to read related articles by Guttentag:

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That makes no sense at all. They try to compare

  1. Relation of your payments over previous five periods to the loan amortization for those periods versus
  2. The HELOC interest rate.

and that's exactly the same as comparing apples versus oranges.

Mortgage is long-term loan, so for the first many years the huge part of the payment will go to repaying interest, so that ratio 1 will indeed be something like 20% or more despite the fact that the interest rate on the mortgage is much lower - something around 6%.

HELOC will have the interest rate of 6%, but it will have the same structure so that you have equal payments, so if you compute that ratio 1 it will be very close to that of the mortgage.

The bottom line is - if HELOCs were that great noone would apply for mortgages. You should stick to making extra payments towards the principal on the mortgage.

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This doesn't say the whole story (like the length of the HELOC). if you have 15 years left on a mortgage and "refinance" into a 30 year HELOC then yes, your payments maybe 20% lower, but you add 15 years to pay it off.

Just remember that interest occurs daily on what you owe. If you move 100K of debt from 5% mortgage to 6% HELOC you'll be paying more to the banks no matter how you slice it.

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Sounds fishy - taking out more debt to pay the main mortgage down faster?

There are a couple of issues I can see:

  • Second mortgages/HELOCs aren't that easy to come by at the moment and they're more expensive on an APR basis than the first mortgage because the risk is higher
  • I would expect a HELOC to incur closing costs, and those are probably high enough to cover at least a payment on your main mortgage. Closing costs and other transaction costs aren't mentioned and as people are likely to forget, there are mountains of investment strategies out there that make you money if only you forget about the transaction costs
  • It seems to me that we're comparing two different loans with two different durations and hence two different amortisation schedules. Of course you end up paying back a larger portion of the principal per month if your loan amortises over 5 years compared to one that's amortising over 30 year, especially if you make those comparisons in the first few years.

I would think that a much more sensible strategy with a lot less risk is to save up extra cash and send your lender a check every quarter or six months.

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No need to wait that long. You can add extra principal to every monthly payment, a different amount each month, depending how your expenses were. The only value provided by this ripoff software scam is that it will tell you your balance and remaining time left on the mortgage. Creating a spreadsheet to do the same thing took me a few hours one weekend, and goes one step better, you can see history, forecast out, and print the sheet. Better still, you can see that the $3500 if sent to principal early on will save you $20,000 (or so) worth of payments at the end of the loan. – JoeTaxpayer Aug 24 '11 at 15:23

I think the idea here is that because of the way mortgages are amortized, you can drop additional principal payments in the early years of the mortgage and significantly lower the overall interest expense over the life of the loan.

A HELOC accrues interest like a credit card, so if you make a large principal payment using a HELOC, you will be able to retire those "chunks" of debt quicker than if you made normal mortgage payments.

I haven't worked out the numbers, but I suspect that you could achieve similar results by simply paying ahead -- making even one extra payment per year will take 7-9 years off of a 30 year loan. I think that the advantage of the HELOC approach is that if you borrow enough, you may be able to recalculate/lower the payment of the mortgage.

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