I had someone on the podcast a while back that was a big fan of mortgage acceleration for paying off your mortgage faster. Like a lot of complex financial products, those who can make a buck off of it say it's magic. They say things like, “Instead of paying off your mortgage in 30 years, you can pay it off in 7!” But when you dive deep down, you see that while there may be something worthwhile there, you don't have to pay too much in fees and extra costs to eliminate the benefit. Let's do a deep dive.
Biweekly Payments
First of all, there's some confusion on the internet about what mortgage or equity acceleration really is. People are using the phrase for two different things. The first is a biweekly payment system. This is where you pay half your mortgage payment every two weeks (presumably as you get your paycheck.) By the end of the year (52 weeks long) you've made 26 half payments instead of 12 full payments. Plus, you're basically paying two weeks ahead, which saves a sliver of interest and slightly accelerates things. But the main benefit is just paying more than the minimum due. By paying that extra payment you knock a few years off your mortgage.
My calculations show you knock 4 years off of a 30 year, 4% mortgage or 16 months off a 15 year, 3% mortgage doing this.
Fair enough. Alternatively, you could just pay a little extra principal with each payment and get the same thing.
The problem comes when the lender or a third company charges you an extra fee to do this. That extra fee would reduce and perhaps even eliminate the benefit. So if you want to do this, just set it up yourself with an auto-transfer.
Using a HELOC
The real scheme I want to discuss is a little more complicated. It involves replacing part or all of your mortgage AND your checking account with a Home Equity Line Of Credit (HELOC). Say what? Don't worry, I'll explain. It's not that complicated. It's actually pretty clever, but it's not quite the magic bullet its proponents would have you believe.
Here's how it works. Let's say you get a mortgage. We'll make it a $400,000, 4%, 30 year fixed mortgage. Cool. You make that $1,910 payment every month for 360 months and you'll be debt-free.
But 30 years is a long time. So instead of just putting that mortgage on auto payment, let's say you did something else. You took out a $100,000 HELOC. Now you take that $100,000 and you pay down the mortgage with it. So now you've got a $300,000 4% fixed mortgage with a payment of $1,910. At that rate, you'll pay off the mortgage in 223 months, or just shy of 20 years. You knocked 10 years off your mortgage! Cool!
Wait. What about the HELOC?
Except you still have that $100,000 HELOC. Which is probably at a higher rate than your mortgage (perhaps 5%). And the rate is variable. And you probably had to pay for an appraisal and maybe even some other fees to get it.
Now your move doesn't sound so smart, does it? You just traded a lower fixed rate loan for a higher variable rate loan. HELOCs are also often interest-only, which is convenient, but if you just paid the minimum payment for 20 years, you'd still owe all $100,000 and you would have paid more interest over the years than if you'd just kept the boring old 30-year mortgage.
But here's where the fun comes in. Now instead of using a checking account paying you 0% and a savings account paying you 1%, you just use the HELOC. Your paycheck is deposited into the HELOC (decreasing the size of the debt) and your mortgage and other payments (hopefully consolidated on one credit card) are paid from the HELOC (increasing the size of the debt.)
Since interest is calculated based on the daily balance, there is usually LESS than $100K in debt. You do carry a balance in your checking and savings accounts, right? So if you've “got $50,000 sitting in the HELOC,” meaning you really only owe $50,000 on it, then the interest is half as much as it would otherwise be. And in fact it is LESS than what it would cost you even at a lower interest rate if you had just left the money in a savings account and earned 1% on it.
Think about it:
- 1 year's worth of interest on a $400K 4% mortgage = $16K, maybe $9,600 after tax, plus
- 1 year's worth of interest on $50K in a 1% savings account = $500, maybe $300 after tax.
- Put it together and you're paying $9,300 in interest.
But
- 1 year's worth of interest on a $300K 4% mortgage = $12K, perhaps $7,200 after tax, plus
- 1 year's worth of interest on a $50K 5% mortgage = $2500, perhaps $1,500 after tax equals
- $8,700 worth of interest.
Meanwhile, that extra $600 is going toward paying down that HELOC/mortgage combination even faster.
Perhaps you get the float on your credit card too. Let's say that gives you six weeks worth of $5K, which is a few dollars more.
And as the HELOC gets smaller, eventually you can take some more out of the HELOC and put it against the regular mortgage, further accelerating things.
Will that all help you to pay off your mortgage sooner? Sure will. But not magically. You see, in order to do the really magic stuff (some of these guys promise to help you pay off your 30-year mortgage in 7 years) there is one more part to the puzzle. That part involves paying more toward the mortgage/HELOC each month than you otherwise would have. If you spend less than you earn (which is a good thing that I'm very much in favor of) then that extra money sits in the HELOC. But that's precisely the equivalent of using the difference between what you earn and what you spend to send in an extra mortgage payment. Sure, you get a few extra days worth of interest savings messing with the HELOC, but the bottom line is you're making a bunch of extra payments without realizing it. It's a behavioral solution, not a mathematical one. I mean, alternatively, you could be investing that money and perhaps even making a better return than you're getting paying down your mortgage/HELOC and then turning around and paying off the mortgage with the investments once they equal the mortgage.
The Downsides
Interest Rate Risk
There are a few other risks that probably ought to be considered here. First, it's a variable rate loan. So if rates rise dramatically, you're now stuck with a HELOC at 6%, 7%, 8% or even higher. At a certain point, you're going to be better off with just your regular old fixed rate mortgage.
Behavior Risk
Another risk occurs if you don't actually spend less than you earn. In that case, all the wand-waving that fools you into paying extra on your mortgage works in reverse and you're actually using that HELOC as an ATM. The system works a little bit if you can only manage to spend exactly what you earn, but in order for it to really work, you've got to be “making those extra payments” by spending less than you earn and leaving the difference in the HELOC.
Opportunity Cost
Another risk is that you could be passing up on better investments in order to pay off your mortgage early, which is generally considered a fairly low returning investment. Paying off a 4% mortgage when you could be earning 5%, 7%, 9% or more isn't exactly a winning move. It's a downright stupid move if you're missing out on an employer 401(k) match. But I would argue it could be pretty dumb if you're missing out on maxing out any type of tax-protected account. That tax break is huge for high-income professionals and I rarely advocate paying off a low rate mortgage if you're not investing anything in a taxable account. There's also an asset protection angle here. In most states, most of your home equity is available to creditors, but your retirement accounts are not. So you're missing out on additional asset protection too.
Risk of Picking Wrong HELOC
Yet another risk is that you might not pick a very good HELOC. Perhaps there was a 4.5% one available somewhere and you picked one that costs 5.5%. Or it has high fees.
Risk of Paying Too Much in Fees
In order to avoid that problem, some people hire a company to help them do this. That company picks the HELOC for you and teaches you how to do all this, but they want to make a profit too. Guess where that profit comes from? That's right, your pocket. The more you pay in fees, the less benefit you're going to see from doing this.
Credit Card Related Risks
It sounds like most people doing this are using a credit card. Not only do you get to “invest” the float, but you may also get some reward points. Two issues with that. First, the data is pretty clear that we spend more when we're using cards. If you really need or want to get out of debt, you're probably better off going to a cash budget. Second, most people who use credit cards don't manage to pay off the balance every month. You don't have to carry a balance on a credit card very many times before the cost of doing so outweighs any possible benefit you're going to get from a mortgage acceleration program. You won't be surprised to learn that Dave Ramsey thinks this is all a big scam.
Similar to Bank On Yourself/Infinite Banking
In a lot of ways, mortgage acceleration using a HELOC is similar to one way that insurance agents sell whole life policies. They encourage you to be your own bank, borrowing from the policy instead of keeping your money in a savings account. You try to mitigate all the downsides of whole life insurance and there are obviously some costs up front for 5 or 10 years. But in the very long run, you're basically earning 2-5% on your savings instead of 1%. And you get some sort of a death benefit depending on how much of the cash value you use. When you break through all the smoke and mirrors, that's basically what it comes down to. You pay a bunch of fees and opportunity cost up front in return for making a couple percent more on your savings in the long run.
The issue with both schemes is that their benefits are dramatically oversold (usually while minimizing the downsides) such that it causes many people to engage in them rather than doing something even smarter with their money, like maxing out retirement accounts. The minor benefits you do get with either scheme are probably just fair payment for the additional risks and hassle you took on.
An Alternative Mortgage Payoff Plan
So you're interested in being rid of your mortgage in 7 years instead of 30? Okay, you've come to the right place. I've actually got a little bit of experience in this. We paid our mortgage off in about 6 1/2 years. That's right. We paid off our home in less time than many of you pay off your educations. Maybe I should market The White Coat Investor Mortgage Acceleration Plan. Here are the components:
# 1 Don't overconsume housing
Keep your mortgage to less than 2X your gross income in the first place. Not only is it a smaller loan to pay off, but it improves your cash flow. And that's not even considering the transaction, insurance, maintenance, furnishing, repair, and upkeep costs associated with a more expensive home.
# 2 Put down a 20% down payment
Doctor loans are great, but there's something to be said for a conventional, 20% down payment. To start with, that 20% down reduces your mortgage by, well, 20%. You're already 1/5th of the way to your goal before you leave the starting line! Those financial muscles you used to deny yourself while saving up that 20% are also going to help you to pay off that loan faster. In addition, you have a lot more lenders to choose from and can get the very lowest fees and interest rate available.
# 3 Get a 15-year loan
We took out a 15-year loan. We refinanced it at no cost about a year later (which restarted the clock), but the point is that it wasn't a 30-year loan. Not only does that ensure we were making larger regular payments, but we also received a lower interest rate than we would have had on a 30-year mortgage, allowing even more of that larger regular payment to go to principle instead of interest.
# 4 Max out retirement accounts
We've always maxed out our retirement accounts. This allowed us to build wealth quickly and protect it from creditors. We NEVER paid extra on the mortgage while we had available retirement account space. Long-time readers know we have LOTS of tax-protected accounts available to us (over $200K in 2017), so that actually delayed us paying off our mortgage a lot more than it would most of our readers. But borrowing money at an after-tax rate of less than 2% in order to max out a Roth IRA invested aggressively or to take advantage of the tax rate arbitrage available in a tax-deferred account (and the asset protection available in most retirement accounts) is a no-brainer.
# 5 Send some of your taxable investment money to the mortgage company
Once you've maxed out your tax-protected accounts, it's a little more reasonable to pay down the mortgage instead of investing. Maybe you don't want to send in everything above and beyond the retirement accounts, and that's fine. As long as it's going toward building wealth, both investing and paying down the mortgage are good things to do. We don't need to get dogmatic about it.
# 6 Use windfalls to pay off mortgage
At some point in our life, most of us get a windfall of some kind. Perhaps it is an inheritance. Perhaps you just made a little more than you expected. Or spent a little less than you expected. Or decided you didn't want to own that wakeboat after all. Great! Send it in to the mortgage. Our big windfall was The White Coat Investor, LLC becoming financially successful. Yes, we spend a little extra. We give away a lot more (more than we spent in 2017). But most of what WCI made in 2016 that didn't go toward taxes, charity, or the individual 401(k)s went toward the mortgage in three big payments. And honestly, we could have done it about a year earlier than we did but chose to invest the money in taxable instead (and actually came out ahead for doing so.)
There you go. Mortgage acceleration. And you didn't even have to fuss with a HELOC. But if you want to do the magic version of mortgage acceleration, I don't think you're stupid. Just make sure you're aware of the risks, do what you can to mitigate them, avoid any significant fees, and stay disciplined. It may help a little.
What do you think? Do you do mortgage or equity acceleration? How did it work out for you? Do you feel that this technique is oversold? Why or why not? Comment below!
WCI left out the other possibility in the HELOC checking account example:
– write a check for $50K to the mortgage company reducing the balance to $350K
– 1 year’s worth of interest on a $350K 4% mortgage = $14K, maybe $8,400 after tax
– Put it together and you’re paying $8,400 in interest (which is less than the other two options)
WCI, can you comment on this approach? Csciora’s rough calculation shows it’s less interest that the other approaches, and simpler. You lose your savings to pay down the mortgage, but it’s the same as putting the $50k in savings to the $100k HELOC in your example above?
Also, what does this statement mean?
“And in fact it is LESS than what it would cost you even at a lower interest rate if you had just left it in the mortgage and earned 1% on it.”
Sure what csciora is leaving out is the fact that you’ve lost liquidity on that money you paid toward your mortgage. If you had paid it to a HELOC instead, you could easily borrow it right back out if you needed it by writing a check.
The second statement should say “left it in your savings account” instead of “left it in the mortgage.” Thanks for pointing that out. I’ll fix it.
How about putting liquid savings towards the mortgage, paying down mortgage quickly, and having a HELOC but not drawing from it unless absolutely needed? (This assumes HELOC doesn’t have any fees just to open but not withdraw. We had a HELOC like that before)
You could do that if you wanted. It would preserve liquidity and minimize the interest rate. But what do you do with your paycheck and credit card payments? Put it in checking? Then you miss out on the benefit of that further reducing interest paid. I don’t know if that effect is more or less than the effect of the higher interest rate. I’d have to run the numbers.
You could be ‘lean’ in your checking account, and schedule payments and extra mortgage payments right after you are paid, so your account balance is relatively low for most of the month. Like you said, it seems like a convoluted method to get a relative small savings of a few hundred dollars/year? I would probably just do the mortgage pay down directly for simplicity.
It’s a good idea without a clear cut answer. Paying off the mortgage early is really dependent on your other liquid assets and cashflow. For example, WCI had a pretty sizable portfolio and considerable monthly cashflow before paying off the mortgage. There’s many older people with free and clear mortgages that are still struggling with monthly bills from lack of disposable income. It’s one of the major reasons that reverse mortgages are popular.
We refinanced a couple years ago at 2.75% / 15 years with the intent of traveling on extended trips over the next 10-15 years and renting the house out on a periodic basis. It will easily cashflow at that rate, so I have no plans to pay it off before the scheduled completion date. Most likely it will never be sold, so there isn’t much concern about losing the capital gains exemption. Otherwise, we’ll have to come back and live here for a couple of years before selling it.
I’m comfortable with the mortgage since it’s fully secured with about $200K in equity and the PITI payments are under $3K monthly. Be wary about counting too much on credit lines for liquidity. They have an unfortunate tendency to disappear just when they’re most needed. Almost everyone thinks HELOCs are indestructible, but that certainly wasn’t the case back in 2008.
I’ve heard of a HELOC with zero balance being used in place of a large emergency fund. If you have 50k in an emergency fund sitting in a low interest savings account, you could put that 50k in your taxable investment account instead. If your delta earnings is 6% a year that’s roughly 17k over 5 years. It’s not for everyone, but for high income earners that don’t often need their emergency fund it is an alternative way to fund an emergency without having to keep a lot of cash.
I’ve heard of it too, but I’m not a huge fan of debt as e-fund. One point of my e-fund is to keep me from going INTO debt. Obviously the projected math always works out well to maximally leverage your life. But in real life, that doesn’t always work out well.
In the end, I wasn’t convinced this product would ever save any money. The only financial advantage is the average daily balance from depositing the paycheck each month. Paying more toward principal or making more frequent payments are easily done without this setup. Instead of making an overly complicated spreadsheet with lots of assumptions, here’s a simple way to picture the best-case scenario:
Imagine the entire mortgage is on a single fixed rate credit card @ 4%, your $10,000 monthly paycheck is electronically transferred on the 1st of each month and you pay all bills on the last day of the month with no money leftover. That makes the HELOC effectively 4% and gives the longest possible float time. Both are magical assumptions, hence the best-case scenario.
That $10,000 earns $33.33 each month with the higher average daily balance. Someone earning that much likely has a 3x income mortgage around $360,000. Put those into a mortgage calculator and it reduces the 30 year note by 1 year. More realistically, bills are paid throughout the month so all those numbers are halved. The mortgage would be paid off six months earlier saving about $6,000 over thirty years. If you can get a zero fee everything HELOC under 8% and never draw against it or get penalized, this scheme actually would save a few bucks. Wow.
Or just buy three less cups of coffee each month and send $200 add’l principal payment each year.
I think you’ve arrived at my conclusion. It does work, but it’s not huge.
csciora, I can’t disagree with the math in your post…saving $33.33 a month isn’t lighting anyone’s world on fire and $33.33 per month is going to get anyone debt free in 5-7 years. You CAN NOT save enough in interest for that quick of a payoff. However, if I was your financial advisor and promised you $33.33 a month in earnings with only minor adjustments to how you manage your finances…and the $33.33 would obviously be compounding on a monthly basis would you tell him you are not interest and you’ll just not drink three cups of coffee per month to achieve the same goal? The numbers on the debt side of the ledger work exactly the same on the asset side of the ledger so why is one deemed acceptable and the other is not?
Well, I’d probably point out that there’s additional risk in earning the $33.33 each month that isn’t being considered. The scenario I outlined is rather magical in the various assumptions and would likely work for only a small percentage of people. The other much larger majority of people is how the mortgage acceleration vendors make money in the same manner as refis are marketed.
Drawing extra funds against the credit line, not shopping for the best rate, incurring penalties and fees for not making minimum payments on time, etc. All the usual culprits that come out when playing arbitrage with borrowed money. One US company even charges $3,500 for specialized software for “optimizing” the timing and amounts of various transfers to make their system work.
We’ve all seen the downside of using home equity as an ATM back in 2007 – 2010. It would be nice to see any mortgage acceleration company simply answer “What’s the typical amount of time it takes for your customers to fully pay off their mortgage?” in a believable manner.
I’ve used a variation in this HELOC strategy for years. I’m pretty aggressive though. I basically defer all of my federal income tax until December with no penalty. I can provide details, but you need a business. So I pay down the HELOC over the year, then draw it back for taxes. So I save.
The other issue is using a portion of the HELOC as a commitment to pay off over the short term. When we did a refi a few years ago, we decided to take a 15 year fixed for a 3500 payment, then leave a chunk on the HELOC. We could have done more fixed and had a payment of 5,000. Once they HELOC is paid, our committee payments are less.
I’ve literally done every technique on this blog for 20 years. It all works. Since my wife is an employee, the 53k shelter goes up 18.5k. I turned 50 last year. She turns 50 this year, so we get 6k more each.
Presumably your business isn’t paying you a salary until late in the year eh? No salary, no taxes to withhold yet.
That is one way. You need flexibility. Even with a regular payroll, if your employer is flexible, you can go light all year, then make big payments before the year end. I think the rule is that so long as the estimates are in spec, through a payroll, by year end, no estimated taxes are needed. There is a tax form that treats is like estimates.
One thing I do that isn’t in many blogs is to buy a fair amount of municipal bonds – directly. Not in a fund. Now that I’ve built that up, there is a natural monthly income stream. Big picture, I have no real dead money in a savings account.
I don’t understand being able to defer federal taxes for the entire year. At a minimum, you’d have to put aside quarterly payments for safe harbor equivalent to last years tax liability. The only way around this that I can picture is losing money year after year, but there’s no need for any tax strategy in that case.
What’s the basis for deferring quarterly federal taxes? Thanks!
Basically you don’t take a paycheck until the end of the year except maybe to do your 401k/hsa. Take a few distributions to live on, then at the end of the year your entire payroll paycheck goes towards taxes. Since it’s a withholding, not a quarter estimate you are good as long as you pay at least 110% of last years taxes.
Since I don’t want to mess with quarterly taxes it works for me, but it’s not some magical bullet to not pay what’s required it just delays it a little. Just have to leave enough in the business to be sure to cover all the taxes at once.
Also, this doesn’t work for a very high earner who likely pays more in taxes than what they take in payroll!
Sure, that’s definitely a valid approach.
I just wouldn’t call it deferring taxes. That means getting money today while postponing tax obligations until some future date. What you’ve described is just deferring payroll entirely until a future date.
A more common variation is borrowing money from the company throughout the year, issuing a single year-end paycheck, paying off the note and declaring the income. It actually does defer personal income taxes for an entire year. Or indefinitely for business owners who like to push the envelope.
IRS is already a step ahead of you on that one and what you describe won’t fly if audited. In order for a loan like this to work you would need at minimum a legally enforceable promissory note with valid corporate minutes authorizing the loan. Interest should at a minimum be provided for at the applicable federal rate. Collateral should be provided.
A demand loan should be repaid within a reasonable amount of time and repayments and continued growth of the loan, or full repayment at the end of the year followed by renewal of the loan at the beginning of the next year doesn’t work and the IRS will treat the “loan” as taxable income.
Granted all this only matters if you get caught, until then you can do whatever you want!
Agreed. It’s fine when structured properly, but definitely not worth the hassle on a regular basis to postpone payroll taxes. Also less than ideal when you need any kind of traditional financing like a mortgage or car loan with regular paycheck stubs. I got one of the last no-doc mortgages (aka “drug dealer loans”) before the real estate collapse, but needed traditional paperwork to refinance three years ago.
I really only see this strategy in two places:
– corporations issuing officer loans to purchase stock and relocation houses
– small biz owners playing in the grey area
Most of the latter group already does plenty of things the IRS doesn’t like. Usually ignorance more than anything else though. They just don’t earn enough money to make an audit worthwhile.
I think you are exactly right.
It’s not just payroll taxes, but federal estimates. It’s not shady, but solid. I have never had issues with mortgages. They look at a p/l and actual tax returns.
This is not for everyone, but there is a lot on the table if you do it right.
Other big bills are property taxes. Life insurance. Etc. I really don’t keep anything in non interest accounts.
How do you defer federal estimates? You can’t pay it all 4th quarter unless you put it on a w2 payroll check, in which case the IRS looks at it like you paid throughout the year.
I have read the majority of comments in this thread and each one is valid in their own right…when looking threw the lens of the conventional model of banking and borrowing. This HELOC strategy is simply an alternative to the conventional model. No one is claiming the new model to be the one and only in comparison. Just like investing…does one strategy fit everyone? However, it is a model that has proven itself to be more efficient than any other strategy within the conventional model. When comparing debt elimination strategies focus on the efficiencies of both while concentrating on the two primary elements; debt balance and income. The debt balance is the villain as it pertains to cost NOT the interest rate….regardless of the interest rate. The higher the balance the higher the cost. There was no comment in any of the posts regarding income. I would assume a great deal of you earn five figures per month…what is that income doing for you while you wait to make one payment per month? Calculate what you could save per year IF your income was suppressing a large debt balance that is continually(30 days a month) trying to take some of your income as its own (interest). Multiply yearly net income deposits by a proposed HELOC rate of 4.50%. That number in your calculator is what you could be saving per year. Your regular income could become a compounding interest savings mechanism at 4.5%. Now, how much could you save by just throwing additional principal at the debt balance…calculate projected principal reduction via regular payments and additional payments by your current conventional interest rate. Divide the total yearly principal pay down…regular payments and additional principal…and divide by annual net deposited income…if that number is less than 100% then you will not achieve at the same rate as you would with the HELOC strategy. There is nothing more efficient than 100%. And, if that 100% is driving down the HELOC balance faster than the rate can keep up then you are interest rate immune. When you adopt this new model you are balance driven not interest rate driven. Interest costs will be what they will be at the end of the day. The balance(s) by which those costs will be calculated dictate the overall cost. Under the conventional model you have less control over those balances vs. a HELOC strategy where you have ultimate control. Give it a through examination before dismissing the remedy/prescription or putting the scalpel to it.
After reflection, I am convinced Mortgage Acceleration or Optimization is better driven by the owner/investor as part of their comprehensive financial plan. I agree that this is a financial service industry imposed behavioral solution that is like a fad diet for weight loss and not sustainable to the “fast food” market it attracts. Service fees and “monetary” lapse of discipline will likely destroy any short term accumulated benefit and likely do much more harm than good in the mid to long term. As always it is better to leave your own hands on the DIY investor steering wheel and view mortgage debt service as taxable savings equivalent to secure low interest investment, best paired with taxable equity investmest in a ratio depending onthe tge investors debt and risk tolerances. This product does not pass my sniff test and smells like permanent life insurace on a hot summer day.
Would love to know more about what you mean by “But borrowing money at an after-tax rate of less than 2% in order to max out a Roth IRA invested aggressively or to take advantage of the tax rate”?
I’m not sure what you’re confused about. Can you be more specific? Do you not know what a Roth IRA is? Do you not know what investing aggressively is? Do you not know why it is important to look at the after-tax rate when borrowing?
No, I don’t know. That’s why I phrased it in the form of a question.
I don’t borrow money that I put into my retirement accounts which is why I asked.
Is this a blog not about educating ppl?
It sure is, but I’m trying to figure out exactly what you’re asking.
That particular line you quote under # 4 refers to the fact that we didn’t pay off our mortgage immediately as soon as we could because the interest rate was very low and we had better uses for our money at the time (like fund Roth IRAs). When it made sense to do so, we paid off the mortgage.
Hope that helps.
The fact that you are reducing a 30 year amortized loan to 5 to 7 years tells me one thing… you are dramatically reducing interest costs. Principal cannot be reduced, period. Principal balance owed, time, and interest rate are the variables to consider here.
The efficiency of a mortgage is somewhere in the ballpark of 20% in the first 5 to 7 years of its term. This means that say a $1,000 payment will be $800 paid toward interest and only $200 toward your actual payoff of the debt. This inefficiency needs to be improved. Offloading debt from the mortgage to a HELOC means that you are in charge of how efficient your payment is. Paycheck parking gives both a temporary reduction and a permanent reduction inside the HELOC. Further offset interest by allowing your paychecks to knock the hell out of your HELOC balance while paying your bills from 0% credit cards. About every 3 months pay these down with the HELOC. You can’t beat free. Set up your CC’s for auto pay and just set it and forget it. Very easy to do. There are other tweaks you can do like modifying your tax deductions to end up slightly underpaying your taxes (this money will be working against HELOC interest). Foregoing an impound account so your property taxes stay in your HELOC until it’s due. My favorite, take out a 401k loan just after chunking the same amount to your mortgage. Deposit the loan into the HELOC. The loan gets paid back to yourself at interest and at the same time saving many thousands in Mortgage interest.
I recently went to a presentation about CMG Financial’s “All in One” Mortgage. This is a full HELOC so you take it out for your entire mortgage balance and run your checking and savings through this account. You put as much as you can of your monthly expenses on a credit card and pay it off at the end of each month. As our paychecks are deposited 4 times per month and therefore keeping a higher daily balance, the interest on the HELOC is calculated on a daily basis instead of a monthly basis. As long as we are cash forward and live within our means, We are being told our $315K loan will be paid off in 7.8 years.
Your example above uses a partial mortgage and a partial HELOC. Have you heard about the All in One?
Same principles apply. The only way you’ll pay a 15-30 year mortgage off in 7.8 years is if you put a lot of money toward it instead of spending it or investing it elsewhere. There is very little magic here.
There are 2 parts to the acceleration concept:
(1) Lower your daily balance by running your checking/savings through the HELOC, thus reducing total interest costs.
(2) Utilize spare cashflow to pay early on the mortgage.
When I ran the numbers a few years ago on several scenarios, 95% of the acceleration comes from using the spare cash flow to pay down and 5% came from the interest reduction. This did not take into account the costs of the “program” and ongoing fees. So, basically this can be done just by paying early on principal. The sales pitches never tell you that 95% of the reduction is really just simply paying down the principal.
That’s exactly what my numbers showed as well. It’s mostly a behavioral trick to trick you into paying off the mortgage early. That’s fine if you need it and that’s your goal.