Speeding through your mortgage

Do not prepay on your mortgage. Every available cent should be pushed into your brokerage account - INVEST! The earlier you start, the WAAAAAY better off you are.

I mailed in a request a few weeks back for Wise Bread to do a post on mortgage accelerators, and if this is in response to that I greatly appreciate it.

It seems to me however that your analysis isn't 100% right. Let's look at a situation where you make no additional principal payments and you spend every cent you make. If your bank account and mortgage are merged, the time between when you receive your paycheck and you spend your paycheck can be used to temporarily lower your principal. This results in a reduction of interest paid.

Now the $3500 fee could very well negate all the interest savings, but what if you opened a HELOC yourself? Say you normally keep $5k in your checking account. You open a HELOC and immediately transfer $5k to your mortgage along with the $5k in your checking account. Now although your interest rate on your HELOC is higher than your mortgage, you direct deposit your paychecks into your HELOC and pay your bills out of it. The HELOC then acts as your "money merge account" without you having to refinance your original mortgage. Your optimal gain is when you keep your HELOC at as close to 0 as possible.

I'm not sure what the costs are in setting up a HELOC, but you also have the benefit of an emergency fund. Rather than keep cash sitting around in case of an emergency, you use it to pay down your mortgage. Should an emergency arise, you already have the HELOC set up to cover you.

My math is a little fuzzy right now but I think it could certainly help, although not to the degree MMA claims since you're not paying off $1k extra in principal each month.

When I lived in the UK I had a 'virgin one' mortgage through the royal bank of scotland. It was a credit card, savings and checking account all in one. I dont remember any fees. Mortgages work a little differently over there, but I basically could borrow up to my full mortgage if I needed to so it offered me a great deal of flexibility as well as saving a ton of cash.

Julie,

Thanks for all your work on this post - I find it really interesting. I'm unable to view the U first video on their site (currently at work), but I did find this:

http://youtube.com/watch?v=D_URQoEblKE

Also there seems to be a problem with the comparison done in your spreadsheet. You model the $3500 cost of "The Other Way" correctly, however you don't model the resulting benefit.

The calculation isn't simple, which is why I've been having so much trouble with it. It sounds like the U first system provides software that tells you when to transfer money from your HELOC to your mortgage such that you maintain the smallest possible revolving balance.

I don't think the software is worth $3500, however I can't figure out how to calculate exactly how much you'd be saving. The claims of paying off a mortgage in 8-10 years always comes from also making additional payments; I'm curious how much time is shaved off by making no additional payments and just by making your payments differently via the HELOC.

I disagree - I think there IS a benefit without making additional principal payments. I'm having trouble calculating the exact benefit, so let me try through an example.

Let's say you have a $200k mortgage, and make $5k a month. Let's also say you have a $1500 mortgage payment, and spend the remaining $3500. This leaves you with no extra money to apply to principal.

1) With a "normal" mortgage, you'll pay your $1500 every month, and your principal goes down a small amount.

2) Now say you take out a HELOC for the same amount as your monthly income, $5k, and apply this directly to your mortgage. Your paychecks get direct deposited into this HELOC and your bills get paid out of it, and depending on the exact timing of when you get paid and when your bills are due, you could say that the average daily balance is $2500.

So how are these two different? In #1 you pay interest on $200k. In #2 you pay interest on $197.5k. What I can't figure out is how significant that is, but it is definitely different and you have not contributed anything extra to principal. You're benefiting from the difference in how interest is calculated on a mortgage (monthly) and a HELOC (daily). Also the benefit should increase over time. The price you pay is the difference in interest rates as well as any fees associated with it.

I'm not saying U First is selling a good product, but that there is some sense to what they're saying.

I originally submitted this question after hearing a news interview with the author of this book:
http://www.amazon.com/How-Your-Home-Years-Sooner/dp/0974267600
I haven't read the book, although there are some interesting comments from people who have. He recommends using a HELOC as a way to reduce interest payments.

Thanks for discussing this, and for dealing with a stubborn Wise Bread reader :)

Thanks Julie, you really did a lot of work on this one. It looks like without making additional principal payments, the benefit is so small it's hardly worth the hassle and risk. Thanks for doing the research and number crunching.

MS Excel has a bi-weekly calculator; if you add in the maximum discretionary income that you can give up to the bi-weekly payments you are no doubt getting the biggest bang for your buck. Open a Heloc (if you can) with the bank you have your checking or mortgage with directly (it should cost just a few hundred if any $$ to open). If you need emergency funds or discretionary funds draw against the Heloc and then pay it down to 0 as soon as you can (because it has higher interest rates now). The people defending MMA's program are the people charging $3,500 and where their commission is between $1-2K. Their program would have only a marginal difference over an under $100 personal finance program such as MS Money or Quicken. Plan to automatically deduct your bi-weekly and additional set priciple payments from your pay check and then sticking with it is the key; the rest is a shell game and salesmanship. I know people that bought into this program and I hope they stick with it. They could have saved $3,400 ($3500-$100 for a personal finance program). It’s a tough time in the market place and everyone is looking for a better way and a fast buck. Selling your friends on a program that does little more that fill the linings of the up-lines pockets is a sure way to end up with nobody at your funeral.
Credentials: 28 years in RE sales and RE lending (owning my own investment company & mortgage branch); I have a BA Real Estate Finance, Arizona State University, Tempe AZ and have transacted well over $1 Billion in my career. As I said have a plan and sticking to it (with periodic review and adjustment); hard as it is these days, is the best advice anyone can give. If it does cost you $3,500 for a plan, I hope you stick with it! Brad G.

I just found this thread and I think many people are on the right track. The fact is that there are people that believe mortgage acceleration is good while others believe that investing is better. Basically, everyone invest early to benefit from compounding interest as a way to leverage wealth. But you must remember that, this is exaclty why the banks lend you money, they benefit from compounding interest utilizing your mortgage as their investment tool. Either way you look at it the average consumer pays almost three times the cost of their home just to own it. The key principle is that you should accelerate the payoff of your mortgage. Just do something, pay extra utilize any means of accomplishing the same goal. As explained above there are many ways to accomplish that, and some are better than others due to comparable savings. Remember interest saved is like interest earned. My example is that I would rather have my house paid off let's say in 10 years then reinvest that money for the next 20 years. The basic premise of these software programs is that they provide a strategy road map to achieving the highest interest savings. The software's benefit is to keep you on target with your goals. I personally have to fight procrastination and have discipline to employ such a strategy. For me the software provides a snapshot of the exact savings and strategy being accomplished. I have looked at all the programs available and cost is a factor. I have found a new program that is less expensive and provides the same benefits at www.equityexpress.com , there is also a discounted promotional price available call them and ask for the promo code#orla .

Well the price in #24 is more competitive ($1997) compared to the other MMA products ($3500) and cost is really one of my biggest concerns about these programs. The HELOC arrangement is a bit of a bother to me, but I may just be old-fashioned about borrowing against my home.

The BankRate article is interesting and I like its info (the site is on my blogroll) but there is one, critical difference between the UK/Australia program and the US process in regard to the HELOC account. In the UK for example, the account being used is a combo savings/checking/mortgage/home equity account (see comment #11) and not a HELOC account and separate mortgage account. So the UK account owner doesn't incur additional, unnecessary finance charges that may be generated using the HELOC but rather money earns interest (via the savings/checking account).

It can be a dilemma to decide pay off early vs. invest; I have a mutual fund account that I was thinking of using to finish paying off my mortgage. I'm glad I didn't this year because 2007 spread (to date) of investment return - interest rate is over 20%. Of course, now I am wondering if I should take my gains and pay off the mortgage in case the fund doesn't do well next year. If you have a low-interest loan (6% or less), it may be wise to invest rather than pay off early.

Still, I understand that if the program works for you and it helps establish discipline, that's great -- seeing results is motivating. If anyone wants to download my spreadsheet, that may work well for many also.

Julie,

(I posted #23 and #24)

I agree that there is a big dilemma regarding taking discretionary income to prepay or invest. Clearly, that decision is based on ROI(return on investment) if you can make more on your investments then it may be the better choice. You must take in to consideration the capital gains and liquidity on the investment. My personal challenge is how much more comfortable will I feel if I own my home outright? Clearly, it would give me a sense of financial freedom, I then can invest my full mortgage amount and accelerate my investment portfolio. It's clearly about personal comfort levels and choices. There are many opinions and "gurus" that would argue for and against all choices. One just needs to take personal financial responsibility and makes choices to secure one's financial goals. It's just like being healthy; everyone knows about it, there are different types of excercises ie. gym, bicycle riding, eating right etc. But you see many in our society that just don't or can't unless they have a plan. I've found a great analogy between buying and owning your home: Would you like to buy your home for $250,000 or own it for $660,000? Clearly the bank wants you to own it for $660,000. My goal: I'd rather own it for as close to the purchase price as I can, that's the key to mortgage acceleration. We Just must do something!! It's not about how much money one has, it's about how one manages the money they have. It's been great taking part in this discussion.

Tri,

Excellent overview! Thanks for the quick synopsis. I too researched the programs available and felt that you must weigh the pros and cons of the expense. Clearly with the high cost programs I felt that I 'd rather put that money as my first mortgage injection. The cost with some programs are out of reach to some consumers. The companies that offer a good service at a reasonable cost will prevail. The company I mentioned on post #24 has a promotional offer that is a fraction of the cost of other programs. I wish everyone luck on their desire to take personal responsibility for one's finances. And Julie thank you for the open discussion on your blog. Let's educate not bash. Thanks.

Points taken about using the HELOC to access cash when needed. I guess I was thinking of using HELOCs for purposes other than paying off the mortgage, such as major vacations, cars, etc. There are tax advantages to the HELOC vs. other types of loans but I would still think carefully about having many liens against my primary residence. If you build up your investments, you can borrow against them as well but without the tax advantage.

The simple, open-ended interest sounds better than close-ended, compound interest but there are pros and cons of each. (See discussion about simple interest by Jack Guttentag, a former professor with the Wharton School of Business, University of Pennsylvania). In my earlier discussion about using the HELOC, I was compounding the interest and the example Tri is using simple interest; you need to look at the term of the loan (or watch it in action) to see how interest is applied. Jack, aka The Mortgage Professor (overlook his visual design, he's got great content), also discusses HELOCs and it looks like interest in his example is calculated daily using an average balance calculation but, again, you would need to analyze the HELOC documents and the bank's interpretation to get an accurate picture of how interest is calculated.

If you apply $5,000 to the principal when you first get the loan, then you will shave off $23,000 from the loan balance over the 30 year period. But it looks like you are paying $5458 to save $23,000 which sounds good but the $5458 is in today's dollars (present value) and the $23,000 is in future dollars (future value). The future value of $5458 at 6% in 30 years is over $32,000.

I do see how managing every dollar and timing every expense with a program could work but the fees involved with the program, HELOC, etc. may cause it not to work as expected.

I created an Excel spreadsheet to implement the approach of using a HELOC to accelerate the mortgage payoff. It's very basic, but it proves that this approach works. It's basic in the sense that it does't take into consideration if you move your paycheck money into the HELOC to reduce the interest cost.

More importantly, it works better than paying Bi-Monthly, Semi-Monthly, Bi-Weekly, Weekly, or paying extra each month. I think it comes very close if not better than better than if you pay Semi-Monthly and add extra money on each first payment of the month. And this is based on using this basic version of the method. UFF's product promises much, much better outcomes than what a basic spreadsheet can do.

But here's the kicker...are you ready...I'm getting pretty much the same savings in interests with my basic spreadsheet method as the $1999 program that is currently selling out there (i.e. EquityGeniePro)!!! Or at least it matches/beats the results from the SAMPLE payoff calculator that they use on their website.

So what are you paying $1999 for? You’re paying for a software that tracks your progress and maybe some other features that may or may not be useful to you. Oh, you're also paying for someone to develop an easy to use program so you don't have to worry about how all this works or how to keep track of everything in case you deviate from the plan. I’m not sure if you can implement something like this in Quicken or not…but I would venture between Quicken and Excel, you can get pretty close. Is it worth $1999? That's up to you to decide.

The UFF product is clearly the superior product so far (IMHO). But I've only been playing around with the spreadsheet for a day. Why do I say the UFF product is superior? Because as of now, their claim of savings is so much more than what I'm getting in the spreadsheet that I may just plunk down the $3500 and go for it. Furthermore, I believe UFF guarantees your results in writing, provided you can consistently come up with the positive cash flow that you claim to have in the initial analysis of your mortgage. But please don't quote me on that...simply inquire them about it.

Here's my analysis (and I cannot guarantee any of these values as I'm not a financial expert):

Approach A:

Pay mortgage down via HELOC in $1977.73 blocks, and using $1000 each month to pay off the HELOC:

Loan Amount $200,000.00
Annual Interest Rate 6.00%
Term of Loan in Years 30
First Payment Date 11/1/2007
Frequency of Payment Monthly
Payment (per period) $1,199.10

Rate (per period) 0.500%
Total Payments $267,504.98
Total Interest $67,504.98
Interest Savings $162,812.49
# of Payments Saved 237
# of Years to Payoff 10.25
Built-up Cash Reserve $120,015.30

Approach B (Brad G.’s method… it appears to give you the best out come, although I’m no expert):

Pay mortgage down via semi-monthly and adding $1000 extra with each 1st payment of the month:

Loan Amount $200,000.00
Annual Interest Rate 6.00%
Term of Loan in Years 30
First Payment Date 11/1/2007
Frequency of Payment Semi-Monthly
Payment (per period) $599.28

Rate (per period) 0.250%
Total Payments $266,891.61
Total Interest $66,891.61
Interest Savings $164,592.65
# of Payments Saved 476
# of Years to Payoff 10.17
Built-up Cash Reserve $120,664.63

From the above data, you can see that the Approach A costs ($67504.98 - $66891.61) = $613.37 more in interest and takes one month longer to pay off the loan than Approach B. However, keep in mind that the $613.37 in interest cost will most likely be eliminated if you move your paycheck into your HELOC account each month.

Plus being on a semi-monthly plan could restrict your cash flow quite a bit as it is a contract between you and the bank. You can’t choose to pay one month semi-monthly, and pay monthly on another month (at least this is my understanding of how it works…please correct me if I’m wrong).

If you use my spreadsheet, you can track your results and speed things along without paying fees, which can be put applied toward the principal or placed in an emergency fund. If you want to pay variable amounts each month, then you can adjust the principal amount paid. Or, if you are promoting a program, you can keep posting that you need to pay for a tool rather than download one for free.

First, I want to humbly apologize to all the readers of this topic. My intention is not to hawk any product or vendor. After re-reading my posts, I guess one can surmise that I was trying to push the UFF product. I am merely researching on this topic and wanted to really understand the mechanics of what makes the HELOC method work so well.

I could not find anything on the web that clearly shows how this method works without having to pay some one for information. The information in this blog did not seem very accurate in terms of how the HELOC method works...so that's why I decided to contribute my findings.

I was able to produce similar results to UFF's interest savings claims on a spreadsheet last night. Upon reaching that, I conclude my research.

Some final remarks for those who are interested:

1. HELOC method is the best approach to use to pay down your mortgage FAST! Hands down, it beats all other approaches. I'm talking you are saving a huge amount of money in interest cost as well as time!

Go have any of the product vendors do an analysis of your loan. You will be amazed at the savings and at how soon you can own your home free & clear!!

And the beauty of this approach is it doesn't affect your normal spending habits and it will give you access to your equity when you need it. That's why I strongly believe in this approach so much.

But it's NOT for everyone...only those who are good at managing their money!

2. This approach CAN be implemented with a simple spreadsheet. Software will NOT help you pay down your mortgage faster. You need to have positive cash flow to make it work.

Some software may make more aggressive recommendations than others in deciding how to best use the HELOC to accelerate the mortgage payoff.

Post #38 appears to be from someone who's very familiar with one of the software packages and I concur with his/her remarks. It will make implementing the HELOC method much simpler and more carefree. That may be worth the price for some people.

3. Are there more risks in the approach than others? Maybe. Refer to Julie's Post #31. It contains a link to a website that discusses about the risks of simple-interest loans.

But IMHO, the way the HELOC is used to pay down the mortgage limits that risk because of the size of the balance (we're talking $1000-$5000 balance here...see my example in Post #38).

Thanks again Julie, for creating this blog. I'm sure many people will find it useful in their research to understand the HELOC method.

I just found this site here that sells the program for only $99!!!

http://www.maxmyequity.com

This the most reasonable one (in terms of pricing) I've found so far.

I think you'll be extremely disappointed with that calculator, errr ahh, I mean program.

After you buy it, why don't you let Julie know. Maybe you can convince her to delete your post. Meantime I'm going out to a nice $99 dinner.

I meant Post #45 above.

Hello everyone,

I have been reviewing all the comments regarding the mortgage acceleration software available. And I agree that there are pros and cons regarding the need for such a product. My question is: At what price if any does one think it is beneficial? Clearly return on investment is important and there is always a distinction between price and value. I am just wondering if the biggest issue is the current price that the product is selling for that makes it such a hot topic? I personally agree that as I look at the products my personal challenge is the PRICE. Do I see value in a tool that guides you through the process, personally yes. We've already addressed many opinions on the product so I just would like everyone's opinion on price point? Thanks.

In case anyone is interested, I re-examine the information from the MMA projections and the projected savings didn't look very achievable to me. So I'm holding off on this purchase until I can get them to prove the math for me. If not, then I'll most likely go for the Equity Genie product instead.

I'll put in another plug for my amortization schedule: DIY Acceleration, which is a free download right here at Wise Bread. It's in Excel and allows you to create an original schedule (how your mortgage was designed to be paid off), a $100/month acceleration schedule, and what I called a real-life schedule based on random extra payments made over the life of the loan. If anyone needs any help in using the spreadsheet, let me know.

Ok, I finally got to the bottom of the UFF projection and now I know why they had such spectacular projected savings as opposed to what I was getting on my spreadsheet.

Essentially, I told the UFF agent that I get paid bi-weekly and my wife gets paid semi-monthly. So in his analysis, he punched in those values but the net monthly income was erroneously calculated. My bi-weekly payments were mistakenly calculated as if they were semi-monthly. Once I corrected this, the math matches.

For example, say I earn 1000 bi-weekly, and my wife earns 1000 semi-monthly. The MMA net monthly income was calculated as:
(1000x24 + 1000x24)/12 = 4000/month.

But it should have been calculated as:
(1000x26 + 1000x24)/12 = 4167/month (rounded for simplicity).

As you can see, that's 167/month extra income. I was assuming their net monthly income calculation was correct and using 4000 in my spreadsheet. However, their actual calculation used 4167 (although they reported 4000).

In closing, all the products out there do the same thing, IMHO, so pick the one that is easiest to use or cheapest or has best feature, etc.

The software makes recommendations as to the best amount to use from your HELOC to pay towards your mortgage's principal such that it will minimize your mortgage payoff time as well as maximize your interest savings.

This is not as trivial as it sounds. Especially if your financial situation changes (and who's situation doesn't change over time)!

From Tri, "Another approach one could take is simply pay extra towards the principal monthly but open up a HELOC anyway. The HELOC would allow access to your equity in times of need. This will yield the same result and cost you nothing extra!"

This is where I've landed -- it is nice to have the line of credit (whether it is tied to the home or not) for emergency funds though it pays to be cautious when taking a lien on your home.

Also, commenter Scott is likely a sales rep for the UFF product. Loans don't have to be paid ahead and if you can earn a return in the market that is greater than your interest rate, it may not be the best thing to pay off early.

When I go to the calculator (sponsored by the company who is selling this program), here's what I do: put in the following

• loan amount of $200,000
• interest rate of 6%,
• term of 30 years
• monthly income (net) of $4,000
• monthly expenses (excluding mortgage payment) of $2,000.

That means that I have an available budget of $800.90. Now here's one thing that gets tricky: if I apply that entire pot of money to making extra payments, then I can pay off the loan in 11 years and 7 months, ahead of the system's payoff in 11 years, 11 months.

So, why does the "extra payments" method (given these assumptions) have a payoff of 19 years, 2 months? Because, if you look at the asterisks**, using the extra payment method of calculation involves "making additional payments every month that total one third of available monthly budget"; in other words, paying $266.67 (rather than $800.90).

Just to make sure that we are comparing apples to apples, what amount did you put in the Monthly Income and Monthly Expenses blanks?

When I used the calculator at bankrate.com and plug in the same numbers ($200,000 loan, 6% interest rate, 30 years for a loan payment of 1199.10 and then add 800.90 to the monthly payment), the loan is paid off in 11 years, 7 months. The maxequity system gives me an 11-year, 11-month payoff, which is not as attractive as the 11-year, 7-month scenario.

Ok, so now that I bought the program. I thought I'd enter in a whole year of estimated income expenses based on my income frequency to see what the savings would be like.

I can't get the loan monthly payments to match up exactly but they are close enough such that the effect is minimal.

I'm paid biweekly and my wife is paid semi-monthly. On my spreadsheet, I simply average both of our earnings to be monthly so I come up with a monthly income and monthly expense for simplicity. From that, I get an extra monthly income of $621.80. I then apply that full $621.80 each month to the principal of the mortgage for 12 months.

For my situation, this approach yielded a savings of $27,239 in the first year alone of extra monthly payments.

I then went onto Equity Genie and enter a whole year of income/expenses but according to our pay schedule. I even pay some expenses twice by accident (an extra expenses $8100 by mistake). The program comes back and tells me I saved $55K in interest in my first year!!!

Makes a believer out of me for sure. I'll run another case where I use an average monthly income/expense for a more apple-to-apple comparison.

I beg to differ!

For my scenario, I'm saving much, much more than a mere couple of thousands. I did many test run with the software since I've bought it and I'm seeing savings of over $45K in the first year alone as compared to simply taking the extra money and paying it towards principal each month!!!

But please send me your spreadsheet anyway. I'd like to know if your spreadsheet was set up similar to mine (I also did the HELOC method on the spreadsheet - and it showed me more than a couple of thousands in savings).

To answer the question of whether paying off the mortgage with extra money or using it to invest in the stock market, I've made the following comparison.

Assume a mortgage of $300,000 @ 6% fixed for 30 yrs. By the end of the 30 yr term, you would pay $347,515 (rounded) in interest.

If you have $500 extra income per month and you applied it towards the principal each month, you would pay only $187,220 (rounded) in interest for the duration of 12 yrs and 4 months.

That gives you a savings of $347,515 - $187,220 = $160,295.

That means your monthly contribution of $500 for 12 yrs and 4 months would yield a $160,295 tax-free gain.

Using bankrate.com's savings calculator:

http://www.bankrate.com/brm/cgi-bin/savings.asp,

I get the following pre-tax gains based on $500/month contribution:

Your monthly deposit of $500 for 13 years with an interest rate of 8% compounded monthly with an initial starting balance of $ 0:

Year Balance

1 6440
2 13395.2
3 20906.82
4 29019.36
5 37780.91
6 47243.38
7 57462.85
8 68499.88
9 80419.87
10 93293.46
11 107196.94
12 122212.69
13 138429.71

Final Savings Balance: $138,429.71. Keep in mind this is PRE-TAX gains!!!

As you can see, paying off your mortgage is a much better investment!

Hey Tri,

I think you need to rerun your numbers.

Borrowing $300,000 @ 6% for 30 years and paying $500/month extra does cost $187,220 rounded, in interest, but it takes 17 years and 8 months to pay off the mortgage. The mortgage is payed off 12 years and 4 months earlier, not the other way around.

Regarding my spreadsheet, how do I get it to you?

Spreadsheet -- hey I'd like to see it too! I found HELOC calculations tedious even though I usually like making spreadsheets. If you want to send a spreadsheet to Wise Bread, you can use the contact form.

My findings were that you need to consider the compounded cost of the loan over time and not just the initial cost (which the illustrations tend to emphasize); and also consider whether when the bank credits your account for deposits/loan payments, which banks tend to delay for as long as legally possible. This delay can wreak havoc in the value of the HELOC system.

As far as investing vs. payoff, the smaller the spread (8% in investments vs. 6% in loan rate), the more attractive the payoff; the higher the growth rate, the less attractive the payoff.

Looks like in Post 76 I made another error...the time it took to pay off the mortgage by extra payment method is incorrect. Lets hope I get it right this time around.

Mortgage: $300,000
Rate: 6%
Term: 30 yrs
P&I: $1798.65
Interest: $347,515

Extra-pay $500 monthly:
Interest: $187,220
Term: 17 yrs and 8 mos

That gives you an interest savings of $160,295 ($347,515 - $187,220).

If you choose to carry your mortgage for 30 yrs and invest your $500 extra per month ($6000/yr) at an 8% annualized rate of return, you will get $734,075 at the end of the 30 yr period.

If you choose to pay the $500 extra towards your mortgage for 17 yrs and 8 months, and then investing $2298.65 ($500 + $1798.65 [since you no longer have a mortgage payment to make]) each month (or $27,583.8/yr) for the next 12 yrs and 4 months at an 8% annualized rate of return, you will get $749,754 ($589,459 + $160,295 [interest savings]).

So it appears the extra-pay plan is more advantageous at this point, so no need to look at tax issues.

But of course, each scenario is different, so it's best you run an analysis for your individual case.

I used the calculator below to calculate the capital gains:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Please disregard post 76.

HELOC method with $500 monthly:
Interest: $174,847 <- how much interest you pay by time loan is paid.
Term: 16 yrs 6 mos <- time it takes to pay off loan.

That gives you an interest savings of $172,668 ($347,515 - $174,847).

If you choose to pay the $500 extra towards your mortgage for 13 yrs 6 mos and then investing $2298.65 ($500 + $1798.65 [since you no longer have a mortgage payment to make]) each month (or $27,583.8/yr) for the next 17 yrs at an 8% annualized rate of return, you will get $839,074 ($666,406 + $172,668 [interest savings]).

I was thinking some more about the debate between investing and paying down your mortgage.

Go back to either Post 81 or Post 77. I thought about it some more and at first, if you look at the numbers, yes it appears paying off the mortgage is more beneficial. But upon more careful analysis, I realize, my math is totally wrong here!!!

Lets look at it more carefully. At the end of 30 yrs, in both cases, you would own the house outright. However, in the investment scenario you would end up with $734,075 in your investment account, whereas if you prepay, you only end up with $589,459 or $666,406 in your investment account. Yes you saved a lot of interest if you prepay. But in the end, you still have less cash in the investment account than if you had invested the extra payments. So in the final analysis, you end up being more wealthy if you had invested.

But I think it really boils down to one's risk tolerance. The security of having being debt free is priceless to some people. For others, it's a non-issue.

Tri,

When you said you bought the software package, were you referring to the MMA product or another brand?

I've been reading a few blogs regarding MMA and HELOC use, and this is my observation.
There are two drivers to any acceleration system, the extra principal payments, which the spreadsheets can easily calculate.

The HELOC portion is a bit tougher to get a grip on. Assume you are paid $5000 on the first of the month, and it's not due to pay any bills until the 31st. Well, you basically have $5000 just sitting there (at 0%, the MMA folk would want to claim). By getting a return equal to your mortgage rate, you gain $5000*.06 or $300/yr (wahoo!!). If that $5000 is applied to one's mortgage as principal, it turns into quite the sum, over $25,000 in the 30th year. Where the HELOC comes in is when the bills are due earlier, say the 24th. Now, you owe $5,000*(say 8%)*1/4 = $100/yr since it's only borrowed for 1 week per month. And it's certainly stretching the point, but that $100/ yr has still gained you $25,000 by year 30. You realize if you are getting a high rate on your checking, this explanation is rendered moot. The MMA people focus on putting all your money against principal. Yea, I want to destroy any liquidity I have by paying down my mortgage. Just my observation.
JOE

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To post 93-
If you can borrow at 4% to pay off a debt at 5.625%, and you don't have to pay anything for the privilege of borrowing at 4% (other then the obvious interest) then you will save some money. However, helocs often have adjustable rates so be careful of that.

Additionally, to optimize your savings you'd probably want to use the 4% (hopefully fixed interest rate) heloc to borrow the entire amount of money you owe on the mortgage and pay your primary mortgage off. Then pay the heloc back at its 4% [this is an example of the principle of paying off the highest interest rate debt first to maximize interest savings].

You may also want to look at refinancing. You may be able to get a lower rate then the 4% from the heloc on a refi. Yes, you might have to pay some closing costs, but if the savings going this route might pay for the closing costs.

I was recently involved with a person selling the MMA software. I crunched the numbers, using their example, versus investing their software cost and only the same amount of money they did. That was approximately 2785 every 3 months. Using a best case, and unrealistic scenario of putting all of my cash into the Heloc on the 1st day of the month, and pulling out of the Heloc on the last day, thus achieving the absolute lowest average daily balance, no matter how you look at it - doing it yourself always works out better. What they don't say in the video, is that there is a balance in the Heloc of around 11,000, and you still pay more interest because of that generated using the Heloc. Also, when is it EVER a good idea to take money from a lower interest loan and put it into a one with higher interest. The only advantage is the Heloc, where in case of an emergency, you still haad funds available.

I think maybe my last post was too strongly worded. I apologize to anyone I may have offended by it.

I do believe that the program is a scam, pure snake oil. And I am concerned that someone will fall for it and have it cost them wasted money. Actually, I am pretty sure that many people HAVE fallen for it but I don't mean to disparage anyone.