HELOC Acceleration
 

Hey Readers!

I’ll be blunt – this post is somewhat controversial to traditional financial wisdom. It scares people. But please, take the time to understand and you may just save yourself a great deal of income and accelerate your future – be it savings, paying debt or retirement. I really hope you enjoy because this has helped us amazingly! This is why in 2016 we paid 17,000 in interest and in 2017 we have only paid $4,000… because we are actually getting ahead and attacking the principal balance!! 

“It is well enough that people of the nation do not understand our banking and monetary system,

for if they did, I believe there would be a revolution before tomorrow morning.”

― Henry Ford

 

Paying off debt with debt!

Often times when we tell people how much student loan and auto debt we paid off in 18 months, people are either shocked or are so confused it doesn’t even make sense.The inquisitive one’s ask how, and we say with extra income streams and discipline we have figured out how to put over 60% of our income towards our debt. Paying off over 90K in student loan principal is no easy feat. Student loans suck!

Most of the time our answer is not what they want to hear, because there are some lifestyle changes involved with adjusting to 60/40 percent with a goal of 70/30. Pay now, play later is our mantra, not play now, pay forever.

In reality, we have sorta been telling a half lie. Not because we are dishonest, all the above is true. But because we are leaving one thing out: we use a debt acceleration program. 

 

What is an acceleration program?

 
In short, an acceleration program is typically used to accelerate the mortgage payments on a home in order to save on interest in the long haul. It can be done manually with extra payments, through mortgage connected checking accounts, or with HELOCs (Home Equity Line of Credit).
 
The idea behind the HELOC is you take large sums (upwards 25-50K) and make large principal payments on your mortgage. By doing this and regularly maintaining your normal payment you attack the principal faster, therefore saving huge on the interest. In our case we used it to pay huge chunks of student loans before the interest caught up!
 
 

Why are people reluctant to use acceleration programs?

 

When we mention acceleration using a home equity line of credit people tense up and become uneasy. Add that most programs cost money and people have already said “no” in their head. The realist in most of us tells us something like this is too good to be true and we immediately knock the notion that it works. Ask Dave Ramsey and he will say don’t proceed with the idea. Like anything, it is not for everyone, there is some discipline involved and you need to generate positive cash flow. Another writer called the concept tricky and confusing.

Personally, this is just what I needed to hear to motivate me to make it work! But in our specific case, what did we have to be cautious about? We were robbing Peter to pay Paul. In order to pay off over $300K in student loan debt we needed to act and think outside the box. Additionally, there is not much literature on the concept, which makes it hard to find information on.

Not even MMM has much to say about the concept.  A simple google search only yielded 42,000 search results. Not a lot when compared to a google search of “Debt consolidation,” that yielded 103 million results.

 

But why have I not heard about it ?

  • Banks do not want people to accelerate mortgages. It is not something that is commercialized or recommended. So most programs are small companies, sometimes that can scare people away
  • Banks would rather have you re-fi or consolidate, they don’t deal in the financial advice world
  • Most people have no clue what amortization even means
  • Most people use traditional methods their parents use
  • Requires a positive cash flow each month
  • Seems complicated but very simple once the concept is embraced and studied.
  • Streamlines life (we run everything through 4 Penfed accounts)
  • By attacking the principal amount (the amount the interest capitalizes off) you pay less in interest and more of your payments go towards the principal, not allowing the interest to catch-up

How simple is it?

With the help of a trusted mentor we were referred and met with a consultant at Truth In Equity.  Bill is now our lifetime planner and has helped us out immensely. If you are interested after you are done reading you can use this link, fill out a free profile and get an e-book explaining more about equity optimization. Knowledge never hurts.
 
We simply took a line of credit out at 3% (Nearly 5% lower than the student loan rates) and paid down 40K in loans. When we did this, we immediately freed up about $800 in cash flow and funneled that in with all other extra money into the line, paying it down in 6 months only to repeat in June.
 
In December we will make another $40,000 payment. Wash, rinse, repeat. In a future post I will detail the first two installments and the target for the upcoming third installment along with a comparison of how much we saved. We used the debt snowball to help coordinate what we wanted to attack.
 

What it would look like for a $300,000 mortgage & a $40,000 HELOC applied at the start of each year?

 

*If you do not want to read to the amortization schedules just scroll to the bottom*

 

(Disclaimer: this is the amount we use, the amount depends on your cash flow. We went conservative when we decided on the amount to pay each month towards the line)

Amortization Schedule sample
 
2018 Amortization
 
2018 total:
$46,362    Principal
$11,637    Interest
 
Amortization acceleration
2019 total:
$48,491    Principal
$9,508      Interest
 
 
 2020 total:
$50,719    Principal
$7,280      Interest
 
 
 
2021 total:
$53,049    Principal
$4,950      Interest
 
2022 total:
$55,486    Principal
$2,513      Interest
Total interest: $41,680
 
 
By 2023 the mortgage is paid in full, and over the life of the loan the owner has paid a grand total of $41,680 in interest. The HELOC has interest, but over the course of five years you can assume paying an average of about 75$ a month or $4,500 over 5 years so a grand total in interest of: $46,180. (Remember $46,180 as we look at a traditional 30 year fixed mortgage at 4.5%).
 

Traditional 30 Year Fixed – No Extra Payments or Acceleration

 
2018 Totals:
Principal: $4,931
Interest:   $13,310
 
2019 Totals:
Principal: $5,158
Interest:   $13,083
 
2020 Totals:
Principal: $5,395
Interest:   $12,846
(Running total interest: $44,849)
 
2021 Totals:
Principal: $5,642
Interest:   $12,598
 
2022 Totals:
Principal: $5,902
Interest:   $12,339
 
 
2023 Totals:
Principal: $6,173
Interest:  $12,068
(Only 24 years to go)
 
Final Amortization Year

2047 Paid in Full 

 
traditional mortgage
total for a 30 year fixed mortgage
 
Total amount paid  traditionally in interest: $247,220
Total amount paid with the HELOC in interest: $46,180
Difference: $201,040
 
 
 

What would you do with an extra $201,040?

 
Or how about being 6 years away from not having a mortgage and having an additional $2,218 a month (combined mortgage payment and interest amount saved) to put towards retirement or savings? At the end of the day, to beat the banks you need to beat them at their own game. We are using this same method to pay off student loans, then using it to attack our mortgage. Then we will use it to save & invest :).
 
 
 

 Q: What do you think about this approach?

 
Remember to subscribe and you could win $. Read more about the HELOC process here: HELOC 2.0

Your future self will be glad you read.                  – Josh

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