Whether you are familiar with or brand new to this unconventional concept of paying off your mortgage with a HELOC, it’s important you understand you can’t find everything you need to know on the internet. There’s no way the internet can compensate for your unique budget or an unforeseen life circumstance. Replacing your mortgage with a HELOC is not like going out and shopping for a conventional loan. There is no way you can even make the comparison. Most of what you see and read anywhere is filled with mistruths and inaccurate information, provided by people with limited experience and shallow exposure to the inner workings of conventional loans let alone this strategy.
I’m here to set the record straight and reveal the truths about interest and your conventional mortgage and some revelations about a 1st lien HELOC that you can’t find anywhere on the internet. I’m going to reveal the bogus arguments against conventional mortgages that drive your financial decisions. What I have discovered and about to reveal comes from 18 years of dedicated teaching and helping regular folks run this mortgage acceleration strategy on their own.
The strategy itself is very simple, money in and out of a HELOC. The complexities come with getting the right HELOC and then managing your monthly budget to optimize the interest savings and maintaining the acceleration process, without disrupting your lifestyle. Again, not wildly complicated, you just need to know what to do and when to do it. Most important, as part of your research and discovery, you want to know what you don’t know versus relying on what someone else wants you to know so they get what they want. This is a very important decision don’t tread lightly on the education.
- I want you to know the truth about conventional mortgages.
- I want you to know how to recognize the truth from lies and bs.
- Most of the stuff you hear about 1st lien HELOC’s, to get you to buy into a 1st lien HELOC just aren’t true.
- Know the truth and protect yourself.
- Don’t believe what you hear. Believe what you know.
Interest on a conventional mortgage is compounded and front-loaded.
These are the biggest lies in mortgages. Mathematically neither of those claims can be proven! These arguments come from people who don’t know what they are talking about but want to sound smart. Or they have an agenda that doesn’t match yours. These are classic ‘tell them what they need to hear to sell the product’ arguments. I’ll explain why in a minute, but let’s first look at the real math and the truth behind mortgage interest so you can easily recognize the falsehoods when they appear.
Here’s the truth…
All interest on all debt is simple interest. All the interest you’ve paid on every loan, on every line of credit, and every credit card you’ve ever had or will have was calculated using a simple interest formula.
Follow the exercise below and you’ll know the truth. You’ll need a calculator. And for those of you who ‘aren’t good at math’, you’ll be good at this. It’s 6th grade easy.
| Simple interest formula: Balance x interest rate / 12! |
That’s it. That’s all there is to calculating mortgage interest. Try it yourself. Pull up an amortization table anywhere on the internet. Plug in the following loan parameters or use your own numbers:
- $300,000, 4.0% for 30 years.
- Complete the equation from above in your calculator.
- Compare calculator result with line 1 interest of the table?
- The table and your calculator should both read $1,000.
- $300,000 x 4% = $12,000 annual interest / 12 months = $1,000 monthly interest.
- Test this formula on any loan term…30, 20, 15, 10 years for mortgages or 5, 6 or 7 years on a vehicle.
- Conventional loan interest is simple interest.
Prove it…
I can give you the interest for line 1 here because I know the exact balance on line 1. You can now double-check the theory and my opinion by scrolling down the table and pick any line between 2 and 359. Conduct the same exercise: Balance x rate / 12. However, this time, to match the table to your calculator you’ll have to move down one line on the table to get the numbers to match. Do they match? If yes, then we’ve proven the theory to be true. If your numbers don’t match do it again. This simple interest formula is 100% accurate 100% of the time.
| The truth is in the proof! |
| Conventional mortgage interest is simple interest because we can prove it with a simple interest formula. |
| Balance x interest rate / 12! |
Compounded mortgage interest…fact or fiction?
Ok, now that we know the truth about how mortgage interest is calculated let’s dissect the compounding-interest argument. Right upfront, it’s total BS. It would be illegal for a bank or lender to charge us interest on the accrued interest. That’s the cost on cost! Think about it in terms of right now!
If the bank used the Note rate of 4% for compounding purposes then with the example above you would be charged an additional $3.33 charged on the interest you already owe them. Does this make any sense? Where and when would they collect the $3.33? Would they add it to the outstanding loan balance so you could pay more interest on the $3.33? This is an insane notion. 18 years in the business and I’ve never seen the math or proof to substantiate that claim.
If you want to do your own research Google the amortization formula and see if you can find the compounding-interest portion of the formula. You could look at your mortgage statement and try to find it there. Research is a lesson in futility. Compounding interest on debt doesn’t exist. It’s impossible to calculate because it’s not happening. It’s an absolute lie.
You can quantify and verify the simple interest above. You can’t quantify and verify compounded interest. The reality, each monthly payment creates compound interest savings. You actually save interest on interest saved with a conventional mortgage. The exact opposite to what you’ve been told. Compound interest savings works just like and just as well as compounded interest earnings in an investment, just in the opposite direction
Some of you might be thinking the grand total of interest paid at the bottom of the amortization table justifies the compounding interest theory. Stop. That is a GRAND TOTAL of interest paid over 30 years! You have to break the grand total down to an annual number to calculate your effective interest rate which will be spot on to the note rate.
Your bank or lender can ONLY charge you using the current interest rate on the balance owed throughout the life of the loan. They cannot charge more than what is owed. No matter how much you send them, they can only take what is rightfully theirs which is the interest that accrued over the last billing cycle. Make regular payments and you pay the maximum. Manipulate the balance and accelerate repayment you’ll pay much less.
| The truth…compounding mortgage interest is a lie! |
| Compounding interest is impossible to verify mathematically, it is illegal and does not exist on the debt side of the ledger! |
Conventional mortgages are front-loaded? Show me!
To disprove the front-loaded interest lie let’s go back to the amortization table exercise from above. Why did you have to move down a line to get the interest numbers to match? Because next month’s payment pays the current month’s interest. The January payment pays December interest. The August payment will pay interest accrued in July. The July payment will not pay August’s interest. You can’t pay for or front load interest that hasn’t occurred yet!
We are always paying interest in arrears, an interest that has already occurred. This is why you had to move down a line on the amortization table. Because the next payment is paying the interest you just calculated for the current line. Line 6 interest-due is calculated on Line 5’s outstanding balance. See how this works? Every debt works like this. Every one! Interest is calculated and paid in arrears…interest accrued from the previous month.
If interest isn’t front-loaded then why do we pay so much interest at the beginning of the loan?
We pay the highest amount of interest at the beginning of a loan because that’s when the balance is the highest! You can refer back to the simple interest calculation–balance x interest rate / 12 = monthly interest–to prove the theory. Every month is simple interest so how or where do we take interest and have it paid before it’s due? You can’t take interest due 15 years from now and pay it today.
| The truth: Mortgage interest is not front-loaded! |
| You can’t pay interest that has yet to accrue. |
Calculate interest anytime anywhere…
You can use the simple interest formula for ANY debt.
For lines of credit and credit cards, exchange 12 in the equation to 365(days) x 30 (days in the billing cycle).
Balance x interest rate / 365 x 30 = monthly interest due.
Caution: The result when using 365 x 30 might be less than using 12 months, but don’t let this trick you into justifying a 1st lien HELOC. This is a deception. There is more to the story and requires deeper analysis. You can get a free analysis and learn more here…Contact Us
You don’t have to take my word on any of this. You can test it yourself with your own statements for any debt you might have. If your numbers don’t match up to what I am telling you then try it again. This exercise is 100% accurate 100% of the time because it’s the same formula’s the banks use to calculate and charge you interest. In fact, if you have debt that formula is in play as you are reading this.
No matter how you dice it or slice it there is no argument…you can use this formula to calculate interest on any debt.
- Loans: Balance x interest rate / 12 = monthly interest due.
- Credit Cards / Lines of Credit: Balance x interest rate / 365(days) x 30(days in billing cycle) = monthly interest due.
*If you see a Daily Rate on your statement, multiply by 365 to get your current interest rate.
Bonus mortgage myth-buster…
Mortgage interest is amortized. No, it is not!
The exercise from above disproves another mortgage myth. Mortgage interest IS NOT amortized! We just verified its simple interest using a simple interest formula. Plus, how can interest be amortized when the principal is the ONLY amortized amount on an amortization table. Why, because that is the only amount that is repaying the loan. Interest is a cost of doing business calculated on the outstanding balance at any given time.
Payback and acceleration are determined by principal reduction, not interest cost. As we’ve just learned, interest is based on the balance regardless of the amortization term. If conventional mortgage interest was amortized then your mortgage payment would have to change every time you decided to accelerate the payoff of the principal.
You know have what you need to go play with the numbers on any amortization table. Play with adding more to principal monthly or annually. As soon as the table refreshes pull out your calculator and start calculating interest. I guarantee you…this simple interest formula will be right 100% of the time.
Ok, we’ve dispelled a couple of big-time mortgage lies. Now let’s tackle the big lie in mortgage acceleration and the 1st line HELOC.
Replace your mortgage with a 1st lien HELOC?
Since the Great Recession of 2008 this ‘HELOC’ strategy has gained popularity with homeowners and financial professionals who saw this ‘product’ as a new way of differentiating themselves from their competitors in a very competitive mortgage market. Unfortunately, this has led to marketing practices that don’t tell you the full story about how to implement and run this strategy for optimal safety and optimal returns.
As mentioned previously, I’ve been doing this a very long time. Granted, when this strategy arrived in the US in 2001 it was introduced as a product like a regular mortgage. Macquarie Mortgages Asset Manager was designed to replace your current mortgage. At the time and up until the bubble popped in 2008-2009 I don’t believe anyone thought outside of that box. Unfortunately, 20 years through manipulative marketing the 1st lien HELOC has become known as the only or best way to implement this strategy.
Again, total BS. A 1st lien HELOC is one way to go, but it’s not the best or only. Following that line of thinking could be catastrophic to your finances and your financial goals. It’s not that you can’t or won’t succeed, but why to open yourself to that kind of risk when you don’t have to. Don’t believe what you hear, believe what you know before pulling the trigger on replacing your low fixed rate 1st mortgage.
Here some key findings after 18 years of clinical trials…
- Converting a large six-figure mortgage to a 1st lien HELOC is unnecessary and DOES NOT accelerate the acceleration process. If anyone tells you otherwise make them prove it with the math or walk away!
- Converting a large six-figure mortgage to a 1st lien HELOC exposes a large six-figure mortgage to a variable interest rate. This will slow and possibly stop the acceleration process. Way too risky!
- The banks DO NOT look at a 1st lien or 2nd lien any differently. Make your payment and your invisible. Miss a payment and you’ll pop up like a duck at a shooting gallery.
- Do not default to a 1st lien HELOC because someone told you it was the best. Make them prove it with the math.
- Implementing this strategy with a smaller 2nd lien HELOC is safer, accrues less interest and payoffs off faster than a 1st lien HELOC. We have 18 years of data to substantiate this claim.
| The truth: A 1st lien HELOC is NOT the only or best way to mortgage acceleration. |
To avoid a too lengthy article I will stop here for now. Come back next week and I will breakdown the numbers on our most popular two-loan program the Professional Blend. You’ll see mortgage acceleration in a whole new light. In the mean time you can learn more by talking with one of our staff…Contact Us