What do you think?

[missyali]

My friend (yes, really) checked a book out of the library and got this idea on how to pay off her mortgage sooner. She has a $350k mortgage and HELOC combined. More house than they can afford (she says this). So in her "creative budgeting" she decided to deposit her check into her HELOC and then pay her bills from there. She feels this will cut down her debt faster as she will have a smaller balance immediately following payday and will accrue less interest and pay the loan off faster. This just seems ridiculous to me (for many reasons that I also haven't told you about, including her spending habits). I told her I thought it was probably not in her best interest. I think I'll email DR and see if he has a response for her because she partially buys into his ideas. What would you tell her? I really am fearful that they are in WAY over their heads and it is just a matter of time before everything keeps up with them. TIA

[monkeywrangler71]

That's how I paid my line of credit. Saved a ton of interest.
If the issue is spending habits, then that is what needs to be addressed. If she can stick to a budget then her method will pay it off faster.

[JENROY]

Don't think I'm dumb...but what's a HELOC?

[homemaker66]

Can you please give me more information about the "HELOO" thanks.

[joyofsix]

HELOC=home equity line of credit. I had to google that one once.

[DJ1972]

I have heard DR talk about this. There is even a program that you pay for, that basically does this for you. He said it was crap and that you can do it yourself just by being on a budget and changing your spending habits. If this is the same thing he was talking about, he also said that he is not a fan of rearranging debt. Let us know what his response is to your email.

[Greebo]

If the HELOC bases its interest on an average daily balance, as some do, then putting extra money into the HELOC on day one and taking money out again over the month will save a very very little interest - something on the order of, well, lets say you owe 10,000 on a HELOC at 5% interest. The monthly interest then is 10000 * .05 / 12 or $41.67. If it's daily compounding the daily interest is 10,000 * .05 / 12 / 30, or $1.38 a day.

Now lets say your monthly payments that you run thru the HELOC are $1000 and this is a 30 day month.

Day 1 you put $1000 extra on the heloc lowering the balance to $9000. Daily interest is now $1.25 (9000 * .05 / 12 / 30 ).

Assuming you pay out $250/wk for 4 weeks then week one your balance is 9000, week 2 its 9250, 3 = 9500, 4 is 9750 and on the 29th the balance goes back up to 10,000.

So now your interest is:
9000 * .05 / 12 / 30 * 7 (1st - 7th) $8.75
+ 9250 * .05 / 12 / 30 * 7 (8th - 14th) $8.99
+ 9500 * .05 / 12 / 30 * 7 (15th - 21st) $9.24
+ 9750 * .05 / 12 / 30 * 7 (22nd - 28th) $9.48
+ 10000 * .05 / 12 / 30 * 2 (29th - 30th) $2.78

Grand total, $39.24 vs $41.67
Savings for the month: $2.43
For the year, $29.16

Not exactly the most cost effective use of time...is it?