Introduction
Home Equity Line of Credit (HELOC) strategies, such as accelerated Banking, have gained traction as methods to pay off mortgages faster. However, there's confusion about how interest on HELOCs differs from mortgages. Are the savings real, and how does the math work? In this blog, we break down the differences, address misconceptions, and explore the true benefits of leveraging a HELOC to pay off your mortgage.

HELOC vs. Mortgage: Are Interest Calculations Different?
A common misconception is that the way interest is calculated on a mortgage and a HELOC is fundamentally different. Many videos and creators have incorrectly suggested that HELOCs use a different form of interest calculation compared to mortgages. The truth is, both mortgages and HELOCs use simple interest.

Mortgage Interest: It is simple interest calculated based on an amortization schedule.
HELOC Interest: It also uses simple interest, but because it’s a line of credit, it doesn't have an amortization schedule.
The key difference isn’t how the interest is calculated, but how you can manipulate the balance on a HELOC to lower the overall interest paid.

How Does the HELOC Strategy Save You Money?
The main advantage of using a HELOC over a traditional mortgage is its flexibility. With a HELOC, you can apply your cash flow (income) to reduce the balance, thus lowering the daily interest accrued. Additionally, because a HELOC is a revolving line of credit, you can draw funds back out if needed, unlike a mortgage, which is a closed-end loan.

Mortgage: When you make a principal payment, you can’t access those funds again without refinancing.
HELOC: After making a payment to reduce the principal, you can borrow the funds again as needed, making it more flexible for managing cash flow.
The Role of Cash Flow in HELOC Payoff
One of the main principles of accelerated Banking is using your income to lower the HELOC balance. For example, if you have a $10,000 HELOC balance at 6% interest, you can make a $1,000 payment mid-month, reducing the balance to $9,000. This lowers the daily interest that accrues, saving you money over time.

Illustration:

Starting Balance: $10,000
Daily Interest: $1.64 at 6%
After Payment: The balance drops to $9,000, and daily interest reduces to $1.47.
By strategically using cash flow, you reduce the interest paid, and over time, this can lead to significant savings.

Myth: HELOCs Are Riskier Because of Variable Rates
A common concern is that HELOCs often come with variable interest rates, which can increase, unlike the fixed rates of many mortgages. While this is true, the savings you gain from manipulating the balance can offset the risk of fluctuating rates. In some cases, even with a higher variable rate, the overall interest paid can still be lower due to how the balance is managed.

Using a HELOC vs. Bi-Weekly Mortgage Payments
Another common strategy to pay off mortgages faster is to make bi-weekly payments. While this method reduces interest by adding an extra payment each year, the HELOC strategy often results in greater savings because it allows you to apply larger, more frequent payments to the principal, further reducing the balance.

The Offset Mortgage Concept: A Global Perspective
In countries like Australia, homeowners use a concept called an offset mortgage, which operates similarly to a HELOC. In the U.S., the closest equivalent is the HELOC, making it the best option available for those looking to accelerate their mortgage payoff by manipulating the balance and interest calculations.

Conclusion: Why HELOCs Are Effective
The HELOC strategy works not because it changes how interest is calculated, but because it allows you to influence the balance in ways a traditional mortgage does not. By using your income to reduce the balance, you pay less interest over time, and the revolving nature of the credit allows for flexibility in managing expenses.

The key takeaway is that the effectiveness of accelerated Banking lies in its ability to leverage your cash flow to reduce your debt faster. While not for everyone, this strategy can significantly shorten your mortgage term and save thousands in interest costs.
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