What is the difference between Extra Payments to Principal vs. HELOC (Accelerated Banking)

1.) Liquidity Lock-Up

When you simply send extra payments to your mortgage, you’re locking up your cash in your equity. With a traditional mortgage, you don’t have access to your equity unless you refinance. With a HELOC, you’re able to access your equity and turn it into cash in matter of few seconds.

2.) Savings Account Earnings vs. HELOC Savings

Most Saving accounts today in 2021-2022 are only yielding 0.5 ~ 1.0% APY.

On the other side, you have your HELOC where the interest rates can be anywhere between 7% – 10%. Cash can be used to lower the average daily balance on the HELOC and thus help us save 7% to 10%.

Keep in mind that you can still draw the money out of the HELOC if you need it for emergencies or for investment accounts.

3.) The decreasing Average Daily Balance through ALL of your Income.

Sending extra payment to your mortgage can help save money… but not as effectively as the accelerated banking method. With the Accelerated banking method, not only are you decreasing the average daily balance using the left-over of your income… the strategy allows you to affect a larger decrease in the average daily balance because you’re depositing ALL of your income against the HELOC.

This way, your HELOC is experiencing a larger drop in a balance for 21-30 days. If you keep the balance low for that long, it emulates a situation where your entire income acts as the actual payment against the principal. While you would draw the money out of the HELOC for expenses and thus increase the balance of the HELOC, the increase is only temporary since you would do another income deposit against the HELOC to lower the average daily balance yet again.

4.) The Opportunity Cost

By having a HELOC, it allows you to act on these investment opportunities much more quickly since you can transfer funds from your HELOC to your checking account in matter of few seconds. But while you’re not using the funds for investments, the funds are sitting in your HELOC saving you interest through reduction of average daily balance.