I know this is a bit of an old thread, but I'm positing here because I had to talk a friend out of this. In short, PILL (Principal Isolation Leverage Liquidity) is a characterization of interest payments designed to make you think that borrowing at a higher rate is good for you, while encouraging you to live your life out of a loan rather than an accumulation of savings. IMO, PILL = RUNAWAY AS FAST AS YOU CAN!
It is based upon total interest paid, but it fails to take things all the way through, so it appears to be a "savings."
Using made up rounded numbers.
If the first payment only covers $100 P, and $900 interest, than if you pay $1200 of additional principal at payment 1, then it is the equivalent of 12 payments. This moves you to the 13th payment, and you avoid ~$10,800 of interest. The method suggests you borrow the $1200 and use it to pay the mortgage to avoid the $10,800 of interest that you pay on this $1,200 over the year. That statement is the snake oil. They then say that even at 10% interest, that $1200 only cost you $120 a year instead of $10,800.
Here's where the program fails IMO. the ~$10,800 of interest isn't on the $1,200, its on the $200,000. The impact of the $1,200 does advance you through the amortization schedule, but you are still paying the interest on the $198,800 and will still pay close to $10,800 of interest over this time period. The reduction of the amount that you would have paid with the standard payment and the actual amount you paid in interest payments over the period is the real comparison to the $120, and since mortgages are 3-6%, that's going to be in the $36-$72, so let's call it $60.
I had to use an Excel spreadsheet with each month of the amortization worked out to show my friend that this ends up costing them more money, and that instead, if they take the difference between the 120 and the ~60 and use that, then they actually pay less over the lifetime of the loan.
They go on to suggest that you run your life out of a HELOC rather than having savings, using the logic that the HELOC is average daily balance vs. end of month average for the loan calc, and the net return of your savings will be higher than the nothing that other accounts pay. They do not mention that this works ONLY if you have a positive cash flow and that you have a secure income stream through the life of the loan. All this approach is really doing is aggressively paying all your savings into extra principle and putting you into a HUGE financial trap if anything happens to your income stream.
So if people ask how to pay off their mortgage faster, the answer is: Make additional interest payments with each payment. All of the methods that promote faster mortgage payoff are essentially the same thing: Make additional principal payments. Most of them just attach a fee to the mechanism of doing this. With PILL its a software package they want to sell you (Mint can do similar for free), Banks often want to charge a "set-up" fee for the bi-weekly payment option etc. All any of them really do, is provide systematic means of paying extra principal. This can be done for no additional cost, just by writing a larger check.
