Society and the banks teach out about mortgages at a young age. We hear the terms refinance and 2nd mortgages, but fail to learn some of the hidden ways to pay off that loan earlier. Today I am talking about how to pay off your mortgage fast!
These ways are opposite to what you may have been taught – why? Who has taught us about banking in our lives? Maybe our parents or another family member. Who do you think they were taught by? THE BANK. So the bank teaches you how to take out loans and pretends that they are “in it” to help you, but what you don’t realize is that they are really “in it” to make money. They are a business too – right?
So let’s break this down a little bit more. For this article, I am going to be using the free calculators on pigly.com. They offer a wide range of tools from savings, budgeting, retirement planning, mortgages, auto loans, personal loans, and so on, so their site should offer something relevant for just about everyone! I am going to be using their mortgage calculators for this blog post, but they have so many other great free calculators on their website!
When learning how to budget, you start looking for ways to lower your monthly payments. One of the ways that many people think of is to refinance your mortgage rate to a lower interest rate. But I want to warn you – DO NOT REFINANCE! Yes – I said it! Do NOT Refinance!!!!!! This is the opposite of what I wrote about in this post on the best ways to pay down your mortgage. Why? Because I started working with a wealth-building specialist and he has taught me this top-secret information 🙂
When you first get your mortgage loan, a large percentage of your payments go to interest and a small percentage go to the principal of your mortgage loan. As you continue to pay your mortgage your payment starts going more to principal and less to interest. You can typically see this in your amortization table provided in your mortgage loan closing documents.
When you refinance that loan, you get a new amortization table and you are back at square one paying more to interest and less to the principal. This will also start your loan over and you now start back at 30 years. This extends the life of your loan and you will also pay much more interest over time. You can use the Mortgage Refinance Calculator from Pigly to find out how much you will save, but keep in mind that this saving is VERY slow and minimal.
This is NOT a Home Equity Loan, this is a line of credit. I just closed on this type of HELOC line of credit a few weeks ago. It took me calling SIX banks to find one that offered this type of line of credit, so call around and don’t get discouraged. You are going to use this HELOC to pay off your primary mortgage loan. This type of line of credit is super amazing. The bank controls all of the equity in your home, when you get this type of loan you will control the equity.
For example: My house appraised at $140,000. The bank I used had an 80/20 loan to value first position HELOC. I got a $112,000 HELOC and only owed $80,000 on my home. I now have $32,000 in my own equity that I can use to pay for rental homes, use as emergency savings, etc. The first position is important because you want this to REPLACE your current mortgage. Here is a great book that will help you understand this concept.
Keep this in worthmind – most bankers will not understand what you are doing. They will instruct you to refinance instead (because the banks make more money in interest payments). They also may just tell you that you can make extra payments to your mortgage to pay it down faster. Yes, we understand that we can BUT we don’t want to. The benefit of this type of HELOC is that it is a line of credit AND interest only.
What you want to do with this HELOC is put all of your money into it every month. ALL. This includes what you typically put in savings. The goal is to put all the money into the HELOC and take out only what you need for your bills. Doing this month after month helps you pay that down FAST!
Here is an example:
Your home is worth $120,000, you owe $80,000 on your mortgage. You apply for a 1st position HELOC with 80/20 loan to value. You get a $100,000 1st position HELOC, the bank uses $80,000 of that line of credit to pay off your current mortgage. You now have $20,000 left to ‘play with’.
Every month your bills are $5,000 but you make $8,000. Instead of putting $5,000 into your checking, you put the full $8,000 into your HELOC. That makes the balance $72,000 after you deposit that first $8,000. You take out the $5,000 for bills and now your balance is $77,000. You paid all your bills plus you now have $3,000 less on your HELOC balance. If you do this every month for a year, you would have paid off $36,000 of that $100,000 loan. That is SO much faster! Do this for 3 years and you have your mortgage totally paid off! The term associated with this concept is called
The Velocity of Banking – Here is a great video that explains the velocity of banking system.
This tip may seem more common. If you are in a position to make extra payments per month, you should! This would be an additional check sent right to your bank with a note on it to go towards your principal only.
You have to make sure that you don’t mind not having that extra cash in your pocket. So keep that in mind. You can use the Accelerated Mortgage Payment Calculator from Pigly.com to help you see how much interest you will save. This calculator shows homeowners how much interest they will save and how much faster they will pay off their home loan if they make extra payments on their mortgage using any of the following methods:
It took me a while to understand the concept of this. It went against everything that I was taught!
I highly recommend checking out the book I posted above and start paying off your mortgage fast!