“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford
Mr. Ford is right. Especially after you really stop and think about how much interest the average homeowner is paying to the banks and mortgage companies.
However, in this post, I am going to show you what I have taught thousands of homeowners to do to pay their home off faster and save tens of thousands of dollars in interest payments.
Hint: It isn’t making just one extra payment on your mortgage, although that does help.
Before we can talk about the solution though, we have to understand the problem.
2 Frustrating Problems With Traditional Mortgages
The average homeowner typically reaches out to their loan officer and the only option they are presented with typically is a 10,15 or 30 year mortgage. So what’s the problem? That’s what most everyone goes with. There are 2 actually.
1. If you read your loan estimate on your mortgage you will see that you will basically be paying for two homes. One for yourself and one for the bank.
Although the interest rate might be in the 4-5% range, if you look at the total interest paid it might be as high as 77%. That’s the number banks don’t want you to pay attention to on the loan estimate.
Here is a picture of a loan estimate. Look familiar? You signed it when you got your mortgage. Notice the total interest percentage.
2. Problem number two is that mortgages are close-ended. This means that once money goes into the loan, you can’t get it back out. If you needed to access that money again, you would have to refinance or sell your home.
Because the loan is close-ended, you can’t put all of your money onto the loan and still pay your bills. This is intentional by the bank. They want you to separate your money so you are in debt longer. They want you to put some in savings. Some in checking. Some in a money market.
Don’t worry though. Not only am I about to show you how to get all of your money working for you 100% of the time so you pay way less interest but I am going to show you how to build wealth as well.
Information Most Banks Don’t Want You To Know About
So what is a homeowner to do? Are they at the mercy of the big banks? Fortunately not.
A homeowner can use a home equity line of credit (HELOC for short) as a more efficient way to pay off their home faster. Typically this loan is used to pay off debt or to fix up a home, however, if used correctly, this loan is mathematically proven to allow a homeowner to pay less interest on the life of their loan compared to a mortgage.
One of the problems though is that there is so much money to be made in mortgages as you saw above, that banks continue to push them and do not educate their staff on the other options they offer.
Don’t believe me?
Here is one of our most popular youtube videos of me calling a mortgage lender which is where you are getting your information. I think you will get a kick out of how it ends.
I wish I could tell you that this was a random lender who didn’t know what he was doing but in fact, we deal with this on a daily basis while working with clients to help them get a HELOC.
How To Use A HELOC To Pay Off Your Home Faster
Step 1: Refinance to a first lien position HELOC. This will replace your mortgage with just one line of credit. You will not have two loans or a mortgage anymore.
Step 2: Put all of your money that you make into the home equity line of credit account.
Step 3: Pay all your bills out of your HELOC account. Most HELOC’s give you a debit card that you can use just like your debit card for your checking account.
By following the three steps above, you will drive down your balance and pay less interest. As I like to say, “It’s math. Not magic”. There are more advanced strategies that can shave an additional 3-4 years off a loan as well but that will get you started for sure.
This isn’t for everyone though. You will need to have a 640 credit score or above, 10% equity or more in your home and have a positive cash flow.
5 Reasons Why You Should Use A HELOC To Pay Off Your Home Faster
So what makes a HELOC so much better than a mortgage? Here are 5 reasons why.
1. You pay less interest – Because a HELOC charges interest on the average daily balance verses a mortgage with amortized interest, you will pay less interest.
2. You have 100% of your money working for you – With a HELOC, you can move money in and out of the loan so you don’t have to be afraid of putting your entire paycheck in your account. Your money will drive down the balance and you will pay less interest.
3. You will have opportunity money – My business partner was able to buy a foreclosure across the street from his home for $167,000. It was about to be auctioned off in 4 days. He put $13,500 into it in two weeks and it is now worth $230,000. He is renting it though for $1,550 a month. He was able to do that because him and his wife had paid off their home earlier in the year and he had access to his line of credit. He didn’t have time to get a loan and would of missed out on an opportunity had he not had access to money. He now has an asset that he could sell and net $49,000.
4. You can retire earlier – When you biggest debt is paid off, you don’t need as much money to live off of and you can retire much quicker. We have clients doing this all the time.
5. You can finally build wealth – The average 401k has about $90,000 in it. If your home is paid down quicker then you can use more money to build wealth in things such as real estate.
In closing, I hope you found this post valuable. The middle class are getting crushed by the rising cost of living. I am wanting to change that and help more families become debt free so that they can spend more time with each other. That is what will make this country a better place for everyone.
Author Bio: Michael Lush is the co-founder of www.ReplaceYourMortgage.com, the #1 destination on the internet for paying off a home using a heloc. Besides watching Kentucky basketball, you can also find him on the farm with his wife and three boys.