Debunking Systems to Pay Your Mortgage Off Quickly

There are many systems out there that claim to help you pay your mortgage off in 13 years, or 10 years.  I was surfing YouTube this week when somehow in my feed I saw this video on how to pay my mortgage off in 7 years!

 

While the internet has made these programs free to learn about, there are still many programs out there that charge you a fee to set you up in their proprietary system.  I’ve received many calls over the years asking if these programs work.  Today let’s investigate how they work.

 

 

Math is Math:

Working with numbers all day, I love math.  And one of the things about math that is amazing is that no matter how you try and play with the numbers, 2 plus 2 will always equal 4 (unless like my comedian friend Billy Sage used to say that 2+2=5 making it a dim-sum).  Knowing that there’s no trick to breaking the rules of mathematics, the only way to pay your mortgage off quicker is by paying more towards that balance than required.  Know that every one of these accelerated mortgage payoff programs requires you to put more money towards your mortgage each month.

 

The HELOC System:

Almost every program incorporates a home equity line of credit into their system.  I’ll try and make this concept as easy to understand as possible.

 

Step #1: Obtain a HELOC 2nd mortgage on your home – typically $50,000 to $100,000.

 

Step #2: Draw 100% of the HELOC line and make an additional payment towards the principal on your 1st mortgage.

 

Step #3: From this point forward, you will deposit all your family paychecks into that HELOC account – not your checking or savings account.

 

Step #4: From this point forward, you will pay all your bills out of the HELOC account – including your regular monthly mortgage payment.

 

The concept is simple.  So long as your income is more than your bills, each month the HELOC balance will decrease because of the cashflow surplus.  At some point the HELOC balance will be reset to $0.  At that point you will draw the full HELOC line and make another large additional payment towards the principal on your 1st mortgage.

 

Why Use a HELOC?

Traditional mortgages calculate interest on a monthly basis.  Whatever your balance is at the end of each month, the interest for that month is assessed.  Interest for a HELOC is calculated on a daily basis.  Mathematically, dumping your paychecks into the HELOC balance will reduce the interest owed because the average daily balance will be lower than how the interest is accrued on your 1st mortgage.  That is why having a HELOC with a higher interest rate than your 1st mortgage still works.

 

On the other end, making occasional large single payments towards principal on your 1st mortgage will reduce your accrued interest greater than paying smaller amounts of principal reduction each month.

 

 

Pros: The 1st mortgage balance will get paid down faster because on top of the regular monthly payment, the family is diverting all their excess funds towards mortgage principal reduction.

 

Cons: Because all excess funds are being diverted to mortgage principal reduction, there’s no other savings or safety net.  These programs calculate your bills on a monthly basis.  Many don’t consider annual bills such as income taxes owed.  If you decide to use this program, you must take into account all your bills for the year then divide them by 12 to get a true monthly figure.  Know that without anything in savings, if something comes up, you’ll have to draw upon the unused portion of the HELOC for the unexpected expense.

 

Other Debt:  Your mortgage most likely carries the lowest interest rate of any liability you have.  Auto loans are higher.  Credit cards are most likely 4-5 times the rate of your mortgage.  Debt is debt.  Attack the debt with the highest interest rate first.  Once the credit card balances are paid off, jump onto any personal loan or auto loans.

 

Savings: With this program you typically don’t have any savings.  All your spare income is being used for mortgage principal reduction.  The program can be modified where you determine a monthly savings amount and have that diverted to a separate account.

 

 

Other Options:

 

Additional Payments: Instead of obtaining a HELOC and utilizing that system, determine your monthly surplus – just like the program above, and add that amount to your regular mortgage payment.  If your regular mortgage payment is $3,650 per month, and your surplus is $500, start making your monthly payments to your mortgage company for $4,150.  You will still achieve accelerated principal reduction, but the reduction will be slightly slower than the HELOC method.  I prefer this option because it doesn’t upend the way most of us earn, save, and pay our bills.

 

Surplus into Investments: What if you were to take the monthly surplus and put it into an investment account?  If, averaged over time, the investment account was to have a higher rate of return that the interest charged on your mortgage, putting your money there would be more beneficial than mortgage principal reduction.  Here’s an example using a $500,000 mortgage at 4.500% for 30 years:

 

Scenario #1 – Extra $500 payment each month:

You would pay the 30-year mortgage off in 21.5 years.

 

Scenario #2 – Invest $500 per month with an average rate of return of 7.5%.

In 19.25 years, you would have saved enough in your investment account to pay off your mortgage.

 

 

Contrarian View:

As your mortgage balance decreases, you are locked out of the equity you have in the property.  When it comes time to sell, your property will sell for the same price regardless of the mortgage balance.  One must decide their financial goals.  If getting that mortgage paid off quickly is your goal, use one of the methods above.  But if your goal is to maximize the money you earn through investments, accelerated principal reduction is not a good option.

 

I personally like the Surplus into Investments option.  One can still accomplish their goal of principal reduction if they want, and at the same time build their investment portfolio.  What to invest in?  Do your research.  Pick 4 different no-load mutual funds that have different characteristics and split your monthly deposit equally into each fund.

 

 

In summary, if you have a goal to pay down your mortgage quicker than the standard amortization tables, keep in mind that it will require you to pay more towards that mortgage.  No system can bend the rules of math to magically make that happen without you allocating more money towards your mortgage.  Decide how much you can comfortably divert towards that goal without putting yourself in jeopardy of having no reserves.

 

 

 

 

 

 

And now the week’s economic news…….

 

New Home Sales Surge

It was a relatively quiet week for mortgage markets.  The latest inflation report revealed results that were right in line with expectations.  As a result, mortgage rates ended the week slightly higher but remain near the lowest levels of the year.

 

Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator.  In August, Core PCE was 2.9% higher than a year ago, matching expectations, and the same annual rate of increase as last month.  Progress toward the 2.0% target of the Fed has not been easy, and this desired level has not been achieved since February 2021.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In August, sales of existing homes fell slightly from July, close to expectations.  The median existing-home price of $422,600 was up a slim 2% from last year at this time.  Inventories remain stuck at a 4.6-month supply nationally.  However, inventories were 12% higher than a year ago.  Homes stayed on the market longer, for an average of 31 days, up from 26 days last year at this time.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of new homes displayed much better performance in August, surging 21% from July, far exceeding the consensus forecast.  Sales were up 15% from a year ago and at the highest level since January 2022.  The median new-home price of $413,500 was up 2% from last year at this time.  Existing home sales measure actual closing during the month, while new home sales are based on contracts signed, making them a leading indicator of future housing market activity.

 

Finally, the latest home building data was somewhat disappointing.  In August, single-family housing starts fell 7% from July to the lowest level since April 2023.  Single-family building permits, a leading indicator of future construction, dropped for the sixth straight month to the lowest level since March 2023.  A separate survey of home builder sentiment on housing market conditions from the NAHB remained at the lowest level since 2022.  According to the NAHB, 65% of builders used sales incentives in September and 39% cut prices, the most since the pandemic.

 

 

 

 

Next Week

Looking ahead, investors will continue to watch for additional information about tariffs and monitor comments from Fed officials for hints about monetary policy later in the year.  For economic reports, the ISM national manufacturing sector index will be released on Wednesday and the services sector index on Friday.  The key Employment report also will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation are always closely watched.

 

 

Until next week….

 

*** Please note that Freddie Mac publishes their weekly rate report on Wednesday mornings from data received Monday and Tuesday. 

The graph above is intended to shown rate trends, and not “today’s current rate”. ***

 

 

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