Today's Thursday Thoughts is a bit different. Our guest, Michael Lush is an expert on paying off your mortgage early. Since the economy is the way it is, I thought his info would give us something to think about!
How To Pay Off Your Mortgage In Five To Seven Years On Your Current Income
When sharing with other homeowners that they can pay off their mortgage in five to seven years using just their present income, their guard typically goes up since this is all new to them. I can't blame them for that. Mine did too.
Before I begin sharing how this works, I want to assure you that I have real world knowledge on the topic of home financing. I call myself a "recovering" mortgage banker. I use that term because for 14 years I promoted 15-30 year mortgages before coming across using a home equity line of credit to pay a home off much quicker.
This whole business of teaching people how to pay off their home quicker came by pure accident. I had no intention of doing anything else but mortgages. I was making an incredible living helping lots of people buy a home. I was on a call with a mentor one day because I wanted him to introduce me to his wealthy clients. I got paid on loan volume so the bigger the loan the better. However, he informed me that his clients didn't get mortgages on their homes. They didn't pay cash either. What they did was they used a home equity line of credit instead.
The Problem With A 15-30 Year Mortgage
While on the surface this sounded like a crazy way to buy a house, after conducting a ton of research about this concept, it made sense. It was just math.
Interest on a mortgage is front loaded. In 18.5 years, most of the payments made will go towards interest. Banks are well aware that the average family will make a change every five to seven years so the cycle starts over again. If you are curious how loan originators are paid so well, all one needs to do is follow the money.
My wife and I wanted to put this concept to the test so we replaced our mortgage with a HELOC. It worked just like I calculated and as of this writing, we are 13 months away from having a paid off home.
How A HELOC Works
On a HELOC, the interest in calculated by the average daily balance. The more money that is deposited in the account, the lower balance goes and less interest paid out. Let's look at some of the benefits with a HELOC.
1. You can pull money out as needed with no penalties. With a mortgage, you can't do that. It is close ended.
Let me give you an example. Your transmission goes out and it is $1500. You really could of used the money from your mortgage payment to get it fixed but you don't have access to it anymore. With a HELOC, you simply use your debit card and pull the money out immediately.
2. With most HELOC's, closing costs as well as mortgage insurance do not com into play. A mortgage can have both.
3. With a HELOC, more money gets applied to the loan balance than with a mortgage.
Getting approved for an interest only HELOC is what we teach our clients. Of course we do not teach them to just make interest only payments though because they would never pay their home off. Let's use the example of a $142,000 HELOC. The interest only payment would be around $420 a month. Whatever income that is put into the account over the $420 is applied towards the principle. Compare that to a mortgage where most of the payment at the beginning is being applied towards interest.
Why Are HELOC's Not More Popular?
The truth? Money.
While reading through your loan documents when you apply for a traditional mortgage, you will notice that you are basically buying two homes. The banks gets one and you get one.
Also, loan originators rarely make commission on HELOC's and if they do, it might be up to $750. If they have a chance to sell a homeowner a mortgage and make a few thousand dollars instead of $750 for a HELOC, what do you think they will do? We know what they would do because millions of homeowners are unfortunately being sold a mortgage. If someone calculates the math between the two, a HELOC will win every time.
One last thing that I will add, and this is the biggest reason why we decided to start teaching homeowners how to pay off their home in 5-7 years. Most loan officers do not take the time to educate themselves on HELOC's because they don't plan on selling them which can lead to selling a homeowner the wrong type of loan. Some homeowners who decide not to take our class and just try to go get a HELOC themselves almost end up getting a home equity loan instead which is just as bad as a mortgage. It is unfortunate that this happens but it happens every day.
My partners dad was applying for a HELOC and we had to call and help him while he was in the office with the loan officer. The shocking thing was we had to educate the originator on her own product. It was sad because how many homeowners are losing tens of thousands of dollars by having inacccurate information?
Before I close out this article, I want to make sure that you know that this is just math. It isn't magic. After obtaining the correct home loan along with living their current lifestyle, most clients are shocked at how fast their balance goes down.
Michael Lush is co-author of the book Replace Your Mortgage. He teaches homeowners a Proven 6 Step Method For Paying Off Their Home In 5-7 Years Using Just Their Current Income . You can request a free copy of his book by visiting his website.
Well friends, I hope you enjoyed today's thoughts and found the information useful.
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Until next time...take care and God bless!