OK, you have read a little on the website and you like the idea of paying off your home in 8-11 years. You probably have some reservations. How is this possible? This sounds too good to be true! What's the catch? We have heard them all. The beauty of our strategies is that they are all simple concepts that you can understand. When you put them all together, like pieces of a puzzle, they form a beautiful picture.
We will begin by explaining a scenario, and then applying the concepts to the scenario to illustrate how everything works together.
When we met Mary Jones, she had at $150,000 mortgage, $40,000 worth of credit cards, and a $10,000 auto loan. Her total debt was about $200,000.
Mary takes home a net pay of $5,000 per month from her job.
Mary's total expenses, including mortgage, taxes, utlities, groceries, and everything else is about $5,000 per month.
This leaves Mary with no discretionary income per month.
We restructured Mary's debt maximize her monthly discretionary income, and now her finances look like this:
Now Mary has a $200,000 mortgage at 6% on a 30 year fixed rate loan. She also has a $20,000 home equity line of credit (HELOC) with a $0 balance at 8% adjustable rate note. In summary, she still owes a total of $200,000.
Mary still takes home a net pay of $5,000 per month from her job.
Mary's total expenses, including mortgage, taxes, utlities, groceries, and everything else is now only $4,000 per month.
This leaves Mary with $1,000 discretionary income per month.
Now we have something to work with!
What if Mary wrote a $5,000 check from her checking account made payable directly to her 1st mortgage? How much would she save in mortgage interest? This prepayment will save Mary about $23,500 in mortgage interest on her 1st mortgage. (The general rule of thumb is about 5x the prepayment: Prepay $5,000 = Savings of about $25,000.) That's a great return on her money!
Why don't we all do this when we have a few extra dollars lying around? Because we know that any prepayment to our mortgage is permanent. Once you make a payment to your 1st mortgage, you cannot get that money back, and what is you need it? You just never know, so you keep it in checking. If you're like most people, you probably spend it eventually too.
Here's another interesting thing about your mortgage. Most people's mortgages are "due" on the 1st of the month, and considered "late" after the 10th of the month (the grace period). Did you know that no matter when you make your mortgage payment (1st, 5th, 10th, whatever) the bank does not credit your account until the end of the grace period? So if you make your payment "early" by sending it on the 25th of the prior month, the bank cashes your check on the 25th, but does not credit your account until the 10th of the following month. They collect interest on those 15 days of your money, and the money from millions of other customers to keep those marble floors shiny.
Let's go back to Mary. Mary is like most of us, and she does not have $5,000 in checking. So, what if Mary wrote a $5,000 check from her HELOC made payable directly to her 1st mortgage? On the surface, this doesn't make any sense. Why would she want to move money from 6% fixed to 8% adjustable? The answer is because she is going to deposit her $5,000 income into her HELOC, which would then give her HELOC a $0 balance. So how much interest will Mary actually pay on her line of credit with a $0 balance? ZERO! This is called "Interest Cancellation."
Myth: Deposit your paycheck into checking account
We were all taught this. I don't know very many people who don't deposit their paychecks into their checking account. That's we're supposed to do, right? Well, what sense does it make to deposit all that money into checking when the bank only pays 0-2% return on your money? It makes sense to the banks, but not you. Now you know that checking accounts are not a good place to hold your money. Deposit your paycheck into your HELOC.
Open Ended Line of Credit
Let's go back to Mary. If Mary deposited all of her paycheck into her HELOC, how was she supposed to pay all her bills, buy groceries, and make the car payment? If she uses the HELOC to pay her bills, then the balance on the line of credit will go up, and she will pay interest. True.
However, because interest on a HELOC is calculated on an AVERAGE DAILY BALANCE, Mary would not pay as much interest as if she had kept the money sitting in her 1st mortgage. To illustrate this point, let's break down her $4,000 in expenses.
On day 1 her HELOC balance was $1000.
On day 10, she paid her mortgage payment of $1166. (Balance $2166)
On day 15, she paid her bills of $1000. (Balance $3166)
On day 20, she spent $1000. (Balance $4166)
On day 25, she spent $834. (Balance $5000)
On day 31, she deposited her paycheck of $5000 into her HELOC
OK now let's break down the Average Daily Balance and Monthly Interest Expense.
10 days @ $1000 = $10000
5 days @ $2166 = $10830
5 days @ $3166 = $15830
5 days @ $4166 = $21830
5 days @ $5000 = $25000
Total = $83490
Average Daily Balance = $83490 / 30 days = $2783
$2783 x 8% / 12 months = $18.55 of interest.
Compare that to leaving the $5,000 in the mortgage at 6% interest.
$5,000 x 6% / 12 months = $25.00 of interest.
See, Mary just saved a whole $6.45 of interest, and it only took me an hour of math to prove it to you! The point is that this method works. Don't forget that I started her off with a $1,000 beginning balance, and she still has access to her entire line of credit if she needed it. However, don't get too wrapped up in these numbers, because I will show you how to reduce the interest even further, possibly back to $0.
OK so I have proven the concept, but what we really want to do is keep the HELOC balance at or near $0 for as long as possible to cancel as much interest as possible. How can we do that?
If you have a credit card, you probably know that if you pay the balance in full each month, the credit card company does not charge you any interest. If you didn't know that let me explain how this benefits you.
Let's say Mary starts the month with a $0 balance on her credit card, and then charges it up just as we explained above. By then end of the month, she would owe $4,000 on her credit card. However, when she gets the bill, it is only for $4,000. There is no interest charged as long as she pays it in full by the end of the grace period. Regardless of her interest rate, Mary just got use of the money for free!
So if Mary would use her credit card for all of her bills and expenses, including her car payment, insurance, taxes, groceries, eating out, gasoline, etc, she would not touch any of the money on her HELOC, and that would keep her balance on her HELOC at $0 for the entire month, cancelling as much interest as possible.
So let's recap.
1. Pay all bills and expenses with a credit card.
2. Pay off the credit card with the HELOC.
3. Pay your mortgage payment with the HELOC. (Unfortunately you cannot pay a mortgage with a credit card)
4. Deposit your paycheck into your HELOC.
Did Mary refinance her mortgage? No. Did her monthly budget increase? No. Mary saved over $23,000 in her first month alone just by changing a couple of little things about her banking habits. If Mary continues to use these strategies, she will save over $186,000 of mortgage interest, and save 21 YEARS off her mortgage!
That's the power of putting your money to work for you.
To find out if restructuring your debt will accelerate the payoff of your home, call Westpark Equity Group at (949) 551-6222 or send an email to
info@westparkequitygroup.com. One of our trained financial consultants will get you started on the track to building real wealth by conducting a free analysis of your financial needs and prepare a comprehensive wealth building solution for you.