- Personal Finance»
- Mortgages & Loans
How To Pay Off Your Mortgage with the Banks Money
My Home My Castle - My Mortgage
Okay, so we know that our home is our castle, but it is also one of the most expensive item the average American purchases. While we have pride-of-ownership in our home and consider it our greatest asset we should also consider how much it cost us. What are the affects of our mortgage on our overall wealth?
A person who purchases a home and takes a $150,000.00 mortgage at 6% on a 30 year term will end up paying $323,758.80. Think about that for a moment. They will pay the purchase price plus the purchase price again plus another $24,000. Consider the difference in lifestyle between this person and one who owns their home debt free.
Most people when they purchase a home will haggle over $5,000 or whether the carpet will be replaced. This is a trivial amount compare to what you will pay in interest on your mortgage over the next 30 years.
Methods of Payoff
While there are many programs out there that will help you payoff your mortgage so that you can be debt free, most of them center around paying extra. In other words, you end up making more principle payments then what is called for in the mortgage repayment structure resulting in your balance coming down and you saving money in interest over the years.
While it makes sense to do this, when you stop and think about it, the money that is reducing the principle is money coming out of your monthly budget. In other words you have less money for other expenses or things you enjoy doing. This is the reason why most people don't pay extra on their mortgages.
Some of the methods for these accelerated mortgage payoffs include but are not limited to:
- Rounding your mortgage payment up to the nearest $100
- Bi monthly payment (making two 1/2 payments a month resulting in 13 full payments a year)
What I want to talk to you about is how to pay off your mortgage using the banks money. In other words reduce your mortgage balance without taking extra money out of your monthly income.
Before I dive into this let me tell you that there are companies out there that will do this for you. I have even provided a link to one of the many. I am not endorsing the company, but just want to let you know should you desire to use one. There is typically a pretty heavy fee associated with these companies so my thought is, why not put their fee toward my mortgage payoff?
One of Many Such Companies
- United First Financial Money Merge Account Program
United First Financial exclusively offers the Money Merge Account System in the United States and Canada. Ufirst developed the system to help eliminate debt, cancel interest and build wealth
On the above loan example ($150,000/360 mos/6%) your monthly payment will be $899.33 (this represents principal and interest only - not taxes and insurance). On your very first payment (assuming it was paid on time) this payment would be broken down as $149.33 being applied toward the principal and $750.00 being applied toward interest (bank profit).
We understand that wit each payment this breakdown is going to change because interest is calculated on the outstanding balance and when the second payment comes due the balance is $149.33 less than it was on the first payment.
Stop and think for a moment. Even though the monthly payment is $899.33 if I would have paid $1,048.66 instead of the 899.33 which was due ($149.33 extra = one month's principle reduction) I would have reduced by 360 (30 years) payments by two payments instead of one. The reason for this is because I reduced the principle amount twice instead of once.
In a very simplistic term that $149.33 extra payment saved me $750.00 interest which I didn't have to pay. In reality it will save me far more than $750 because my extra reduced balance will be lower throughout my 30 year term thus saving me money every month.
Just think what would happen if I could put an extra payment of $1,000, $2,000 or $5,000 against my mortgage. The interest saving become staggering.
The problem is that most don't have the extra money laying around and if they did they don't want to apply it against their mortgage. So how can I leverage the banks money to pay off my loan?
Helps For Learning
Your Basic Checking Account
I want you to think about your household checking account and how it works. People are paid differently (weekly, bi-weekly, monthly, commissions), but it really doesn't matter. We all handle our checking accounts the same way.
When we are paid we deposit the check into our checking account and then we pay our bills out of the account. I will give an example using a couple of bills, but you will get the picture. As you go through this try and apply the example to your specific monthly income and expenses:
Paycheck: $1,500.00 on the first of the month
Car payment: ($ 800.00) due on the 5th of the month
Checkbook balance: $ 700.00
Electric Bill ($ 100.00) due on the 10th of the month
Checkbook balance $ 600.00
Deposit Paycheck $1,500.00 on the 15th of the month
Checkbook balance $2,100.00
House payment ($ 899.33) Due on the 1st late on the 15th (this will be important)
Get the picture? Now, let me ask you a question. How much money do you make on the balance sitting in your checking account?
If you have an interest bearing checking account and carry a $25,000 or higher balance you may make .00000035% (just kidding, but it is really really low)
Remember the above breakdown of our mortgage payment? What if I could take my idle money that is sitting in my checking account and have it sit on my mortgage loan?
Remember how much money we could save it I could only apply an extra $149.33?
Let's see how this works
Revolving Line of Credit
The bank has a product called a Revolving Line of Credit. A revolving line of credit works like a checkbook in reverse. You get checks and instead of having a balance that you write checks against you have a line of credit that you write checks against.
When you write a check money is added to what you owe the bank and your are charged interest for using this money. But don't forget the amount of interest you are already paying to the bank for the usage of their money on your home loan.
On a revolving line of credit the interest is calculated on your average daily balance. Therefore, if you have a $500 balance the first five days of the month interest is only being calculated on that $500. If you pay it off then interest stops calculating. If you write a check for $1,000 then interest is calculated on the $1,000.00.
At the end of the month you may have had all different types of balances because there is typically no limit to how many transactions (payments/advances) you make on this line of credit.
Now let me show you how to put this together and put money into your pocket.
Getting Your Mortgage Paid Off
To pay your mortgage off with the banks money requires using your revolving line of credit like your checking account. However, the interest on your revolving line of credit will typically be higher than the interest on your mortgage so you have to pay attention to what you are doing.
Instead of taking your paycheck and depositing your money into your checking account and letting the money sit in the bank (allowing the bank to use it for free) why not make a principle payment on your mortgage (saving thousands of dollars) using your revolving line of credit?
Let's say you get paid $1,500 on the first and the 15th. Your mortgage payment is due on the first, but why pay it on the first. Your payment due on the first of September is paying for the interest in August. Therefore, it doesn't matter if you pay it on the 1st, 5th, 10th or 13th the interest that is deducted from it will be the same on a typical 30 year loan.
Let's say this person making $3,000.00 a month wrote a check from their line of credit for $1,000.00 (bank money) as a principle payment on their mortgage (in my example above that would cover about 6 months principle reduction saving over $4,000 interest immediately and thousands more over the life of the loan).
When they write this $1,000.00 the bank will charge them interest on it, but remember they just got paid $1,500.00. So instead of letting all their money sit in their checking account they take $1,000.00 and pay off the line of credit. Now they are saving money on their mortgage and it is costing them nothing. On the 5th their car payment is due. They may not have the money in their checking account so they pay their car payment with a check from their line of credit.
Now their line of credit is at $800 for which they will pay interest, but their $1,000 is still working on their mortgage. They continue doing the same thing using the line of credit when their bills come due, but on the 15th they get their second check which they will apply to their line of credit knocking down balance thus reducing their interest charges again.
With the ease of online banking it is easy to transfer money between checking account and line of credit. Because our mortgage is due on the first and late on the 15th and because it doesn't cost me any more to pay it on the first or pay it on the 15th I will wait to make my mortgage payment as late as possible without incurring a late fee. This allows me to keep my line of credit artificially lower for half a month.
What happens? I am using the banks money via my line of credit to reduce my interest charges on my mortgages resulting in thousands of dollars being saved.
There is a balance here that you want to achieve:
You want as much money applied to your mortgage as possible while also keeping the balance on your line of credit as low as possible.
Does this really work?
Absolutely! I am doing this on my mortgage. In my first 12 months of following this strategy I was able to reduce my balance the equivalent of 17 months while paying less than $200 interest on my revolving line of credit.
The biggest thing that is need is a "pay attention" attitude. Watch your balances on your line of credit, checkbook, and prepayment amounts. You can get excited and transfer too much and you end up paying a lot of non-deductible higher rate interest on your line of credit.
The key is to keep the balance of your line of credit below a predefined percentage that you determine. If you keep your line of credit at 50% of your net income then there will be periods of time during the month that you can bring your line of credit to a zero balance making your average daily balance (that your interest is calculated on) a very low amount.
You also don't want your line of credit balance to be too low because they you are losing money that could be sitting on your mortgage. You will get the hang of it as you work it and see your mortgage getting paid off. Typically you will be able to make an additional principle payment every 3-5 months.
This section is being added several months after this Hub was originally created. The purpose of this paragraph is to bring some clarification to those who read this and are interested in utilizing this program.
Most people that have read and commented on this Hub struggle in understanding this concept because their thinking is towards the principle balance of their loan. If you borrowed $200,000.00 to purchase your home, you HAVE to pay that $200K back. You borrowed this amount. The principle that you borrow is not the problem, it is the interest that costs you so much money!
If you transfer $5,000 from your home loan to your line of credit, you still owe the $5K, what this program does is uses a float to not have to pay interest on that $5K. That is where you save the money. Two things occur when you float the money. If you do it right you will pay little to know interest on the $5,000, plus there will be additional principle being paid on your mortgage with each payment thus giving you quicker amortization.
By keeping the right amount (based on your income) in the float you are constantly moving money from your mortgage to your line of credit so that you can float it and pay no interest on it. As you try to understand this don't focus your thinking on the mortgage balance, but on the interest that is being paid on the mortgage balance. If you get the interest in control the balance will automatically reduce faster.