Many years ago I had a good friend of mine share a calculator that allowed me to see what the benefit of making an extra payment to my mortgage would do to my overall end payoff of my home. I found that by making even simple payments of an extra $50 or $100 on a monthly basis could shave years off of the overall time frame I’d have to stroke a final check to my lender. I was always appreciative of this calculator and formula, and it led me to examine how is it possible to pay off a mortgage in only five years. In due time I’ll be developing a financial calculator that you will be able to use so you can see the power of making extra mortgage payments can do to your principal and interest. Consider it my way of “sharing the wealth” with my readers here.
I’m always intrigued by ways of being financially creative. That’s why when I stumbled across this YouTube channel, owned by the Kwak Brothers, I was immediately impressed. Based in Chicago, the social media active brothers coin themselves as “Millenial Real Estate Investors.” Here’s what they had to say about paying off your mortgage in five years. As usual, I have the transcript of the video as well as a video embed as well. Enjoy and please feel free to comment below or ask any questions.
Imagine Paying off Your Mortgage in Just Five Years
Sam Kwak: This is Sam Kwak, one of the Kwak brothers, real estate investor, and the author of the book, Fire Your Boss. In this video, I want to show you guys how you can pay off your mortgage within five to seven years. Now, before I go on with the breakdown and the explanation of the strategy, I want to make sure you guys get some disclaimer so that you guys are protected and then I am protected as well. Real quick, I am not an attorney, I am not a CPA, nor am I a financial planner, so anything that I say or mentions of legal tax or financial planning advice, please don’t take it as an advice but rather as a suggestion based on my own experience and my own understanding of the strategy.
Now, this is going to be also a short less than 15-minute video. Make sure you don’t try this alone. If you guys have any questions, if you guys need any help, if you guys need some personal help, I’m going to leave a link down below at the end of this video, I’m going to give you a link to go to to see further explanation. I’m also going to give you guys a little more breakdown in the link that I’ll send you to at the end of this video. Make sure you guys understand that I get it, there’s other videos that will show you this strategy but remember, it’s really crucial that you get some help, a third party or a third pair of eyes, so to speak, to help you guys use the strategy.
The purpose of this video is just to give you an overview, an idea, a possibility on how you can implement a strategy in your own situation so that you don’t have to pay a huge sum of interest and spend all the time in the world trying to pay off your mortgage. Let me go ahead and flip the camera around and I’m going to show you guys using a marker and piece of paper, give you some illustrations on how the strategy will actually work.
All right guys, I went and flipped the camera around so I’m going to show you guys to break down and the explanation as far as how this strategy works. Now, before I get to the actual strategy, I want to show you guys how and why mortgages work and why I think they are inefficient. I’m going to break down the mortgages in a chart for you in relation to interest versus principal.
Now, for those don’t know what principal is, principal is the actual loan balance. If you have a $100,000 loan, your principal balance is $100,000, get it? Interest is the expense that you pay to use the bank’s money. That’s basically the bank’s profit. I’m going to draw the chart for you here. The X-coordinate it is time. We’re going to label zero months. This is going to be 30 years and right between is 15 years. This is going to be your monthly payment amount. Monthly payment.
We’re going to give a good example here. $100,000 loan, 5% interest, a 30-year amortization, it’s going to be just around about $400. Guys don’t quote me here, I don’t have the amortization calculator in front of me but based on my experience, it’s around 400 bucks for principal and interest alone. With that $400 in mind, this curve here is going to be your interest payment, and this curve here is going to be your principal balance.
If you guys noticed, the first half, 15 years bulk of your $400 payment is actually interest payments. In the early months, very little is getting taken out of your actual $100,000 principal balance. In that $400, most people think that if we make that $400 payment, our loan is going back down to 99,600 bucks. Guys, that is not the case. In fact, maybe like 50, 100 bucks, if not even less, are going to be the actual principal payment that’s going to go and lower the balance from $100,000 to the principal payment, whatever we’re subtracting here.
Do you guys see how the first 15 years you guys are actually not making much progress as far as paying off your loan? In fact, the first 10 to 15 years, this is where the banks make money. Banks profit. Does that make sense guys? What’s really interesting and for me, it’s entertaining, most bankers will come to you and say, “Hey, it’s been about 10 years. How would you like to refinance your mortgage for a lower payment? How would you like to pay $350 instead of $400?”
Most people would say, “Wow, I’m saving $50.” That’s actually a pretty good thing, but what sucks and what they don’t tell you is that we’re basically resetting our clock back to zero months and we’re paying all of this interest all over again. It kind of sucks. isn’t it? We’re actually paying more interest by refinancing, by resetting a clock back to zero because if we didn’t refinance and continues paid to 15, 16, 17, 18, and so on, we’re actually going to be making more of that principal payment, and we’re actually going to be doing much better in our progress as far as paying off our principal balance.
Now, what’s really important is that this is something that you should know if you guys are taking notes or if you guys have a pen and paper in front of you. The lower the principal balance, as the principal balance gets lowered, so will the interest. I’m a huge Star Wars fan, so I’m going to make this reference. If you destroy the shield generator, the Death Star is open to being vulnerable. I know guys I’m a geek, I’m a nerd. [chuckles] That’s the best reference and analogy I can give you.
Kill the principal and you’ll also kill the interests too. It’s really important that we take the principal balance down so that we’re not paying interest. Does that make sense? That’s one of the pillars, or I should say the core supporting methodology to making this strategy work. $100,000 illustration. On a $100,000 loan at 5% interest, I know I can’t spell here. 30-year mortgage amortization. Most people think 5% interest is not bad, but little do people know that actually will amortize and will become compounded to actually becoming around $80,000 to $100,000 on interest alone.
On that $100,000 loan, that’s the principal balance, on a 30-year amortization, 5% interest, we’re actually paying $100,000 interest alone plus our original loan amount is going to be around $180,000 to $200,000 we paid to the bank. Now, guys, if we’re going to pay $100,000 interest, we just bought a bank another house. We got a house and they got a house. You guys can see how mortgages suck, doesn’t it? We’re paying a lot of interest, it takes so long, 30 years. That feels like forever, it really does.
I’m actually scared that some of these banks are coming out with 50-year amortization for student loans. That is crazy, that is insane, that’s ludicrous. This shouldn’t be the case and there has to be a better way in paying off our property. There has to be a better way to buy houses without paying 100% interest to the bank. There is a methodology, there is a strategy that I’m going to show you and this is why you’re watching the video, to pay off your mortgage faster. You guys probably already know this.
This is all going to be in what’s called truth in lending statement. Banks will give you this and they won’t tell you the truth in how mortgages work. Now, there’s another debt instrument that I like to use to pay off your mortgage way quicker. With this strategy, what we’re going to accomplish are these. These are the objectives or I should say the overall concept, overall finished touches as far as how the strategy work.
This strategy is called velocity banking. What we’re doing is we’re accelerating how our debt is being paid. It is known that about 66% interest savings with this strategy. We’ve got about 66% of time-saving as well. In some cases, five to seven years of total payment amount and we’re going to keep the same amount of expenses. We don’t have to incur more loss, we’re not paying a penny more on the mortgage, trust me, and the same amount of income.
I’m not going to tell you to go get a better job. I’m not going to go tell you to skimp and save, save every single penny. I’m not going to tell you to go clip coupons. Guys, what I’m telling you here what this strategy will help you is still keep the expense the same, still keep the income the same way, but we’re saving 66% in interest and 66% on time of the payment period. Cool.
Some of you guys might be saying this sounds way too good to be true. This has to be some sort of scam, or some of you guys may say this is too risky, this is too different. Guys, I’m going to show you the overall general concept as far as how this work and the math behind it. Now, this is the only going to be a short video. You’re not going to get the full understanding, I get it. Most of you guys won’t.
That’s why I’m going to share a link at the end of this video on a live example. I’m going to actually show you an Excel spreadsheet, and give you guys the actual breakdown as far as how the strategy will work in numbers, but for now, I’m giving you guys the concept. I’m going to introduce to you guys a new debt instrument. A new way, a new, I should say, a revolution.
This actually has been around for a little bit and most people don’t know. It’s called Home Equity Line of Credit. Also known as a HELOC. The banks have been selling this product for about 15, 17 years. It’s been around for a little bit, but the reason why bankers don’t tell you about this instrument is because– You remember our illustration with this? They want you to make all this crazy money interest. Where did it go? I’m trying to give you guys the illustration again. They want you to pay 100%.
They want you to pay this amount interest. They don’t want you to save interest. That’s not their interest. That’s funny. That’s not their interest. That’s not what they’re after, they want you guys to make ton of interest payments so they can make money. Even though the interest rate is going to be variable and it’s going to be higher than a mortgage, why those two things aren’t going to matter as much and it’s actually going to save you more money this way. I want to show you. I know it’s a little backward and it could be confusing.
I’m going to show you guys number one, the distinction between a mortgage versus a HELOC. Here we go. Mortgage versus a HELOC. First of all, HELOCs are open-ended. Your mortgage broker/banker will know this is open-ended and this is going to be close-ended. What that means, is let’s say, for example, you make a payment of $1000 to the banks. I’m going to draw the best bank as possible. There we go.
On a mortgage situation, you can’t use that again. You can’t use it, but on a HELOC you make the $1000 on the HELOC principal payment, you’re going to be able to use that $1000 again. Does that make sense guys? It works just like a credit card. Credit card, you have a limit and the whole nine yards. Here in a mortgage, you’re kind of stuck. You pay the $1000, and that’s it. It goes to the principal and interest, the end. On the HELOC, you use $1000, you pay it off again. You use $500, pay it off, just like a credit card.
The next distinction is that HELOCs, the interest is calculated and applied on average daily balance. What that means is that every day, so Monday let’s say, you have $100 balance. On Tuesday you have $90 balance, and on Thursday let’s say you have $50 balance. Each day you bring down the daily balance so will your interest go down. I’m going to really quick show you guys how the average daily balance works. Let’s say you have a $100 just like the Monday’s example. It’s going to be multiplied by the interest rate, so 0.07 and it’s going to be divided by 360 days, it’s the commercial lending year and whatever that is, is going to be the average daily interest. That’s going to get applied every single day as long as you have $100 balance.
Let’s say from Wednesday through Friday you have $100 balance. From Wednesday through Friday, whatever this amount is getting applied each day, but let’s say Wednesday you had 100 bucks balance, on Thursday you have $90 balance, well, guess what guys, the next day, this is not going to be 100 bucks, this is going to be $90. On Wednesday you may had let’s say– I’m trying to calculate here. Let’s say $5 interest. Well, the next day because the balance is lower– Thursday not Tuesday. We’re going backwards here. Thursday you may have more like $4 interest.
You see how the balance on a HELOC every day, it matters. The longer you have lower balance, the longer you’ll have smaller amount of interest going out. This is one other key, a second pillar, you can call it that, to understanding why HELOCs are better. Let’s go ahead and show you guys the actual strategy. This is my last sheet of paper, so I better do a good job. What we’re doing is there’s really two ways to skin a cat here. There’s two ways to do this strategy. I’m going to show you guys one way.
Like I mentioned earlier, I’m going to show you guys the full illustration of this method in a link that I’m going to put down below at the end of this video. Back to the example of $100,000 mortgage. $100,000 balance, this is a mortgage. What we’re doing is, we’re going to go ahead and open up a home equity line of credit. Obviously this is going to require a little bit of equity to have. Let’s say we were able to raise or I should say an open a $25,000 limit HELOC.
What we’re doing here is some people might say we just got another $25,000 loan. That is not the case here guys. This is like getting a $25,000 credit card, we didn’t get any more loan. What we’re doing is we’re taking that $25,000 credit line that we have with the HELOC and we’re making a principal payment of $25,000, so now our ending balance is going to be $75,000 balance here, and this is going to be a $25,000 balance. 75,000 plus 25,000, we still have $100,000 balance in terms of debt. We didn’t incur any more debt.
A lot of people seem to confuse at HELOC, they think it’s another mortgage or equity loan product. It’s not. We take in the principal balance and put it here. Does that make sense? What we’re going to do here from now is we’re still going to continue to make our mortgage payment every single month. We can’t forget that unless we want a foreclosure, which we don’t want. What we’re doing here is that we’re going to take our entire income. I’m going to be crazy here. Let’s say our monthly income is $5000 income, and make a principal payment against the HELOC.
Our balance now is $20,000 balance, and we still have a $75,000 balance here. Does that make sense? Here’s the trick guys, out of this $20,000 balance, we still have expenses every month. Don’t we? We have kids, we got to pay for diapers, we have to pay for groceries. What we’re doing is, we’re paying groceries here. Groceries, we’re paying for kids’ expense. We’re still paying our mortgages, our monthly mortgage. We’re paying for other bills, but we know that all of this is not going to happen right away next day.
Remember our average daily interest balance concept. We’re not going to go and deposit $5000 on Monday, and next day on Tuesday we’re not going to incur $4500 of expenses. It’s going to spread out. It’s going to be $100, $500 there, $700 next week. I’m going to do my best to explain this part here. Week one, let’s say we spent $500 on groceries, that means we have a new balance of $20,500 on HELOC, but our total balance is 20,500 plus $75,000 balance. That comes to 95,500 total debt. Does that make sense?
Guess what guys, knowing what we know about average daily balance, our interest is getting applied on $20,500 not $25,000 balance. Even if we do have let’s say a 7% interest.
Usually, HELOCs are higher than mortgage interest. That 7% interest is now getting applied to $20,500 instead of $25,000 balance. If this was a mortgage balance of 95,500, we just saved a whole crap ton of interest right there. Plus that $20,000 principle payment we did or $25,000 principle payment we did on the mortgage, not only we saved interest there, but we also saved close, man, I had to say about five to seven years on that single $25,000 payment, probably even more. I might be even be confident to say 10 years. We just saved 10 years of mortgage. Does that make sense guys?
Let’s say in week two we spent additional $2,000 on whatever expenses you may have, groceries, kids, they all add up, right. At the end, the total balance now including the mortgage balance and the HELOC balance is going to be $97,500, so essentially our HELOC is now becoming a checking account. Nothing has changed, we’re still making the same expense, the same income. Now the one thing that I forgot to mention is that you do need to have leftover money at the end to have the HELOC balance come down as well, the principal balance of the HELOC.
In either cases, you should not be spending more money than what you’re making, so if the expenses, let’s say is $4,500 that $500 is what’s bringing down the balance. Over time that HELOC balance it’s going come down to zero, the balance, but again, we still have that limit. We’re going to take another $25,000 and bring that $75,000 let’s say– Over time we’re going to have balance come down to $60,000 anyways because we’ve been making that mortgage payment over time.
By the time this becomes zero, this would have come down as well to $60,000. Now if you take another $25,000 principal payment against the mortgage, we’re going to be back down to $35,000 and that’s going to probably chop off another ten years. Does that make sense guys? You guys see how quickly we can pay off your mortgage thanks to the average daily balance, and we’re chopping this down way, way, way quicker. What we’re doing is this is inefficient and converting it to what’s efficient.
You can save so much money, more money on this side than letting it sit on a schedule and having it pay every single month. Now some people will argue with me and saying, “Sam why don’t we just take the extra money that you have,” in this case, $500, “and just make an extra payment on that mortgage?” Well, guys, that defeats the purpose of having a lower average daily balance.
In this case, when we introduced the idea of $5,000 income principal payments against the HELOC, we brought the average daily balance from twenty-five thousand to twenty thousand and like I mentioned, you’re not going to be spending all that $4,500 worth expenses the next day. You can be spending $100 here, $500 there, $2,000 next week, so between those spending, you’re saving that interest just like our earlier micro example Wednesday and Thursday.
Between your spendings, that’s where you’re going to save the interest. We’re cutting the mortgage balance from back-end instead of front-end, if that makes sense. Guys, if you guys need an actual illustration, I do have another link, I’m going to put it down below underneath the video. If you need a real-life example, if you need real figures, I have actually made a longer video about 30 minutes with actual spreadsheets. I made an actual example with real interest rate, current market rate. I’m going to show you how the strategy actually works on an Excel sheet. The math does not lie. Numbers don’t lie.
I’m going to show you in an Excel spreadsheet how this strategy actually works in number sense. I know I explained it in a very conceptual way. I made a really quick diagram, but if you guys are like me, you’re a numbers person, you’re very analytical. If you guys want to actually see the real number behind this concept, I’m going to show you it’s called chopmymortgage.com. I’m going to write this in a– There you go. I’m running out of papers so I’m going to write right here. Go to chopmymortgage.com, go to that link guys chopmymortgage.com. I’m going to also put it underneath this video.
You can also look in the link description box if you’re watching this on YouTube. I’m going to give you guys real live illustration also because I’m a real estate investor, I want to show you guys how to use this strategy also on rental properties, so you guys can pay off your rental properties, and I will also show you guys on ideas on how to take this HELOC strategy, the velocity banking strategy, and turn it into an income strategy, isn’t that cool?
What you thought was a strategy to pay off your mortgage quicker, I’m going to also show you guys how to use this method here to also increase your monthly income, so if you guys are interested in saving your time on your mortgage payment, if you guys are interested in paying 66% less on interest, if you guys are interested in possibly and potentially doubling your income using this strategy, go to chopmymortgage.com.
I’m going to show you guys some real-life examples plus I’m going to give you guys an opportunity to interact with me on a phone or Skype and we can chat on how you can take this illustration, this concept and apply in your own life. Go to chopmymortgage.com I will see you guys there I will be waiting and I’ll see you in the next video. All right, take care now.