The BEST Way to Pay off Your Home Early

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Recently, I wrote an article about successfully managing equity from the eyes of a pretty famous financial planner and wealth building expert, Doug Andrew.  I referenced how I had originally started out on a path of trying to acquire real estate with the intentions of paying the properties off as quickly as possible. Later, I became more educated with both wealth building and financial planning techniques, and after having discussed my thoughts and concerns with my accountant and tax advisors, I changed my strategies.  Today, after successfully investing in many asset classes (not just real estate), I’m truly grateful and blessed that I didn’t continue down the path of paying down principle.  It did take some time and experience gained over the last 26 years, utilizing Doug Andrew’s strategy, to get where I am today.

Doug starts off by describing the first myth, that the best way to pay off a home early is to pay extra per principle on your mortgage.  Now, the next statement he makes is pretty bold. He says that in reality, no method of applying extra principal payments to your mortgage is the wisest and most cost-effective way of paying off your house, thus defying the myth.  Now, I don’t know if I’m that bold to make that statement. But, I can tell you from some of my life experiences why I believe that what he says is true.

Mom’s Situation

The reason I chose the story of my mom’s plan is because it’s a common strategy, and serving as an example, it also demonstrates some the flaws of buying into that first myth.  My parents were both from an upbringing where you were supposed to go to school, study real hard, get a job, work real hard, pay your home off as quickly as possible, and live happily ever after.  There’s only one problem with that plan: people are living too long (by the way, today mom is 81 and my dad is deceased).

She and my pop bought their home in 1964 for $19,500 with a 25 year mortgage at 4% interest. I remember seeing one of their payments, and it was around $250 a month. So, in 1989, the house was paid off and my mom had since divorced my dad. She was 56 at the time, and it would be another nine years before she retired and encountered the reality of her situation.

To put it simply, she was equity rich and cash poor. Sure, she had a small pension, Social Security, and her house by 2004 was worth about $250K, but it really wasn’t enough income to do much of anything. Taxes, maintenance, and utilities were starting to add up.  Even if she sold her house and moved into a rental, she would quickly deplete her money if she continued on long into retirement (and the good news is: mom is in really good health).  She really couldn’t afford to buy again even if she downsized.

So, what went wrong?

Looking back, it’s easy to see that mom never worked her equity.  For example, if mom did rehab loans for real estate investors at 15% and borrowed out approximately $200K of the equity at 4% for the last 25 years, she would have an extra $550,000.  Many folks say that lending on first mortgages at 65% loan-to-value is risky, but I think not leveraging your equity is the real risk.  What a huge opportunity cost that was lost in mom’s case.

Luckily, about nine years ago, I was able to intervene with some strategies to help fix the situation.  I purchased mom’s house, and we put the proceeds into an LLC, where mom only owns a small percentage but she’s the manager and draws a salary.  We invested the proceeds into re-performing mortgages that pay a nice yield close to 18%, and this provides enough cash flow to pay our interest only mortgage, pay mom a salary, and there’s cash flow left over.

In fact, today, our notes are starting to buy more notes.  We’re well on our way to really accelerating a quarter million dollars estate into some significant net worth, depending on how long my mom lives.  We managed to get all of the assets out of mom’s name, which is great in regards to taxes and nursing home situations in retirement (i.e. nursing homes now have a five year look back period). Now, these are all positioned favorably for mom’s future.

My First Property

In 1989, I purchased my first property, and it was a $65K duplex that I bought with an FHA, 30 year fixed mortgage. When interest rates fell a year later, I was able to refinance to a 15 year mortgage with no money out of pocket, and my monthly payment only went up by $10. I was sticking to my plan of paying this property off, just as my parents had taught me.

Then, when I got more involved in financial planning, I spoke to my accountant about the relevance of paying the property down.  Around the same time, I built some commercial garages on the property for approximately $25K to $30K using credit cards. The property suddenly appraised for $175K.

Guess what I did next? I refinanced to an interest only 10 year (ARM) mortgage for $131,250, which is 75% LTV. I used that money to pay off the credit cards, and I moved into a real nice house, in a real nice area.

It would’ve taken me much longer to save up for the down payment on my primary residence, if I hadn’t accelerated the process by utilizing the equity of my first property.

Also, I rent out both apartments in the duplex, as well as the commercial garages. After factoring in the mortgage payment (PITI), I still cash-flow approx. $849/month on the property.

My Primary Residence

Because I pulled out equity from my duplex, I literally moved with $300 paid out of pocket for my loan application.  I bought the house for $190K with a seller’s assist for closing costs.  One year later, it appraised for $250K, and I borrowed $35K to do some real estate deals.  A few years later, I refinanced it again at $356K. I took that money to do more real estate deals and even lent out some money to do rehab loans.  Then, in 2005, it appraised for $560K, and I took out another HELOC for $118K and used the money to buy re-performing notes that I put in a separate LLC, with my heirs as the majority owners, and my wife and I are the managers who control the cash flow.

Then the market crashed, and the house dropped in value to about $400K, but we didn’t care because we own so many notes and mortgages that we bought with the equity.  To me the biggest risk would have been not separating the equity with my 3% HELOC to go by notes, that average in excess of 18% returns plus kickers.  Again, my notes are starting to buy more notes.  If I need capital, I can just sell or borrow against my note portfolio, which by the way, is in a separate, safe bucket.

Over the years, I’ve had over $2 million in equity—with 11 lines of credit borrowed at an average of 4%—that I utilized for real estate deals and notes paying 15% and better.  If I had not done this, I would’ve lost approximately $300,000 a year.  To me, that’s a huge, huge opportunity cost.

So, as you can see the best way for me to pay off my real estate is on the balance sheet with my money off the table in a separated, safe bucket, of which I have many (various vehicles) and full control over.  I can pay off most of my real estate anytime I feel like it.  To be quite honest, I still have too much equity out there (exposed and underutilized) because banks have been too conservative lately and because appraisals have been low. But as Bob Dylan use to sing, “the times are a changin’…” and as soon as lending loosens and values return and increase, I’ll be the first one in line at the bank getting another loan or HELOC. Will you?

What’s your strategy to build your net worth?

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


  1. I always appreciate your writings, Dave. I’ve read a couple of the books you mentioned in previous articles. Interesting stuff.

    One of these days, I will call you to talk through some of the details how to make this happen with my assets and my family. My parents story sounds quite similar. My parents paid off their house about fifteen years ago. My Dad is deceased now. Mom is looking at retirement trying to figure out how to make it work. She is equity rich and cash poor too.

    Please keep contributing, Dave!

    • Dave Van Horn

      Hi Jason,
      Thanks for the positive feedback, and thank you for sharing your story. For me, I was very fortunate that my mom was receptive to my advice, since she saw her mother (my grand mom) wipe out three estates after five years in a nursing home. It’s good that you’re both starting to look at it now considering the five year look back period. I do wish you and your family the best.

  2. Paying off mortgage earlier is guaranteed savings and these saving are risk-free. I’ll take 5% risk-free all day every day over 18% on high risk notes.
    BTW, I paid off my 30 yr mortgage in 9 years and saved $150K in interest. That’s real savings not some imaginary “opportunity cost”.

      • Arbitrage is supposed to be risk-free. In 2003-2008 some banks gave 0% credit card loans with no transaction fees while others were paying 4-5% on FDIC-insured savings and CDs. That was a true arbitrage. What described in the article is “carry trade” – one of the most riskiest strategies out there.

        • Dave Van Horn

          Hi Mike,

          I agree with you that you would be saving an interest expense, but I don’t quite see that as being risk free. For example, I see that equity is dramatically at risk if property values were to drop, or in the event of a lawsuit, judgment(s), or bankruptcy. I’ve had many properties fall in value in various cycles before. Also, the equity is illiquid in the event that it’s ever needed. So, in the case of paying it down, one may save on the interest expense, but he/she will lose their Mortgage Interest tax deduction, and make 0% ROI on the equity buried in the property, which is not an imaginary opportunity cost.

          Someone could even funnel the house’s money into an IRA, annuity, or some insurance contracts to have it in a safe, liquid bucket. If they did want to invest that money at a higher rate than they borrowed it out at, it doesn’t have to be Notes, either.

          Carry trade is more commonly associated with the trade of currency, as well as foreign markets and their interest rates, which is definitely not what I’m referring to. I do agree with you that in principle, pure arbitrage should be entirely risk-free, but in actual practice, losses and risks may occur with the common use of arbitrage that’s more statistical in nature.


  3. Mike McKinzie on

    Great article Dave. I am also there, with $3M in assets and $1M in debt. I hope to soon have $4M in assets and $2M in debt. This raises monthly income from $20,000 to $30,000. And guess what, my net worth doesn’t change. Not sure if I want to get above 50% though.

    • Dave Van Horn

      Hi Mike, thanks for your comment!
      It sounds like you’re on the right track. And, I understand your discomfort in taking on more debt. But, let’s say you took out another 1M and placed it in a safe, liquid vehicle (with a return higher than you borrowed it at), would you feel more comfortable than if it was placed into more illiquid real estate assets? Is your concern of going over 50% a liquidity issue?

        • Dave Van Horn

          You are correct—some note investing can be scary for the novice note investor. It’s like anything else, once you learn to manage the risk and understand the statistics you may become more comfortable. Just as you see risk in notes, I see risk in not separating and utilizing my equity. For me, equity fails the ROI, liquidity, and safety test.

          I like to combine my real estate planning with tax planning, retirement planning, and legacy planning simultaneously, so to me, it’s not entirely about yield. But, other investments that can pay higher than 6% include tax liens, REITS, LLCs, Options, Leases (RE, equipment, etc.), RE flips, Account Receivables, Billboards, Cell phone towers, Oil & gas, financing (auto, heaters, furniture, etc.), hard money, livestock, collectables, inventory closeouts, covered calls, transactional funding, check cashing, Lending Club, and other Businesses. I even have a buddy who sells Eagles tickets through his IRA account.

          With regard to tax planning, my accountant told me to defer, defer, die or 1031 exchange my properties. Other than the depreciation factor, he told me it was irrelevant whether I paid my properties down.

          So, even if you don’t agree with separating your equity and putting it into safer buckets or investments that pay a higher return that you may deem risky, you may still be interested in taking out a line of credit. Even if you don’t need to utilize the money, this would still allow you to utilize asset protection through debt, maintain liquidity in case you need it, and keep some of the mortgage interest tax deduction.


    • Hey Mike.. could you share how you have your $2M in equity positioned making 12% return.. And what your plan to turn that into 18% return with more leverage? Just in a similar situation (except sub 10% cashflow..)

      • Mike McKinzie on

        I used rounded numbers so as to not divulge too much personal information. But let me give an example of my last two purchases. My last purchase was a 3 bedroom, 2 bath house in California that I paid $40,000 cash for and it rents for $700 a month. The house before that I paid $52,000 for, put about $10,000 into it and it rents for $900 a month. That house is in Memphis, TN. I paid cash because the price was too low to hassle a loan for them. You can figure out the return on these two investments easily enough. Both these houses had equity when I bought them. How did I find these two houses? Networking!!! One was from BP and the other was from family connections. You will make more money from networking than you will from education. Yes, education is important but networking will help you use that education.

  4. As usual, another great article, Dave. Harvesting equity is a strategy I’ve been using for over 15 years, very successfully. I have a question, however:

    “We managed to get all of the assets out of mom’s name, which is great in regards to taxes and nursing home situations in retirement (i.e. nursing homes now have a five year look back period).”

    I’m not real up on nursing homes, so I was just curious what you meant by that. Thanks!

    • Dave Van Horn

      Hi Sharon, thanks for the positive feedback and a great question!

      Unfortunately, after the first spouse dies, and the other is long into retirement, the estate can be swallowed up by taxes or nursing homes. The nursing home will want to see all of your assets, and they’ll make you liquidate all of them before the government subsidies can kick in. They used to have a three year look back period, but now it’s a five year look back period (in most states). So, for example, if my mom sold off all of her assets and went into a nursing home a few years later, they would still pursue the money from those assets. That’s why it’s better to control assets, rather than to own them, in retirement. Hopefully, people will be able to make that transition 5+ years prior to needing long term health care. But, this may not have as large of an impact on those with no assets, those with long term health care insurance, or the very wealthy.

      I hope this info helps!

  5. Great article Dave!
    My question for you is that do you have a limit of the debt you like to take on your equity?
    Mike mentioned he doesn’t like to go above 50%.

    • Dave Van Horn

      Hi Tracey, thanks for your question!
      No, I’ll take as much out as a commercial bank will give me, because I like to keep the tax deduction and invest the money at a higher rate than I am borrowing it out at. Even if I didn’t need the money, I would still take the line of credit for liquidity reasons and asset protection through debt. Even so, my HELOCs are not normally maxed out. I like to also take some of the house’s money and statistical arbitrage money off of the table and funnel it into never taxed accounts (IRAs, annuities, and some insurance contracts).
      I hope this helps!

      • Thank you for this entire chain as I’ve been contemplating doing another cash out refinance on one of my other cash flowing properties. Over the past few months I’ve taken six figures per property which still generate significant cash flows and I can place the cash into other passive income producing investments to replace the income forfeited from the cash out refinance as a result of the larger mortgage balance. And you a are so right about the additional benefits of asset protection and tax deduction had not thought about those additional benefits.

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