Personal Finance

3 Ways to Eliminate Mortgage Debt

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
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When I was just starting out, I didn't have much money to invest or purchase investment properties. And out of that necessity came creativity. This is probably why 100 percent of the properties in my portfolio I've accumulated over my career have involved some form of leverage. The shorthand for this among real estate investors is "OPM," or other people's money. Usually this refers to private or hard money, but in my own personal definition, I also throw in traditional bank financing because, after all, it's not your money. For the most part, I believe mortgage debt or money borrowed to acquire and renovate property has been a wise investment for me on my path to success. I've purchased millions of dollars worth of real estate over the years with little cash out of pocket, which in turn has enabled me to achieve financial freedom and to take risks on other ventures and even grow my note business.

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But what all this means is—I have some debt. Good debt, in my opinion. Debt that I can leverage, but also debt that can hinder me in other ways (such as qualifying for a traditional mortgage on my personal residence). I’ve come to work around this the past decade or so by renting higher-end properties to live in. But now wanting to settle down and purchase again, I had to sit down and take a hard look at my what I owe. By doing so, I’ve learned and devised some strategies to pay it all down—and some of it rather quickly. So, whether you’re just starting out, looking to minimize your debt, or you’re an old real estate warhorse like me looking to crunch it down quickly, these tips should help you reach your goals while you maintain or are on your way to financial freedom.



Related: What’s Better Financially: Paying Off Your Home Mortgage or Investing That Money?

1. Send Extra

I’ll start with the simplest of these strategies, and that’s just the idea of sending extra with each payment. “You can do that?” People often ask me, to which I reply “Why not!”

Although some banks and hard money lenders have a per-payment penalty fee if you were to pay extra on the loan, many don't mind when you pay them extra. By doing so and accelerating the mortgage debt pay-down, it not only saves you money in interest, it increases your available equity and net worth. I picked up this little trick working as a real estate agent and in the mortgage origination/title world. I would see someone send in extra money a month towards principal or use an amortization schedule and send next month's principal payment with this month's regularly-scheduled mortgage payment (P+I), and I would see the difference that would make. So like I say, "Why not!"

2. Bi-monthly Payments

An even easier strategy—and one I still use today on a few properties—is a bi-monthly pay schedule. I think this could work for almost anyone. This is simply where you send in half a mortgage payment (P+I) every two weeks. Per Wells Fargo: A 30-year mortgage for $100,000 at 6.5% means the homeowner pays $127,544 in interest over the life of the loan. This includes $100,000 principal for a grand total of $227,544. Paying one half of the regular monthly mortgage in a biweekly schedule makes the interest $97,215, which is a savings of $30,329 or approximately four years of an earlier payoff. It may make more sense today to just send in extra principal as long as there's no prepayment penalty fee to prevent the mortgage company from holding the money for two weeks before applying it and/or the use of third-party companies that charge fees.

Keep in mind, these strategies can be pretty powerful, whether you keep a loan to term or you’re the normal mortgage statistic as someone who pays a mortgage for five to seven years before refinancing or selling. The advantage of paying more earlier on is that the typical mortgage is front end loaded with interest and very little principal is paid down. In fact, a break point is approximately 19 years into a 30-year loan when the portion of money going to principal passes the amount going towards interest.

3. Sweep Accounts

My favorite strategy of all when it comes to paying down a first mortgage the quickest is by using a sweep account.

Normally, people pay their bills out of their checking account while their money sits idle most of the month. They say it’s estimated on average in a 40-year period a person’s money sits idle for 30 years. This money is leveraged by banks to generate more revenue through what they do best: lending.

Advanced Excel Tips For A Better Home Budget

Related: Are Extra Mortgage Payments Worth It? A Look at the Numbers

What a sweep account does is it enables the borrower to take advantage of the leverage for themselves. This is commonly done by utilizing a HELOC (Home Equity Line of Credit) that's treated like a checking account. So, instead of putting all of your paycheck into a checking account, you put your income stream into the HELOC. By doing so, you pay your HELOC down over time while you use a HELOC check to prepay your first mortgage thus saving money on a lower interest amount, keeping your money moving as opposed to sitting idle.

By utilizing my third strategy of arbitrage with HELOC’s it has afforded me the utmost form of asset protection and liquidity, as well as tax advantages to offset my earned income.

Now, that I’ve shared some debt elimination strategies with you I’d love to hear what other folks on BiggerPockets have utilized to build their wealth (net worth and cash flow).

What’s your accumulation, preservation, and liquidation or estate plan?

Since 2007, Dave Van Horn has served as president and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nat...
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    Hannah Rubin Rental Property Investor from Pompano Beach, FL
    Replied about 2 years ago
    This is a really interesting article. It falls into my line of thinking, but I often see articles across Bigger Pockets that advise you do the exact opposite and never pay the mortgage down early. I frequently hear the term ‘cheap money’ being thrown about. I suspect this strategy would be better suited for people who have been investing for long periods of time. What is your thought on the benefits of this strategy in comparison to leveraging the time value of money and sticking with the mortgage?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 2 years ago
    Thanks Hannah! Everyone’s different and I suppose it depends on personal preference and one’s own time horizon. At different types of your life you’re in different investing modes. As I’m getting closer to retirement age, I’m less interested in accumulation mode and more interested in debt paydown since I’m wanting less than ever before.
    Hannah Rubin Rental Property Investor from Pompano Beach, FL
    Replied about 2 years ago
    Thanks for the feedback! This does make sense from that perspective.
    Gautam Venkatesan Investor from Dallas, Texas
    Replied about 2 years ago
    Dave – thanks for sharing. Can you expound on what you mean by “By utilizing my third strategy of arbitrage with HELOC’s it has afforded me the utmost form of asset protection and liquidity, as well as tax advantages to offset my earned income”?
    Lakshay G. Small Business Owner from Fallston, MD
    Replied about 2 years ago
    Search on YouTube “pay off your mortgage with HELOC”
    Stephen Rowe from Minneapolis, Mn
    Replied about 2 years ago
    Interesting read, a question though; Would you open the HELOC immediately after you qualified for the Mortgage? I am assuming that you need the Mortgage before you could get that account rolling.- Stephen
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 2 years ago
    Thanks for reading Stephen. I’ve opened HELOCS at the time of purchase before (it can be harder to do that if you don’t have enough equity) but it’s possible. And keep in mind, it doesn’t have to be a large sweep account. The size isn’t as relative as the activity or utilization of it. Best, Dave
    Jay Strickler Investor from Ruston, LA
    Replied about 2 years ago
    Determining how much faster a mortgage is paid of by paying extra or making bi-weekly payments is fairly straightforward. Can you estimate how much acceleration you have gotten on your HELOC method? I know there are a lot of assumptions but I would be curious what your experience has been.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 2 years ago
    Hi Jay, Time will really tell! It’s tough to say exactly because so far one of two things have happened over the years. For one thing, when I’ve paid down a mortgageto a small-ish balance (say $30K) I’ll usually just pay it off. No use in waiting. The other scenario is when I’m paying it down, and I build up the equity to a nice amount, it’s hard not to utilize it. So in those instances I’ll use that equity for a higher return passive investment (like a note or hard money loan) than the interest rate on the 1st mortgage, making money on the float. Best, Dave
    Dave Fagundes
    Replied about 2 years ago
    Great article, Dave. I read more about the second method and it turns out there’s a difference between bi-weekly payments and twice monthly payments. Apparently bi-weekly payments pay down faster because they result in a full extra mortgage payment every year (52 weeks is actually 13 four-week periods). But twice monthly seems to work as well, though the logic is less clear to me. Which do you think is a better strategy?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 2 years ago
    Thanks Dave! And good catch! You are correct, a half of mortgage payment every two weeks is the best strategy of the two.
    Deanne Moore Rental Property Investor from Rancho Cucamonga, CA
    Replied about 2 years ago
    Thank you for sharing this information. Please expound upon the 3rd strategy using sweep accounts.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 2 years ago
    Hi Deanne, George Antone gives a deeper explanation of sweep accounts here http://reinvestorsummit.com/george-antone/ There’s a transcription of the call below the podcast. You can search for the term “sweep accounts” and you’ll find his desciption of how you pay your mortgage down in 1/3rd of the time. Best, Dave
    Mark Welp Investor/Agent/CPA from Columbus, OH
    Replied about 2 years ago
    Dave, Love the article and I use the HELOC strategy on my primary residence, which then I turn around and use the equity to buy rental properties. I wish I could get HELOCS on my rental properties, but a lot of banks will not do this. Again, great article!
    Jerry W. Investor from Thermopolis, Wyoming
    Replied about 2 years ago
    Dave, Excellent article as usual. I have picked up a way to accelerate mortgage paydown that I have used for well over 30 years. I first used it in the late 70s early 80s when interest rates were insane. I had an amortization schedule made up that showed the amount of interest and principal of every payment. then when I would go to make a payment and see the huge amount going to interest and the little amount to principal, I would look to see how much principal would be paid in the next payment, then I would add that amount of extra to my payment. I could then draw a line through the next payment as I had basically paid it. As long as I never missed a payment each month this was super effective. I had a payment that was I believe $122. The amount of principal paid was only about 30$ each month, getting slightly bigger each month. By adding $30 to my payment I wiped out 2 payments. The next principal payment would be higher of course so I would need to $32 for the next months payment. Now eventually the principal payments start getting bigger. Near the end I had to add over $100 to make next months payment, but by then the principal was going down rapidly. It feels so good to draw lines through 2 payments instead of one. Even on a small income you can easily do this in the beginning. It is not so easy near the end. I have shown several friends how to this and some of them have paid their home mortgage off 5 or 10 years earlier than the schedule would have been allowing some of them to plan for an earlier retirement than they could have otherwise. One friend of mine went over his retirement plan and he had calculated having to work full time until he was 69 in order to be able to afford to retire due in part to an unplanned divorce that took a big chunk of his retirement. We went through several different scenarios, and now he is back on track to retire at 65, and do so nearly debt free, which in turn allows him to do more fun stuff in retirement. I could not get him to invest in real estate as a tool to financial freedom, but i was able to get him into an earlier retirement date.
    Nelson Diaz
    Replied about 2 years ago
    The method suggested by Jerry W. is very advantageous., more if combine with b-weekly payments. However, I think it can be more improved even if you don’t have a HELOC , using a credit card as it is explained i this video: The PILL Method Presentation 2010-FANTASTIC, AMAIZING++++++++++ https://www.youtube.com/watch?v=-AzsbB25mbw. To be more effective, the method suggest paying as many months as you can, transforming your HELOC or credit card (chunking), in order to significantly reduce interest and shortening the duration of the mortgage. My daughter and son-in-law will reduced their 15 years loan to about eight years.
    Jason Barnett Flipper/Rehabber from Memphis TN
    Replied about 2 years ago
    Thanks as always for the practical advice! These are great ideas!
    Angela Russo Specialist from Milwaukee, WI
    Replied about 2 years ago
    Very interesting to actually see people, including Dave, advocating for sweep accounts. I’ve read up on it and have looked over in the forums only to see the concept blasted time and again- especially when it is labeled as “mortgage acceleration.” I definitely agree that it is a strategy to be used with caution and diligence that you aren’t spending more than you put in but I’ve never understood the people who hate on it so much citing faulty math/logic. Any thoughts on if the tax change to exclude deduction of HELOC interest makes it less appealing?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 2 years ago
    Thanks Angela! The tax change could affect this but I’m not positive all HELCOs are treated equally by it. I believe it’s different with a rental vs a primary for example. Either way I would suggest checking with your adviser/account before implementing this strategy. Best, Dave
    Angela Russo Specialist from Milwaukee, WI
    Replied about 2 years ago
    Thanks Dave. As I understand it (not a CPA or lawyer so don’t take this as advice) the change made it so only HELOC that go towards improvements to the home are deductible. But I feel that still keeps sweep accounts in the gray area since it’s basically just a transfer of debt location- not sure if that keeps it under the umbrella of “home.” However, if you keep the draw close to your monthly income, the amount of interest the HELOC accrues is minimal so I doubt there would be a significant impact unless you were already used to offsetting other income with the deduction.