Paying off house within 5 years...

25 Replies

I stumbled across this guys website this past weekend and read this post.  I just wanted to know peoples thoughts on this and if you believe it would actually work?

How to pay off your house within 5 years using these awesome ninja tricks

Clayton Morris

December 21, 2015

A few years ago I discovered an amazing way to pay off the house you live in with virtually no time at all. I'm talking 3 to 5 years. And the best part is you don't need to use any of your own money to do it. All you need is a home-equity line of credit, some form of income, and a little discipline.

Let me start off by saying that I'm going to be using round numbers to illustrate my point. For the sake of argument let's say you owe $100,000 on your primary residence. Let's also say that your house is worth $130,000. And you make $3000 a month. The basic premise of this ninja trick will work for anyone even if you owe $500,000 on your house or $50,000 on your house, it doesn't matter.

With the above numbers you can see that the difference between $130,000 and $100,000 is $30,000. That means in this example you have $30,000 of equity in your house. Follow me?

Step one: call up a few local banks and tell them that you're interested in a home equity line of credit and ask them if they have any introductory specials. Our local bank recently had a 1.99% interest rate special for the first year. Important, when they ask you this question: Would you like a home-equity loan or a home-equity line of credit? You need to make sure that you're asking for a home equity line of credit also known as a HELOC. The difference is very important because in a home equity loan the bank will write you a check for the total amount of the equity in your home. So in this example they would cut you a check for $30,000. With a home equity line of credit they're extending a credit line of $30,000 which you can use for a number of years. Don't get bogged down in these details just make sure you get a home equity line of credit.

Because you're getting a home equity line of credit on your primary residence you're likely to get 80 to 90% loan to value ratio. This means that of the $30,000 in equity you're going to get 80 to 90% of that. And that's a value of $24,000-$27,000 depending on the bank.

Again for the sake of argument let's say the bank gave you $24,000 to work with. Most banks will give you a checkbook and debit card associated with this new account. You're going to need this checkbook for step three.

Step Two: Treat this new bank account as your primary bank account. That means you're going to do everything with this account. You'll use this account to set up your direct deposit at work, pay for groceries, pay for gas, everything. Forget about your old bank account. Pretend it longer exists.

Step Three: Grab one of those shiny new HELOC checks and write up a payment to your primary mortgage company. Make the check out for $10,000. Be sure to designate that you're making a payment to your principle balance.

Now it's time to update our numbers. Your primary loan amount is now $90,000 and the balance on your HELOC is now $10,000. You just paid down 10% of the entire balance your primary mortgage with one check. Now you might be saying to yourself that sounds great why wouldn't I just save up $10,000 and make that payment? You could do that of course. But how long will that take you to save that cash? With this strategy the moment the bank approves your HELOC you get to cut a check to pay down the principal balance. See the difference?

Okay I can sense your skepticism. You're probably saying to yourself, "Wait a second that doesn't help me because all I'm doing is shifting money around." Yes that's exactly right. Except it's not your money, it's the banks. You're completely altering the amoratization schedule of your primary mortgage. And instead of paying it off in 25 years you're paying it off in under five years.

The reason the ninja trick works so well is because you set up your HELOC as your primary bank account. Remember your balance is now $10,000. For now. Then your paycheck from work arrives as a direct deposit and your HELOC balance is suddenly $7000. You buy some groceries, you pay for gas, you go to the movies, and your balance goes up to $7250. When you get your next paycheck your new balance is? You guessed it, it's $4250. In a few short weeks or months your HELOC balance will be back down to zero. The reason this works so well is because the remaining money from your paycheck is not sitting in a random bank account doing nothing for you, with this model it's actually paying down your loan balance.

A few short months later your HELOC balance is zero. Then all you need to do is get out the checkbook once again and write another $10,000 check to the primary balance on your mortgage. Now suddenly that loan has dropped to $80,000. Within virtually no time at all you paid down 20% on the principal balance of your loan.

The system will only work if you are diligent about utilizing the HELOC as your primary checking account. The moment you start keeping multiple bank accounts the system will fail.

I know it seems complicated. That's why I want you to go back and reread this article two or three more times until it sinks in. The real fun will begin once you figure out how quickly you can pay off your mortgage.

There's no magic here.....it's based on your ability to save $10k every few months and paying that toward your mortgage. You can do it without the HELOC, you'd just make your first payment a few months later. Also, if the bank will lend up to 80%, that's up to 80% of the Value (which in this case would be $104k, less your $100k balance, they would lend you $4k) Not 80% of the Equity, as shown above, big difference. This is just BS. Maybe this guy could also explain the "magic" of making 1/2 biweekly payments as opposed to monthly payments. Hint, there are 12 months in a year, and there are 52 weeks in a year.

This is just essentially what they call an All In One Mortgage or an Accelerator Mortgage.  It is a popular product in Australia I believe. They have some benefits...and some drawbacks.  For the financially disciplined, they can help you pay off your property quicker, thus reducing the overall interest you pay. For the non-disciplined, a problem people run into with this type of product is increasing their total loan amounts more than the property value, thus getting themselves underwater on their property...and/or increasing the amount of interest they would pay with traditional amortization.

Also for those that are financially disciplined, who this may help...they do not really need this type of product (or ninja trick in your example as it is referred) to accomplish paying of their mortgage quicker.

@George P. That is what I thought was most interesting about it. While using the HELOC as your primary banking account and having your direct deposits placed in it, it quickly brings your balance back down to zero and that is when you write another check for $10,000. You essentially are never drawing more than $10,000 from the HELOC at any time.

While I can't comment on the technique described, Clayton Morris was the guest on episode 151 of the BP podcast (which I enjoyed). I would presume he'd be willing to answer questions either here or in the comments of that show.

SO @Brendan Curley , did you pursue this concept further?  On an owner occupied residence, I think this is a terrific strategy.  If I wanted to, I could borrow against the house and do it again.  

Why put the other stuff on the HELOC? You'll have to pay interest on them even if in 2 weeks your paycheck pays it down. If you used a credit card (pay off statement balance every month) or a debit from checking, you wouldn't have to pay interest on the other stuff.

For the 10k draw, just put a big portion of your paycheck to the HELOC. You'll only pay interest on the 10k. I only see the savings to this if your HELOC is a lower rate than your First Mortgage.

@Brendan Curley I can personally tell you that it works.  There is a book out there called " how to own your home years sooner without making extra payments" https://www.amazon.com/How-Your-Home-Years-Sooner/...

I tried it and it worked fantastic, I was on pace to pay off my 30 year note of 240k in 9 years or so without changing anything other than how I held money. It also worked in making me not spend money as I knew every penny was coming from my homes equity. I hit a point that I realized this traditional thinking of paying off your primary note that is probably in the 3's for interest that we may not see again is not a good idea, and you will have no savings with this method as every penny you make is in your homes equity. I am a believer that you should always have a note on your primary residence especially if you are self employed for the taxes. Rather I used the same method to accelerate my mortgage to purchase multi family real estate increase cash flow and accelerate my net worth. Yes my 1 purchase has now turned into 3 with the help of a HELOC I will soon be able to have real estate pay for my primary mortgage which I believe was your goal of not paying the mortgage. But also dramatically will increase my net worth also. I would recommend to not pay off your primary house and using the equity to buy cash flowing real estate or another primary to cash flow your current primary as a rental. If and when you do want to pay off a house pay off the rentals. Also make sure you are keeping a savings account of 6 months or more as the book does not suggest that and what if they call the HELOC like they did in 08. best of luck

This method is called Home Equity Optimization. The key component is that the HELOC is based off of the average daily balance and the mortgage is amortized. By using the HELOC, you are lowering the overall amount in interest you will pay due to the difference in calculation. Run some scenarios in Excel using current rates where you make an additional payment of, $5,000 annually on a $100k fixed rate 30-year mortgage and do the same for a $5k HELOC. The results will show you what this method can do.

This is a crazy idea, it is not financially sound to me. You have to pay interest in HELOC, that is not considered, plus, once you pay 10k less your income, at the end of every month, you still have to pay mortgage. It is a mind trick to be diligent, no ninja trick for me, the only difference vs traditional is this time, you do not hav any cash you can use, everything is dependent on debt, you have no cash sitting earning sub 1%/yr if none at all, but you have to pay interest on all your expenses, regardless of amount and time borrowed, interest is still paid. It is like selling a slimming powder but you have to follow a certain diet/food restrictions, if you remove the powder and just follow the diet/food restriction, you will still be at the same outcome, maybe +/- 1 pounds after 3 months, but you save on the powder expense.

Biggest problem I see is the LTV. I could get 80% on the total value, which in this case would only be 4k as someone pointed out... so run the scenario putting 4k down against principal and do that over and over.

Next problem... I haven't found a bank that will give me a HELOC because I have too many investment properties.

Refinance the house at 85% since you live there, lower your payment even further because you're putting it out 30 years, pull out 10k and put that down on another investment that pays half your mortgage out of cash-flow... with some one else's after tax dollars.

Interesting... So basically it forces financial discipline.

For those who are already disciplined, no reason to open up Heloc in the above example (because there's a cost to holding a balance). When you save $10k, write a check towards primary principal balance...

I would need to see an example excel breakdown, but I'm highly skeptical.  I understand that the idea is that heloc's base their interest on the loan amount on any given day, not just for the whole month so on the 1st when your paycheck comes in you pay down your loan to the lowest amount for the month, and then it slowly rises back as you buy things, meaning you pay off the loan as early in the month as possible, and delay buying anything as much as possible so that you carry the lowest possible balance for the longest possible time.   However this is offset by the fact that current interest rates for a heloc are generally fairly significantly higher than for a traditional mortgage.  A quick googling lists traditional mortgages at ~3.6% and heloc at 5.99-8.49%.  Additionally since you are using it as your regular bank account, all purchases including gas, groceries, utilities ect are now subject to this loan interest amount.  Which means if I use my heloc and spend $20 to fill my car up with gas on the January 3rd, then I'm paying 28 days worth of interest on that $20.  If I use my credit card to pay these same bills then I pay zero interest assuming I actually pay my monthly bill in full on time.

Why not just simplify the whole process and make regular unscheduled payments against the principle?

And finally banks aren't stupid, they wouldn't allow something that makes them ridiculous amounts of money like a 30yr loan, to simply be bypassed and paid off in 3 years using nothing more than money magic tricks.  Regardless of any money tricks you try to pull, you still need a minimum of 90k to pay off a 90k mortgage.  And your not going to earn 90k worth of disposable income in the 3 - 5years you claim is possible by making your cited 3k a month no matter what tricks you try to play with the interest rates.

Did you notice the HELOC is lending at 100% LTV? Doesn't happen as Wayne mentioned, but the OP states don't sweat the details, LOL.

Did you also notice you're living off $250 a month, really? 

Your HELOC rate can and probably will be higher than your home loan.

If you financial position changes or any of a number of circumstances change, the HELOC lender can stop advances and/or call you loan due, these are not good for long term financing. You just lost the financial security of long term financing.

All around, bad idea, classic shell game. :) 

Originally posted by Account Closed:

@Brendan Curley I can personally tell you that it works.  There is a book out there called " how to own your home years sooner without making extra payments" https://www.amazon.com/How-Your-Home-Years-Sooner/...

I tried it and it worked fantastic, I was on pace to pay off my 30 year note of 240k in 9 years or so without changing anything other than how I held money. It also worked in making me not spend money as I knew every penny was coming from my homes equity. I hit a point that I realized this traditional thinking of paying off your primary note that is probably in the 3's for interest that we may not see again is not a good idea, and you will have no savings with this method as every penny you make is in your homes equity. I am a believer that you should always have a note on your primary residence especially if you are self employed for the taxes. Rather I used the same method to accelerate my mortgage to purchase multi family real estate increase cash flow and accelerate my net worth. Yes my 1 purchase has now turned into 3 with the help of a HELOC I will soon be able to have real estate pay for my primary mortgage which I believe was your goal of not paying the mortgage. But also dramatically will increase my net worth also. I would recommend to not pay off your primary house and using the equity to buy cash flowing real estate or another primary to cash flow your current primary as a rental. If and when you do want to pay off a house pay off the rentals. Also make sure you are keeping a savings account of 6 months or more as the book does not suggest that and what if they call the HELOC like they did in 08. best of luck

Hello Brent, I am interested in your experience with using the HELOC method. I was wondering if you did it on your own or enlisted help. I'm reading the book you referenced now. Thank you in advance for your time!

I wanted to revive this since it’s fascinating and I wanted to some clarifications.

From what I understand, the core of the principle is the savings in interest payments on the original mortgage, by titling the allocation of interest vs principal. 

Using the HELOC allows you to cascade the effect because as your principal balance gets lower on the mortgage side, you can keep pulling more out from the HELOC to pay off even more principal and so on goes the cycle.

I am curious if anyone has some charts or calculator to show various scenarios for these. As interest rates rise, what will be the cutoff where it won’t work. 

Thanks 

I spoke with someone that suggested using HELOC for flips. They said to use the line of credit to pay for your fix and flip and once it's sold pay back the loan and put the rest in your pocket. Then just do it again, this way you can use the same line of credit (the banks money) over and over for your flips. I was also told that I could get 80% of my total value which didn't make sense to me because it's called a home EQUITY line of credit. So I assumed the loan would actually be 80% of the equity which if you had enough would still make this a great idea. I'll definitely be talking to my bank loan officer about interest rates and fine print terms.

@Philip Katz - I am in the midst of this right now (6 months into it). I am using a HELOC on my primary residence to pay off a mortgage on a rental property I have. The results are meeting my expectations and are following very closely to the "model" that I planned out using a simple spreadsheet. Moral of the story is this:

1. Balance on condo as of 12/1/2017 = $183,000

2. Line of credit issued in Jan 2018 for $70,400

3. Balance on condo as of today $17,000 (disclaimer 35k of this was paid from savings. I attacked the mortgage with the HELOC and some cash)

4. Balance on HELOC as of today is $56,000

5. Condo will be paid off in 12/2018.

6. HELOC will be paid off in 3/2020.

7. I will then use HELOC the same way to pay down principle residence mortgage (369k balance). Will be paid off in 2023.

8. These projections make certain assumptions. 1. Interest rates don't change (HELOC could go up and probably will). 2. My budget doesn't change (I know this will change as we are having another baby, but...) 3. Our income doesn't change (hopefully we actually get a raise or two over the next 5 years. This will help offset the other changes).

This model works if you use it properly. I was "earning" 1% on the savings...not worth having it sit there and not be working, while I'm paying interest on other loans. Using the cash and the HELOC will save me about 86k in interest payments on the condo, but will cost a whopping 3.3k in interest on the HELOC. I'm ok with paying 3.3k to save 86k.

It is very important to stick to a budget. I try to put as much on my CC as possible and then pay it off each month. To budget, I took my last two years spending and averaged it monthly and then added $500 as a cushion. If you create a plan within the confines of your own personal situation and stick to a budget, this does work. Another point to clarify is that our lifestyle has not changed one bit. That is, we haven't had to cut out anything in order to make this progress. The only downside or negative would be that our savings account is significantly lower. However I address that by keeping a decent cushion on the HELOC in case I need to write an emergency check.

Message me if you want more info on my personal experience.  I have some tools I can share with you.  

if you want to pay off your house fast, why don't you make extra payment towards the mortgage using your savings, and every time you receive a paycheck, instead of going through that HELOC route?

Your HELOC rate is usually a few points higher than your mortgage rate, so you end up paying more interest while still paying the same amount of principle.

And if your mortgage rate is higher than your HELOC rate, it's time to refinance.

I am doing this also. I don’t have all the details for you guys, but it works. To answer the last question above, if I take my  whole paycheck and put it down on my mortgage, and a week later I need $2,000 for an emergency, what do you think the mortgage company will say if I ask to borrow back $2,000?  They will say hell no. But I can borrow anything I need from the heloc. Hopefully that makes sense

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