Anyone with a decent credit score and good bill-management skills can accelerate the end of their mortgage and other debts by using the system I am going to lay out here.
By: Jordan E. Goodman with Bill Westrom
Pssst — This is a big secret, but it’ s one you are going to be very happy I am sharing with you. It’s a secret that you could use to become completely debt free in less than a decade.
I’m talking about a new way to manage your mortgage, and your monthly cash flow, so that you — and not some banker — get to squeeze the most use out of every dollar that comes in and every dollar that goes out. Used correctly, this strategy will enable you to pay off your mortgage in as many years as some people take to pay off their cars.
The strategy is called equity acceleration, or mortgage acceleration. It’s not such a big secret in Australia and the United Kingdom, where as many as one in four homeowners are accelerating their mortgages.
It’s legal. It’s not a scam. It’s entirely aboveboard. Anyone with a decent credit score and good bill-management skills can accelerate the end of their mortgage and other debts by using the system I am going to lay out here.
Here is a basic outline of how it works:
- * You finance a new home or refinance an existing one by obtaining a home equity line of credit (HELOC) requiring an interest-only monthly payment for at least 10 years.
- * You use the HELOC to pay off your existing mortgage (if you have one). The HELOC replaces a new or existing conventional mortgage.
- * You send your whole paycheck into the HELOC every time you are paid. This covers your monthly minimum payment, and then some. The HELOC becomes the new depository for your income.
- * You pay your bills out of the HELOC, as close to the due date as possible. That maximizes the amount of time your money sits in the HELOC, cutting your interest.
- * Any extra money you have left in the HELOC account after you pay your bills and make the minimum interest payment on the HELOC goes toward further accelerating your debt reduction every month.
Why It Works
The key to grasping the power of equity acceleration to eradicate your debt so quickly is understanding how interest is calculated in a traditional mortgage and in a HELOC which is a revolving loan. That gives you the flexibility to make interest-only minimum monthly payments every month, or to make larger payments if you want to.
In a traditional fixed-rate mortgage, the monthly principal and interest payment is predetermined and calculated according to a conventional amortization schedule, and the principal is assessed every month on an ascending schedule. With an average-sized 30-year conventional mortgage, it could take almost 19 years before more principal than interest is coming out of each monthly payment. You can, of course, pay the mortgage off early and reduce overall interest costs, but it isn’t until you’ve completely paid off the loan that you realize the savings. There isn’t an immediate benefit to you on a monthly basis; you are still obligated to make the original monthly payment, and all of the principal payments are locked away in your mortgage holder’s treasure chest. And of course, they don’t give you a key to their treasure chest.
A portion of your monthly payment is applied toward the outstanding balance of your loan and facilitates the payback of the debt. The remaining portion of your payment pays the interest you agree to when you borrowed the money.
In a HELOC, interest is recalculated every month on the basis of the average daily balance of the principal owed. The more money you run through your line of credit (even if the deposits do not stay there long), the more you are driving down the principal and setting the stage for those interest costs to be calculated on a lower average daily balance. As the monthly interest is pushed down, more and more of your cash goes toward paying off the principal owed, and that results in lower and lower interest charges every month. That gets compounding working for you, instead of against you.
It’s true that interest rates on HELOCs are variable, which means that this strategy operates in an open-ended, variable environment. That may sound scary, but in fact, the accelerator system is so powerful it even trumps rate increases. Bill Westrom, my guru on this strategy, helps consumers to accelerate the payoff of their mortgages. And he has found that even if interest rates on HELOCs rise to frightening, double-digit levels, the equity acceleration strategy creates a smaller bottom line and a faster debt payoff.
Copyright © 2010 Jordan E. Goodman with Bill Westrom, authors of Master Your Debt: Slash Your Monthly Payments and Become Debt-Free
About the Authors:
Jordan E. Goodman, co-author of Master Your Debt: Slash Your Monthly Payments and Become Debt-Free, is a nationally recognized expert on personal finance. He is the author of the bestselling Everyone’s Money Book and twelve other books. For eighteen years, he was the Wall Street correspondent for Money magazine and also served as a regular commentator for NBC News at Sunrise and Mutual Broadcasting System’s America in the Morning. Today, Goodman appears regularly on many radio shows, including public radio’s Marketplace as well as on TV programs on Fox, CNN, CBS, CNBC, and MSNBC. He also speaks regularly to large groups such as the Harv Eker wealth seminars.
Bill Westrom, co-author of Master Your Debt: Slash Your Monthly Payments and Become Debt-Free, is a consumer advocate and veteran mortgage professional who has become a critic of the traditional banking system. His own business, IFS Development Group and TruthInEquity.com, focuses on educating and empowering homeowners so they can make smarter choices about mortgages and employ an innovative mortgage reduction strategy; equity acceleration. Westrom’s mission is to “change the financial landscape of this country by helping homeowners get more out of what they own and what they earn.”