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ADPI_044: How To Pay Your Mortgage Off In 5 Years!!!

Nov 20, 2018


Episode Transcription:

Hey, what's going on guys. Welcome to the active duty passive income podcast. Today’s episode is going to be on an awesome strategy that you can use to build equity into your home fast or potentially pay off your loan faster. So you can use that money to invest, to save or to do whatever the heck it is you want.

Hey,freedom fighters welcome to the active duty passive income podcast. The only place where military members, veterans and their families learn how to build wealth through real estate investing. I'm your host Mike Foster and I'm here to show you how to stop wasting your benefits. Now get off your ass, step up to the firing line and make ready for today's lesson. Shooter stand by.

Hey what's going on guys, welcome to the active duty passive income podcast. Today’s episode is going to be so crazy. Alright listen this is a strategy on how you can pay your mortgage off as quickly as possible really in as little as 5 years, maybe a little more, maybe a little less. Depends on the amount of mortgage you have, depends on the amount of extra income you have coming in. it depends on a lot of factors right. Also how disciplined you really are.

But I'll tell you that this is one of the ways that you can really pay off a lot of your loan and what you owe during your tour right in a certain area. Let’s say if you are just you know of the conservative mindset and you don't really want to hop around from house to house. but you'd rather just you know sit in your home let it build equity and either use that equity to invest in other investments or just let it sit and collect and you kind of just kind of sit comfortably right with your mortgage that you have and not pay large amounts of interest over time okay.

This episode is super important for you if you're interested in paying off your mortgage loan faster than the 30 years that you have for it okay. Alright so before we get started, it's important to understand a few key principles right. So let's talk about amortized interest versus simple interest first okay. So amortized interest is exactly what you know you get from your bank when you try and apply for mortgage.

So they're going to give you a full amortized schedule and it's a fixed payment that will fluctuate over time in regards to the interest in the principle that you're paying back to the bank. If you are paying a loan that is $1,000 a month right that amortized payment consists of principal and interest for the life of the loan that ratio will change and it will start out higher on the interest side. Because the bank wants to get their money up front. They want to get their money as quickly as possible but they also want to get as much as possible, that makes sense? so of that $1,000 payment you might be paying $900 to interest and $100 to principal and every single month that you pay, your principal payment will go up very small amount, may be a few cents may be 50 cents you know whatever right.

It kind of all depends on your interest rate. It depends on how much you owe right. It depends okay. So understand that. That fixed payment is amortized and the interest and principal will change throughout the life of the loan. The closer you get to the end, the more principal you're paying. Obviously the more you are at the start right the more interest you're paying right. Makes sense? So simple interest. All right simple interest is exactly that. It is simple okay. So of the life of the loan that you're given right, you will be charged a certain percentage on that loan right and you have to make that payment over the time that you owe it.

Now, of course the less you owe, the less interest you'll owe at the end of the date. So it's similar but it there's no fixed payment. That payment always changes right and so what they'll do is they'll say if you owe a loan over like the course of 30 months or 60 months whatever right, however many months it doesn't matter. they will take however much you owe, they will hit it with the interest rate that you're charged right and then going to divide it by that time and they'll say okay this is the minimum amount that you have to pay now right and if you owe less next month then that payment will change right. Because it's simple. It’s not amortized, so you're not paying a fixed payment. You’re just paying the minimum payment every single month that it's going to take you to get to the final total. Does that make sense? Okay so keep that in mind. Simple interest is a little better. Because usually that payment is very very low okay in comparison to your amortized payment.

All right so those two concepts in mind that's important to understand. Because that's going to go in heavily to what we're going to talk about with this strategy. But also before we talk about that strategy, it's important to know two separate products and to know the clear distinctions between the two. Because a lot of people get confused on these things and I want to make sure that everything is crystal clear for you okay. So let's talk about a home equity loan versus a home equity line of credit okay. A home equity loan is very simple. It is just a one-time loan on the borrowed principle that you have in your home that you own in your home right.

Let’s say you've owned your home for five years and maybe you have you know 10 grand, 20 grand built up in equity off of your loan right. This is the amount of money that you control in your house. Because you've been making mortgage payments for five years, you've built up a certain amount of principal in your home right. Does that make sense? So based off of that twenty thousand dollar you've saved up inside your home, the bank will let you borrow a certain percentage of that. Usually, banks will let you borrow anywhere from 70 to 80 maybe 90 percent at most right.

Because they're not going to let you borrow the full amount. But they'll give you a certain amount of it and so they'll give you this money as a one-time loan and once you pay it back over a certain amount of time with a certain interest, that's it. It’s gone okay. So important to understand the distinction between that a home equity loan and a home equity line of credit all right. That line of credit is like a credit card. It is revolving debt right. In which case they'll give you the same amount, the same amount of money that you have based on the equity that you own in your home. But it's revolving.

So you'll be charged interest anytime you use that money and when you pay it back, you'll have that money to use again. Does that make sense?  Unhook that some of your wheels are starting to turn already. Because you'll see that I'm going to connect the two.  I'm going to connect the two theories, that simple interest and this revolving line of credit. Because it is absolutely gangster and you definitely want to understand this strategy to its fullest okay.

So now that we've kind of set the foundation all right, I want to explain to you how this is all going to work. But kind of conceptualizing it so it makes sense. So you got to think of this strategy like a seesaw right and if you were listening in our last episode with Clayton Morris in our little interview right. We were talking about his book, how to pay your mortgage off in five years and this is where that strategy comes from. It actually comes from someone that wrote it a while ago and I can't remember her name. But this book was published a while ago and you know this strategy been taught in multiple different forms. But what I'm teaching you

Especially with the conception of you know this theory is specifically from Clayton Morris's book and there's a copy of it in the show notes page. So make sure you go check it out. There’s a link to it and you can go download it and I believe they're also recording the voice-over of it as well. So you have an audio form. If it's not already out, it's coming out soon. So make sure you take a look at that. But anyway so you want to picture this concept as a seesaw okay. You know that on one side right something will force, another side up and then on the other side right it'll force that something down and then the opposite effect happens okay.

So you get in like a little you know up and down effect. That is what you're going to essentially do with your mortgage debt. But you know you're starting up at the top right with the maximum amount that you owe. Cause let's say if you're borrowing money with your VA loan right, you get your VA loan on a house you're putting zero money down. That means you owe the maximum amount of money on your home. so I want you to think if you're taking a HELOC on the amount of equity that you control in your home, you're going to use that home equity line of credit to take major whacks down at the principal of your mortgage all right.

You’re going to take major hacks in it instead of small hacks. A lot of people think that if they add an extra $100 a month, you know they are going to end up you know kind of shaving off so much time off of their loan and you know what it's unfortunate, but that's not the case. You definitely shave off some time, don't get me wrong right. But you'll shave off so much more time taking major whacks at the mortgage up front. Because remember that amortized payment right, that's what's important. Every single month you're paying the same exact amount. Because it's fixed. But what you're doing is you're saving so much more time if you can get that interest and principal ratio to change drastically right. so for example let's say I'm house hacking right, I picked up a book of our military house hacking you know a book off Amazon which you definitely got to go check out right and you're trying to implement one of those strategies right.

So let's say you're renting out to a few of your friends and in a couple different rooms. You’re taking the extra money that you are making from them and you put though that money either in at the end of the year or you put it in incrementally over each month right. Now what you're starting to do is you're starting to change that principle interest payment right. If you're putting it monthly it's going to change a little bit each month. If you put it in at the end of the year, it's going to change a lot a bit. Right at the end of the year and so now every principal and interest payment that you have you know after that is going to be drastically affected and you're going to start paying more towards principle each month. So that is going to save you even more time okay. It’s definitely important you understand this. Because this is going to be key.

All right so again keeping with that same example. Let’s say for instance I am house hacking my two extra bedrooms to a couple different friends and I'm getting about $1,000 each month in rent right. So I put $1,000 on top of what I owe at the end of each month at the end of the year, I have now paid at least right $12,000 in principle payments. Now it's been a little more right. Understand that every single month you're making both a principal and an interest payment right. So a little bit of more of Principles going in okay, don't get confused there. But for the sake of round numbers I'm just going to focus specifically on those extra payments okay.

Are you with me? Hope you're with me all right here we go. So at the end of the year I've put down $12,000. Again that was $1,000 from each month extra that I put into my mortgage payment, got it. So that $12,000 now I'm going to go to a bank right and I'm going to go to a local bank. A bank that is smaller and that's in the area and that wants to compete with the bigger banks like the Bank of America, like Wells Fargo or for us right like navy federal or USAA. Right those are two huge banks. You want to go to a bank that's really really small and you're local and you want to ask them about their home equity line of credit rates okay and you want to ask if they have any promotional rates. because a lot of local banks will be willing to give you a 0% home equity line of credit for like six months or 12 months right.

Whatever the promotional period is. Because they want your business and they understand that people you know have a propensity to usually pay off loans a little bit later, so they can get interest on the back end. So maybe well the first 12 months are 0% interest the next you know two, three years however long your term is you know you know 5% 6% maybe something higher right. Maybe it's 8% okay. So that's not bad and maybe that's something you can negotiate too.  But what's important is you want to get the promotional period as low in interest as you can okay and here's why. You’re going to take that $12,000 that you got from the bank now. Well okay hang on let me backtrack, backtrack. Okay your HELOC that you're going to get is not going to be the full amount of equity that you have in at home, okay understand that. It’s going to be again about that 70 to 90 percent average. Typically it'll be more on the lower side that spectrum.

So if you're going to try and calculate this at home, go for more of that 70 to 80 percent. Okay that's a safer bet. But you know on average you can find anywhere between 70-90%. Some banks will kind of work with you. But okay so understand that that's how much you're going to get okay. You’re going to take that money, they're going to give you an account right. They’re going to set up an account. It’s going to be completely separate from your bank account and they'll give you checks. They may give you a card right. they may give you know all these different things, so you can set up your own specific account and what you're going to do is okay you're going to align all your expenses to that account.

You’re also going to align your pay check to that account alright and here's why. You want to be much disciplined with this strategy. because what you're going to do is you're going to take that money as soon as they give it to you and you're going to write yourself a check directly to the principal of your loan right, of your mortgage loan and that check is going to shave off, let's say around 12,000 or so right dollars of your principal all right of what you owe and it's going to drastically affect your next and your future mortgage payments. Does that make sense? You’re going to now start paying a whole lot more in principal at the beginning of each month right with each mortgage payment. But you're still going to pay your mortgage off all right and you're going to do that within this account that they set up for you in your home equity line of credit right. You’re going to be much disciplined all right. Understand you have to be much disciplined with the strategy. Because the goal is when you'll on all your expenses to this account, you also align your income into this account.

Essentially you're going to save your money every single month and in saving your money right, let's say that extra $1,000 that you're getting at the end of each year; you save that money and you don't spend it. You’re eventually going to pay off your home equity line of credit. So within that first year, if you're saving $1,000 and your goal is to pay off $12,000 right; you will have it paid off within that first year and you have paid no interest on it as long as that first year was a 0% interest you know promotional period okay. Are you following me here? So that large payment that you made has now affected every other mortgage payment that you have coming in.

But your income is coming in to supply your home equity line of credit account and your expenses are taking out of it each month. So you're not changing your lifestyle. You’re just being disciplined in what you're doing with your strategy on saving each month and you're eventually paying yourself back. Okay I hope that makes sense.

So now again that seesaw right. So now you know when you take that home equity line that you borrow that money from your principal right and you chop down your mortgage payment, you have that home equity line of credit that you now owe right. You still owe that debt. but your housing principal right just came down a little bit, which is great right and now you're starting to pay off that HELOC right even more and more each month and now you're getting you know now you're bringing that home equity line and your principal back at the same balance right.

But understand too now you have just forced more equity into your home okay. Because by the end of that promotional period, you've paid off that HELOC and you've also built more equity in there from the time it took you to pay off that line of credit okay. Guys this is huge, this is absolutely huge okay. Stay with me, there's more. Now at the end of that year; now you've built more equity. You go in and you do it again. You find another bank to give you maybe another promotional period of 0% interest or maybe something really really low or maybe you even renegotiate with the bank that you currently got right and because you paid off that loan within that first year.

Tell them that you want to borrow more and you're looking to get that same promotional period okay. This is fine guys you can negotiate with banks like this okay and if they can do it for you, great. If not maybe they can't, maybe they'll give you a lower rate and then you go and you find another bank. Maybe that they'll compete with it, maybe it'll be even lower and you bring that back to another bank right and so you got this little a negotiation game going on right. It’s possible, you can do it all right. So don't be afraid. But I hope you see what I'm talking about now.

You go and you take exactly what you did and you rinse and repeat okay. You borrow more equity right. Let’s say now you've got 24,000 maybe a little bit more than that. Maybe you got $30,000 of equity now builds up. Try and take as much as you can of that and you put that down and now you start to pay back okay. Now understand if you're not making any extra income to save each month to pay this off within the first year or so, that's completely fine. Alright that's completely fine and here's why okay.

You do as much as you can to get to that promotional period and at the end of that promotional period, if you still have money that you owe; understand that you have built more equity in your house. So what you can do is you can go to another bank and you can ask them for a home equity line to refinance the one that you currently owe. You’ll get more money out of it, because you have more equity built up. But you'll also potentially get another zero percent Interest promotional period and again if not something you know that's zero percent, maybe it's lower okay and all this stuff too guys is going to depend on your credit score.

So you really want to make sure too that your credit is you know high or in good standing. You know at least enough with the bank to give you this kind of perks okay. So keep that in mind too. All right that is very important.

Okay so here's what we're going to do right. You’re going to take that strategy and you're going to continue to do this and you'd be surprised guys, you can pay your home off. You can pay your mortgage off so much faster than you thought you ever could okay. They give you this 360 amortization schedule and when you look at it, your eyes just like pop out of your head with how much you're paying the bank and interest over the 30 years of that loan.

It’s insane. But when you implement this strategy, you realize how much less you're paying an interest. Because you're cutting down that amortized interest time and you're converting it into simple interest time okay. Do you understand what I'm talking about here? You will have so much less interest to pay overtime with a home equity line of credit right. Which is kind of like a credit card then you will paying that amortize fixed payment over time okay. Guys I'm telling you this strategy is amazing okay. You definitely need to wrap your head around it and understand it and really dig into it.

I highly recommend that you guys pick up that book, how to pay your mortgage off in five years by Clayton Morris. It is available on all you know the mediums, audible or maybe not audible now. I don't know but on Amazon, you know iTunes. Go check it out, it's a very very short read. But it is very clear and defined and it's amazing. because this can really change your life right and it can really help you build equity fast in your home that you can now use to go invest, to go and I don't know you know to buy something else that you will help you towards your financial future. I never recommend that you take a home equity line of credit on your home to go and buy a liability ok. I never recommend that. I absolutely 110% you know implore you to go buy an asset that's going to cash flow for you. So you can pay off that home equity line. But you can also earn more interest than you're paying okay. Does that make sense? Because you're leveraging the bank's money to help you build your faster and more effective okay.

Because that is what we are all about. Okay we are trying to teach you guys the faster and more effective strategies. Is there risk involved with this strategy? Okay this home equity line of credit strategy? Yes there is and I'll tell you what the risks are. You will face two risks out there. if the market right decides to tank and now you don't have as much equity you know on your home as you think you do, that is a problem okay and so that might derail your strategy on you a little bit okay. But you know are there ways that you can help you know counter the strategy? well you can instead of taking a home equity line of credit for a hundred thousand dollars on the equity that you have in your home right in case that you know you don't end up having that in like a year, you could take something smaller.

Maybe take twenty thousand, maybe take thirty thousand right. Something that you'll be able to pay off you know should anything happen to your home. But you can also still do a very considerable chunk and a whack at your home. Okay, so there's kind of you like your risk mitigation and that factor right. Now there's another risk and really this comes down to yourself right. You have to be honest with yourself in am I disciplined enough for this strategy. Will I be able to save that money or am I going to spend it on something that comes up.

Because guys life always happens okay. But you have to be very focused on your strategy when you are wealth building. Because any compromise will derail you and will end up setting you further back. Doesn’t matter what it is okay. So you have to be much disciplined with the strategy in order for it to work. Because I'm telling you that's the number one reason why the strategy won't work right. It’s because you're not disciplined, it is because you're letting whatever happens to you in life derail you from your plan to get ahead. I understand life is crazy and many things will happen alright.

But if you have bad spending habits alright understand that you need to get your spending habits in check. Because you don't want to end up taking, because essentially it's a second mortgage right. you're taking a second mortgage on your home and the last thing you want to do is end up with a lot of debt that you're not paying off there from your second mortgage and a lot of debt that's going to take you forever to pay off you know with the bank, okay alright. So I'm going to leave it at that. All right, but powerful stuff guys. I really hope that you guys go out there and check out the strategy. Because this can definitely be a game changer for you.

Especially if you know you're going to be in the area for you know three or four years on a tour right and maybe you're out of command where you're going to earn a lot of per diem. This is definitely something that will help you out as well. Because you can take that per Diem and you can put that towards these extra payments on your mortgage and really gain change your life.

Alright alright, guys well that about wraps it up. Thank you so much for listening. Man, I really hope that you guys really check out and digging into this strategy. Because like I said man this is game-changing. You can really really affect the trajectory of your financial future. Alright anyway, enough said on that, check out the show notes. You can check out the links to that books that I mentioned and also

You can check out the link to our military house hacking book. If you're trying to figure out ways that you can generate extra income from the empty space in your home, you need to read this book okay. Military house hacking, you can buy it off Amazon right. It’s really cheap. Go out there and grab it. Also reach out to us and connect. We love to hear from you guys and hear what you guys are doing.

Check out our Facebook page, check out our Instagram. You can always hit us up at www.activedutypassiveincome.com where you can keep connected with the team and find out what we're up to alright. Love you guys, catch you later.

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