Get Rid of Your 30 YR Mortgage in Just 10 Years

There is a mortgage product that was introduced to the U.S. during the last few years. With this mortgage, homeowners can accelerate their payoff, with no monthly payment change in as little as 10 years to 15 years. Thats right, in most cases, you can continue to pay your current fixed rate payment and save 20 years of mortgage interest. I have to say, I love this product.

How it works, its simply a Home Equity Line of Credit just not a normal Home Equity Line from any bank. This loan combines your checking, mortgage and home equity line accounts into one super account. Each week you receive a paycheck, rental income or any other income and its automatically deposited into your bank account.

How it works, lets say your current mortgage payment is $2,500 a month and your paid net income of $2,000 a week. Well each week your depositing that $2,000 into your bank account, your mortgage immediately falls $2,000 and the lower balance used to calculate the interest. So every 30 days you’re essentially reducing your mortgage balance $8000 for 30 days at a time and then at the 1st of the month your bills are due and you simply write a check out of this bank account for the bills. Its really that simple.

Using the accelerated payoff calculator, a borrower with income of $4,000 per month, a $200,000 mortgage at 6.25% would have a payment of approximately $1,231. Lets say that after paying bills this homeowners has 20% left over each month or just $800. This particular homeowner would pay off their mortgage in 12.7 years. Remember, they are still paying only the $1,231 per month! So just by changing HOW they pay their mortgage NOT changing how much, they save $133,745 in interest expense and are mortgage free in just under 13 years!

One thing to point out this is an adjustable, home equity line of credit, based upon the 1 Month LIBOR Index. The highest the 1 Month LIBOR has ever been is 9%. An important point to make that the LIBOR tracks, nearly exactly, the U.S. Fed Funds rate, so its very transparent. But lets assume worst case.

Lets assume that the 1 month LIBOR goes back to 9% the first four years you have the loan and then 8% the remaining years. Using the same example as above but changing from a stable rate environment to an increasing rate environment, the mortgage payoff would be still an incredible 16.3 years! Saving $45,195.

Now 70% of those that get this loan buy down the rate, or in the case of adjustable loans, buy down the margin. So lets say your buy down the margin to the lowest you can .75%. This gives you an overall rate of just over 6%. Again using the same homeowner example as above and still using the worst case, doomsday scenario of 9% and 8%. You would pay off your loan in 13.2 years, still saving $121,367 in interest expense. Comparably, you would have to get a mortgage rate of 3.47%.

Now, same scenario but buying down the margin to .75% in a stable rate environment, you would pay your loan off in only 11 years. Saving $172,793 in interest! Comparably, you would have to get a 30 year fixed rate of a ridiculously low 2.12% to save this much interest.

I do want to point out that we are now in a decreasing rate environment. Fed Chairman Ben Bernanke, has began to lower the Fed Funds rate instituting a .5% rate reduction last month. Remember I stated the LIBOR tracks the Fed Funds. So again, this index is very transparent. The lowest the LIBOR has ever been is 1.2% + / -. Remember you add your margin + LIBOR to get your overall rate.

I am not going to illustrate a decreasing rate environment because I error on the side of caution and would never compromise my clients relationship in that way. But I do think The Fed will continue to lower rates as I have stated since May. So this loan has the potential to be even more powerful now that we are in a decreasing rate environment.

This loan is not for everyone. Those that struggle to make their payment each month, those that have a hard time managing their finances or those that are not “financially savvy” should not get this loan. Those that have a strong desire to actually payoff their mortgage, have a decent cash flow each month and strong credit should really consider this loan. It just may be the only loan you ever have.

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