Let's Learn: Strategy to Pay Off Mortgage (67% Faster & Save $100k+)

in this video I'll be showing you how I can cut down your mortgage payment time frame by two-thirds and also save yourself a hundred to 150 K in interest on average now this is gonna be a long video so buckle up make your tea and let's get started alright so this video is longer than usual so what I've done is broken it up into different chapters and included the timestamps in the description below so if you want to skip ahead check out these timestamps so the strategy I'm about to show you actually there are a lot of similar videos out there each of them with different names philosophy banking or accelerator payment banking or all in one banging etc they essentially mean the exact same thing just but maybe a little bit of variety involved so for my strategy I'm just gonna call it a mortgage payoff strategy now Before we jump into things we first have to understand what kind of mortgage we're signing up for normally and why does these kind of mortgage structure really suck for home owners so when it comes to usually more yourself I personally have three biggest gripes with it number one is the enormous amount interest we have to pay into our mortgage so for example let's say today we have a 500k mortgage and a 4% interest rate for 30 years and what ization now you might look at 4% you might say well that's not too bad for 30 years that's a pretty low interest rate however if we went through the whole mortgage payment by the end of 30 years we would have paid 360k in interest so by the time we're done with our 500k mortgage we could have bought another property with the amount of interest we paid so this is why the term mortgage originally means death pledge and that's because the amount money you have to pay back is so much more than what your borrow you literally became a mortgage slave for life now the second issue I have is the mortgage box were put into the moment we sign up for our mortgage so a mortgage box is how the bank calculates our mortgage payments when we sign up the box represents the total amount payment we have to make in our lifetime and it's broken up into 25 to 30 different bars depending on how long our mortgage is set up the length of the mortgage represents one year of payment in our payment every year is designed to be equal for the next 25 to 30 years however even though our payment looks the same every month and every year what's actually going on inside is different the way our typical mortgage is set up is that we're paying more interest upfront and less principal and as time goes on our interest portion will decrease and our principal will increase so if you look at this 500k mortgage amortization table you notice every month even though our payment is the same we're paying more interest up front and we'll start decreasing over time now you might say okay what's the big deal so what if the bank make more money up front we could just simply pay extra and pay more into it and try to pay down our mortgage faster so we can save more interest right well not exactly if we take out 500k mortgage with 2.5 percent interest rate a 5-year term and a 25-year amortization we will have to make a monthly payment of 2,000 $243 for the next 25 years now let's say for the first five years we want to work hard and pay double into it to pay down faster and save some interest so on top of our monthly payment we're gonna make an extra two thousand two hundred forty three dollars per month for the next five years looking at the comparison the left side is what happens after five years if you just make a minimal monthly payment you will see that you have paid 57 K in interest already and you have a 420 $3,000 as balance now on the right side if we pay double every month you would have paid a hundred thirty four thousand extra in payments and you paid a total of 49 K and interest with a balance remaining of two hundred eighty thousand in your mortgage so right here you might say that what number doesn't really make sense how come I paid a hundred thirty K extra in payments bringing my mortgage principal down by so much yet the interest I save it's only eight thousand dollars what that has something to do with how they handle your extra mortgage payments so the very simplified way to explain this is whenever you make a payment you a minimum monthly payment it's always loaded to the front while any extra payment you make is loaded to the back so what that means is even though you're making all these extra payments month-to-month you still have to pay majority of the interest pre calculated for you up front first now if we go back to the comparison table we just didn't extend it to a full amortization years we would be able to see that by paying a hundred thirty four thousand extra in the first five years we are indeed able to pay down our debt eight years faster and save ourselves about seventy eight K in interest but most of these savings actually happen in the later years and we would have to wait to get there to enjoy those savings now if you have watched my previous video on the three secrets of first-time homebuyer on secret number two I talked about instead of paying extra payments into your mortgage you could have take those money and invested on the side and potentially give you a lot more than the interest you saved if in the first five years we didn't put our extra payment into the mortgage instead we were investing on the side at 8% per year return by the time we're supposed to pay off our mortgage at January two thousand thirty seven we would have created in our side investment account four hundred thirty one thousand dollars now ignoring tax we could take this amount and still pay off our mortgage at the same timeframe but leaving ourselves an extra two hundred thirty six thousand in the process now by here you might say okay then it's your strategy telling us to take our extra payment and invest on the side because I'm not comfortable with investing the mortgage payoff strategy I'll be showing you does not require to do any investments all right so the last problem I have of a typical mortgage setup is the amount penalty people have to pay if they want to get out of the mortgage earlier so typically depending if you have a variable rate of fixed-rate mortgage if you want to end the mortgage in the middle you will have to pay anywhere from three months interest all the way to over 10,000 or 20,000 in penalties and to me that really sucks because life is happening every day and there might be things happening require us to buy a bigger home or downsize or you might simply just see good opportunity we want to sell to me I feel like it's very unfair that we get penalized yet because we have to make a change so instead what I'll be showing you in the next chapter is talking about a different type of mortgage setup that you can ask for at the bank alright so here I will be talking about a different type of mortgage setup that you could potentially ask for at the bank and this is called a home equity line of credit mortgage now by here you might say well I know about home equity line of credit it's when you pay down your principal it becomes equity and you can take it out to spend is that the type you're talking about that's not the type I'm talking about even though they have almost exact name this home equity line of credit mortgage does not require you to pay down your house first you can already get it upfront when you apply for your mortgage the very first time let me first describe to you the characteristics of this type of mortgage when you get this mortgage you no longer have the mortgage box I initially described so your HELOC mortgage works more like a bucket of water and the water level describes how much you owe currently so the first characteristic is that you are only required to make interest only payment every month you do not have to pay back principal if you don't want to know but you any extra payment you do make two words this HELOC mortgage will immediately reduce your principal amount so for example if you want to make an extra 10 K into this mortgage right now it will immediately bring your principal down to 490 K right away number three you can make any amount of extra payment into this HELOC mortgage anytime you like number four the interest is calculated every day based on the current value of that day so if you made an extra payment and now it went down to four hundred ninety K more than tomorrow your daily HELOC mortgage interest will be calculated based on 490 K and not 500 k number five any principal amount that you paid down into this HELOC mortgage will immediately become a line of credit room for you to use in the future now if you take it back out to spend then your water level is gonna go back up next day your interest will be calculated according to a new amount in the last point is there are no penalties for leaving this type of mortgage early so if you buy your house today with this type of mortgage and you want to sell it next week you could exit without getting penalized now by here you might say it's all upside of describing what about the downsides there are actually two downsize you need to be aware of number one this type of HELOC mortgage the maximum borrowing amount is 65% so if you buy your new home today a typical setup would be you still put down 20% down payment and you still borrow 80% the bank would split up this 80 percent in to 65% he loved mortgage and 15% traditional mortgage and then with you your HELOC mortgage typically will have a higher interest rate on paper than your traditional mortgage a typical HELOC mortgage rate would be at prime plus 0.5 so in canada currently will be around two point nine five now when you hear that it's higher interest rate than a traditional mortgage you might say all right Jackie then how is that gonna help me pay down my mortgage faster and help me save interest aren't I paying more into the bank the interest rate is higher and you're right if you just have this and do nothing with it you would be paying more so in the next chapter in chapter four I'll be showing you exactly how we utilize this to help us pay down our mortgage faster now if I go on I prepare a summarized table for traditional mortgage versus a HELOC mortgage for you to use so take a look if you want to revisit the differences so here I want to talk about the concept we're revolving around the strategy and in the next chapter I'll be talking about how the numbers actually work out day to day so the concept of this strategy is trying to solve a typical problem with faced with a traditional mortgage setup before usually we have this a checking account where we are payroll deposits a saving account where we keep our emergency fund and at last we have a mortgage account where we pay money into it every month now with this typical setup the problem is majority of our money is sitting in our checking and saving account which is giving us almost no return but on the other hand our mortgage is charging us interest every day now we know that from chapter 1 that even if we were to all the money and prepay and pay extra into our mortgage account it wouldn't really help us save too much interest upfront so to fix this instead of keeping all three accounts separate we want to essentially combine all of them into one so our emergency cash and our payroll can be deposited into our HELOC mortgage account right away reducing our interest paid every day and as you remember from chapter one any principle we pay down into our HELOC mortgage will immediately become a line of credit room for us to use so at the end of the month but we need to pay for our expense we can simply tap into this room and take the money back out for our spending doing it this way when our money is sitting in our HELOC mortgage account waiting to be spent it's reducing our interest cost every day so you might say all right Jackie I kind of understand how this works and I can see how it's gonna save us some interest but I really can't see how it's gonna cut our mortgage payment time by so much and save us over a hundred K in interest fair enough let's go to the next chapter where I'll be showing you the day-to-day calculation of this strategy now just before I continue I wanna and now that I've made a personal website containing all the video PDF and resources that people can use in the future so for this video for example I've made a PDF version to summarize everything I've been talking about so if you want to get the PDF or other resources make sure you check out the link I posted in the description all right so I've built a calculator to calculate day-by-day how this strategy is gonna help us compare it to a normal traditional mortgage setup and the numbers I'll be using here it's according to one of my clients real situation okay so let's go over some assumption in numbers first so in this example we'll be buying at $800,000 home we have our 20% down payment and we're gonna have a 65% HELOC mortgage of 520,000 and a 15% traditional mortgage of 120,000 our HELOC interest rate is prime plus 0.5% sir is 2.9 5 percent and our mortgage rate it's 2.5 percent so as you can see like I said before our HELOC interest rate is higher than our mortgage rate mortgage amortization is 25 years and we're gonna be making one payment into our 15% traditional mortgage so for our 15% traditional mortgage a monthly payment would be 538 dollars now in this example the family's total income after tax per month is $10,000 and on the side they have 15k saved in their saving account we're gonna assume they get paid bi-weekly every fifteenth of the month and at the end of the month their monthly expense excluding their home equity line of credit monthly interest payment and the traditional mortgage payment is gonna be three thousand five or a dollar on top and we're gonna assume all the bills will be paid on 28th of every month all right so according to all the assumptions I've built a day-to-day calculator showing you what's going on every day I'm gonna walk you through the first three months to show you the pattern of how this works and then it's just gonna repeat itself over and over again so we're gonna start January 1st 2020 the great columns represent our HELOC mortgage we're gonna have to balance the daily interest and the HELOC mortgage rate the red column will be our emergency cash and our bi-weekly pay checks going into that account and the blue part will be our 15% traditional mortgage so it's gonna be one hundred twenty thousand in this case we're gonna have monthly mortgage payments consisted of principal and interest amount the green part will be our living expense and a HELOC monthly interest so these payments will all happen at 28th of every month and also our HELOC monthly interest which is accumulation of all the daily interest for that month all right so let's start so right away we're gonna put out 15,000 emergency cash in our saving account into our HELOC mortgage this is gonna reduce our HELOC mortgage balance to 505 right away and our daily interest will be calculated with 505 times two point ninety five percent divided by 365 because it's every day so it's gonna be 40 bucks a day now on the right side our mortgage balance will remain as 120,000 nothing will change because we haven't made our first payment yet so everything will stay the same until we reach 15th of January where we get paid a total of five and dollar from our payrolls so we're gonna put this into our HELOC mortgage account right away bringing our balance down to 500k and so our interest will reduce as well now again on the right side nothing is happening yet when we reach 28th of January we're gonna have all the expense happening in the same day so we will have to make our mortgage payment our living expense and also our HELOC monthly interest so if you add up all the numbers together it's gonna be about five thousand one hundred and seventy five dollar for the month however we don't have any money left because everything is paid into this HELOC mortgage so what we could do is tap into our he loved mortgage and take out five thousand one hundred seventy five dollar for our spending this is gonna bring our HELOC balance back up to 500 five 175 so our daily interest will go back up now our mortgage principal will have gone down by two $88 because that's the principal amount we just paid for the first month nothing will go on for three days until it's end of January and we get paid $5,000 bringing our balance back down to 500 K and again nothing will happen until 15 we get paid again bringing our balance down to 495 and on the right side nothing will happen because it's not xx yet once we hit 28th of February we're gonna get paid $5,000 now you're gonna notice how come even though we get paid 5,000 our balance did not go down instead it went back up well that's because our expense also happen at the same day so we're putting down 5,000 but at the same time we're taking back our money to spend so net we actually have to take out a little bit more than we put in for our spending now a March same thing will happen so 15th money in balance goes down Tony eighth expense happens balance go back up and then at the end of March 5,000 comes in and the balance go back down now assuming all the number stays the same we're gonna repeat this pattern month to month so what we want to find out is when do we actually pay off our HELOC mortgage so in this example if we scroll all the way back down we will find that we have officially paid down our healer mortgage November 29 2027 so in just about seven years we have done paying down our mortgage and on the right side our 50% traditional mortgage who have 89k left now right away we can tell this an extremely powerful strategy because we just had to compare this to a traditional mortgage setup so let's assume that instead of doing a HELOC mortgage we got all 80 percent boring but a traditional mortgage of 640 thousand our monthly payment would be two thousand eight hundred seventy one dollar in this case and if we just pay minimal every month at the same time we paid off our HELOC mortgage in the last example which is November 2027 our traditional mortgage was to have four hundred seventy eight thousand dollar left comparing to our $89,000 however we don't want to just pay down HELOC mortgage we want to pay down everything so we're gonna take care of the last eighty nine thousand dollar and how we're gonna do this now remember in Chapter one I mentioned that any principal amount you paid down in your HELOC mortgage it becomes your line of credit room for you to use so what we're gonna do here is we're gonna tap into our head of mortgage take out 89k and then pay off our remaining traditional mortgage amount so in the table you're gonna notice our mortgage balance became zero and instead the eighty ninety has been transferred over to our HELOC mortgage balance because we took the money and paid it off so the same pattern is gonna continue now doing it this way we will be able to pay down our last 89k in a HELOC mortgage at the end of two thousand twenty eight so in this example we talk exactly eight years to pay down our whole 640 thousand of mortgage okay so we cut down a mortgage time by two-thirds and get it done in eight years however just getting it done fast is not enough we also want to know how much interest we saved so on the last page I've built a graph to officially represent the difference between our strategy and a traditional mortgage setup in the first graph the green line represents our mortgage payoff strategy and the purple line represent our regular mortgage payment from this you can tell be shorting the time by 17 years the next graph I made is to compare what's going on with the HELOC mortgage and what's going on with a 15% traditional mortgage so as you can see how here our mortgage will get paid out extremely fast and then it's gonna shoot back up because we use that money to pay off our traditional mortgage and then it's gonna go back down using the same system and lastly let's look at how much interest be saved on the left side I've added up all the daily HELOC mortgage interest rate paid so far plus all the interest on the 15% traditional mortgage in total we pay 83k now on the right side if we were to do the usual way of a traditional mortgage by the time we've done in 25 years we would have paid 221,000 in interest so in this example not only we cut down a time by 17 years we've also saved ourselves $137,000 in interest so by now you should have a very clear idea of how powerful this strategy is and the amount of interest and time you can save yourself by utilizing this versus getting a traditional mortgage however there are some things you need to watch out for and I'll also give you some opinion about the strategy number one to watch out for for this to work you really have to make more than you spend so your income has to be more than your expense now if there is a month or two where you went on vacation or there's a wedding you really overspend that's okay but it cannot be a pattern if overspending is a pattern for you this is definitely not for you because you will be forever in debt it will never pay down your mortgage and number two you need to have extreme discipline when doing this because as I said in Chapter 1 when you pay down your principal it's gonna become your line of credit room for you to use in the future you might be tempted to tap into that room and buy yourself a new car a new computer or go on expensive vacations if you do that you're gonna bring your debt level back up and it's gonna delay the amount of time it takes for you to be debt free so you need to have extremely strong discipline going into the system the third thing to watch out for is a HELOC mortgage will have a higher requirement than the traditional mortgage so make sure you find out first whether you qualify or not and not and don't leave too little time for yourself now accompany asked question is does interest rate affect the strategy and it absolutely will your HELOC mortgage rate is fluctuating so if the prime rate increases your HELOC mortgage rate also will increase however this is not a unique problem to your HELOC mortgage because even if you were to do a traditional mortgage setup you will still get affected by the interest rate now you might say okay but I can fixed my mortgage term to make it a fixed interest rate that is true but how long can you fix it for the max you can do is probably five years so in five years if the mortgage rate is still higher you will still have to readjust to a higher amount and pay the higher payment so no matter which side you pick interest rate is always gonna affect you now another commonly asked question I get as people say well then does that mean I can't do any investment from now on because I would have to pay all the money into a HELOC and I shouldn't take it back up but not exactly you should still buy your RSP and your TFSA especially if your income is very high RSP will give you a massive tax saving and tax refund you could take this refund and pay back down into your head of mortgage as long as your investment on the side generates a higher return than the HELOC mortgage interest rate you're paying it is more advantageous to invest on the side this is something you have to discuss with your financial advisor now to share your personal opinion about this there are a couple of things I like about it on top of paying off your mortgage faster potentially and saving a lot of interest number one is the flexibility it will provide because you're not forced to make a principal plus interest payment with this you can just make an interest only payment if you're really tight on cash that month this was extremely helpful for some people with this from what I hear because I've covered 19 their job were affected or the income became very unstable it was very helpful they have the option to just pay a minimal interest payment and took a lot of stress off of them and another thing I like about this is how easy you can access the cash you pay into your house of a traditional mortgage setup it's usually very difficult to tap into the principal you pay down unless you're willing to do a refinance so if you see how in properly you want to take 100 200 K back out from your house to buy this investment property it might be very difficult for you if you were to refinance it may rely on the situation at that time and you might not qualify for a new borrow amount and the last hot tips I want to give you is if you're looking to apply for something like this make sure you work with a professional mortgage broker because while many banks in offered this kind of product they might have different fine prints and structure you really want someone that's experienced with the mortgage field to help you sort out and isolate the products that fits your needs so if you're in the market to hunt for property pre sale market might be something you're interested in I've made a video recently on here talking about an invisible crash that might be happening in the pre sale market currently and if you're more interested in the futures trend of real estate due to the US and China attention make sure you check out the video I made recently on here all right this is a long video thank you so much for sticking with me this is Jackie Koch I hope you learned something new today I'll see you in the next video bye

Channel: Jacky Kuk

Views: 175,413

Rating: 4.8831167 out of 5

Keywords: strategy to pay off mortgage, mortgage payoff strategy, how to pay off your mortgage early, mortgage, pay off mortgage early, mortgage payoff, dave ramsey, velocity banking, how to pay off your mortgage faster, heloc, real estate, how to pay off your mortgage, pay off mortgage, home equity line of credit, pay off your mortgage, how to payoff your mortgage quickly, pay off mortgage with heloc, pay off mortgage in 5 to 7 years, jacky kuk, heloc to pay off mortgage

Id: wxgbmjAUtTA

Length: 25min 30sec (1530 seconds)

Published: Tue Jun 09 2020