How Watching The View Saved Us Over $15,000
It’s true. That morning chatfest where 5 (somewhat opinionated) ladies discuss Hot Topics saved us over $15,000!
It was the most productive hour I’ve ever spent watching TV. And certainly the most lucrative.
In the fall of 2010, self-proclaimed “America’s Money Answers Man,” Jordan Goodman, was a guest. During the interview, Goodman briefly explained a technique called Mortgage Equity Acceleration. He touted that by using this strategy, homeowners could pay off their mortgage in just a few years.
As Goodman spoke, the normally verbose Joy Behar sat quietly. She was either stunned silent by the brilliance of this idea or completely bored.
But me, I was fascinated and couldn’t wait to find out more about it.
The Holy Grail of Personal Finance: Uncommon Advice that Can Save You Thousands of Dollars
I’ve read hundreds of books on personal finance. I’ve listened to radio shows, read countless blog posts and listened to podcasts.
Spend less than you make. Got it.
Pay off your debts using a debt snowball. Uh huh.
Max out your 401(k). Will do.
I love reading about how people triumph over adverse circumstances and get their life on track. Some, like us, even strive for financial independence to retire early.
But THIS, THIS scheme for equity acceleration was something new. Something I’d never heard about. Something I wouldn’t even know how to Google.
Could this be the Holy Grail of Personal Finance? Legal, aboveboard investment advice that isn’t common knowledge but could actually save you thousands of dollars?
Yes. Yes, it could.
The Secret of Equity Acceleration – A Home Equity Line of Credit
Before even reading the details of this technique, I understand there will be skeptics who will have reservations about using a HELOC to pay off a mortgage. After all, many blame the Great Recession on the housing crisis and blame the housing crisis on adjustable rate mortgages. Maybe that’s a little far-reaching, but some people equate a HELOC with financial irresponsibility.
However, when used to its advantage, a HELOC can be used to pay off a mortgage in a fraction of the time of a traditional mortgage and save thousands or tens of thousands or even hundreds of thousands of dollars in interest.
In simple terms, the Equity Acceleration plan works like this:
Obtain a HELOC for your existing home.
Use the HELOC to pay off your existing mortgage.
Deposit every cent of your income into the HELOC account.
Pay your bills out of the HELOC.
Maximize the amount of time the money sits in the HELOC by paying your bills as close to the due date as possible.
The magic of this plan
Monthly interest on a HELOC is calculated using the average daily balance of the account. The more money you have in your account (even if it doesn’t stay there long) will lower your average daily balance. Each month, your monthly interest payment will decrease which increases the amount going toward the principal. In this cycle, the principal will be paid off much faster and for a significant savings in interest.
In the book Master Your Debt, Goodman shares the example of a couple who had 12 years left on a 15-year mortgage. The couple’s original loan amount was $225K at 5.25%, making their monthly payment $1809. After 3 years, the principal was $192,934 or 86% of the original loan amount. The take-home monthly pay of the couple was $7,500 and their monthly expenses, including their mortgage payment, were approximately $5,250.
The couple paid off their conventional mortgage with a HELOC.
Understand that with a traditional fixed-rate mortgage, the monthly payment (consisting of principal and interest) is calculated using an amortization schedule in which the bulk of the interest is paid up-front.
Using the couple in the example, it would take 12 more years to be mortgage free. By employing a HELOC however, the couple reduced the time to 4 years and 10 months and saved $45,000 in interest. In the book, amortization tables are provided to back up the analysis.
How we Used Equity Acceleration to save Thousands of dollars
Immediately after seeing Goodman on The View, I went to the library and checked out the book Master Your Debt. I quickly read through the book. Much of the book would be most helpful for someone needing to Master Your Debt. Understandable, since this is the title of the book. However, Chapter 6 is dedicated to equity acceleration. I read, then reread, Chapter 6 to ensure I understood every detail of how to use a HELOC to pay off a mortgage.
Since my husband and I are both engineers, we analyzed this plan backwards, forwards and sideways.
We too were skeptical. At first.
We decided to proceed with the plan and I called several banks to inquire how this would work. I talked to 3 banks (Wells Fargo, a regional bank and our credit union). Comparing all the offers, we decided to go with the credit union.
The first time I explained this technique to the credit union manager, it was clear she was very hesitant to move forward. In fact, over the course of several weeks, I had to explain the plan to several representatives and finally to the head honcho at the credit union’s corporate headquarters.
In our final conversation he said:
“I’ve never heard of anything like this and I’m not sure how this is going to work out for you, but you can open a HELOC and we don’t care what you use it for, as long as we get paid.”
The Details of Our Experience
When we opened the HELOC, we were 2 years into a 30-year fixed loan of $215,000 at 4%. Our monthly payment was $1025. With 28 years left on the loan, we had paid a whopping $17,000 in interest and still had a mortgage balance of $207,000.
The credit union was offering a special teaser rate of 2.99% (for the 1st six months) increasing to Prime + 1% thereafter. The offer included a free appraisal and no charge for the administrative paperwork, so opening the HELOC cost us nothing. Our home was valued at $400K and the HELOC was opened for $340K (85% of the home’s appraised value).
We paid off the traditional mortgage loan in full.
From the very first month, we started to see significant results. Thanks to the low teaser rate, our interest-only payment dropped to $515. If we did nothing more than keep paying the same amount as our previous monthly payment, we would have reduced the principal by at least $510 every month ($1025 minus $515). This would continue to drop the interest payment, since the interest on the HELOC was calculated from the average daily balance of the loan.
However, we began depositing my husband’s paycheck into the HELOC and drawing on the HELOC only when bills were due. Keeping the money in the HELOC until needed reduced the amount of interest due each month. Which meant more money was going toward principal each month.
It was an awesome cycle!
It’s Difficult to Explain
Early in the equity acceleration process, we were so excited about the quick reduction in principal and how little we were paying in interest, that we wanted to share the news. We decided to tell my husband’s parents about our progress.
The conversation went something like this:
Me: We just started this equity acceleration strategy. Instead of paying the bank all the interest up-front like our old mortgage, we took out a no-cost HELOC and paid off our loan. As we make interest-only payments and keep all our cash in the HELOC, the principal is being reduced every month, which decreases our interest due, which reduces the principal. Doesn’t that sound smart?
My father-in-law: Sooooo, the only thing you’re saving is the cost to refinance?
Me: No. Let me explain the cycle again……….
My father-in-law: That sounds stupid.
In defense of my father-in-law, it’s difficult for some people to wrap their head around a revolutionary idea: a fixed-rate mortgage isn’t the only (or most cost-effective) option to pay for a home.
And that was the last time we ever discussed our personal finances with the in-laws.
After 1 year at the credit union (which was mandatory to receive the initial special offer), we transferred the balance to RBC (Royal Bank of Canada). RBC agreed to waive all administrative costs and offered a HELOC at Prime + .75% (for the life of the loan). At the time, Prime + .75% equaled 4%.
Soon after, my husband received a job offer and we relocated to Canada. We were unable to sell the home but were able to quickly find renters. During the next 5 years we rented the home for $2500 to $2800 per month. Our typical monthly expenses totaled $500 which included insurance, property taxes and HOA dues. Of course, there were maintenance issues from time to time, including 2 new HVAC units, a new washing machine, roof repairs and lawn care.
Our average net passive income during the 5 years was $21,000 per year. All of this money was deposited directly into the HELOC and expenses were withdrawn directly from the HELOC.
In 2012, we sold stock and applied the gain to the principal on the HELOC. With the stock sale, the income from the rental and the decreasing interest-only payment, we reduced the principal on the loan from $204,500 to $142,000.
The following year, in 2013, we purchased a home in Canada and made a significant draw on the HELOC for a down payment on the home, increasing the principal balance on the HELOC to $206,000.
This was an unexpected benefit of the HELOC: the ability to fund another home purchase.
We also tapped into the HELOC for vacation trips to the US. We typically visit twice per year. The costs of hotels, restaurants, gas and multiple trips to Universal (big Harry Potter fans) were all taken from the HELOC. Using the HELOC to pay these bills alleviated the exchange rate difference and the conversion cost between the US Dollar and the Canadian Dollar.
We sold the home in January 2017. During the 6 years we had the HELOC, we paid a total of $33,700 in interest. If we had kept our traditional mortgage, we would have paid $48,700 in interest during the same period. A difference of $15,000!
And with the traditional mortgage, our principal remaining on the loan would have been $190,000. Using the equity acceleration strategy, our remaining principal was much lower when we sold the home.
Plus, the HELOC gave us flexibility that a traditional mortgage did not offer. We were able to use the HELOC to pay for our US vacations. And a trip to Hogwarts is not cheap!
The Advantages of Equity Acceleration
The beauty of this technique is that interest payments can be drastically reduced from a traditional term mortgage, while still providing well-disciplined investors the flexibility of adding to (or even drawing from) the HELOC.
Naysayers will say this strategy worked so well for us because the Fed kept rates low during the time we were on the plan. However, Goodman 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.”
Admittedly, this plan won’t work for everybody.
For this plan to work, you must be diligent, deliberate and dedicated.
Diligent in sending your income into the HELOC every time you are paid.
Deliberate in paying bills out of the HELOC as close to the due date as possible.
And Dedicated to keeping your spending under control and not using the HELOC to make needless purchases.
Thanks to our diligence, deliberateness and dedication, this plan worked like a charm for us.
And a special thanks to the ladies of The View. We couldn’t have done it without you!