The most popular video on Sam Kwak’s YouTube channel has 3.5 million views. There is nothing fancy. Just half an hour of conversation with Kwak. A few sheets of printer paper and a thick black Sharpie his only accessories. But it does offer something viewers can’t resist: the promise to magically pay off a mortgage at extraordinary speed.
“Mortgages are kind of zero,” he says, sitting in a glass-walled conference room, an empty desk sprawled out behind him.
Kwak, now 28, released the video in September 2017 after learning about the strategy at a seminar. The video features a ploy he says can help borrowers pay off a 30-year mortgage in just seven years and save tens of thousands of dollars in interest. A track published in May 2019 has been viewed more than 900,000 times, including a sharp increase in traffic around the start of the coronavirus pandemic in March.
Numbers like these make Kwak and his brother Daniel perhaps the most prominent supporters of a strategy sometimes referred to as “fast-speed banking” or “debt acceleration”. The program isn’t new, but has caught fire on YouTube in recent years with dozens of tutorials posted on the site, many of which have received over 100,000 views.
Like Kwak’s, most of the videos are relatively straightforward productions. In one of the most popular, a woman walks through the process by drawing sticks on a whiteboard surrounded by Christmas lights. In another, a man shares his screen as he inserts numbers into an Excel spreadsheet. Many seem to be recycling the same Powerpoint slides that show a hypothetical borrower with moderate income but huge savings.
The tone suggests that you are being told a secret that will give you the upper hand over your lender. Commentators have described the trick as “stealing Peter to pay Paul”.
The basic idea is to strategically allocate your money across different debt products to minimize interest payments and maximize the amount that will be used to pay off your mortgage principal. However, this only works if you spend less than what you earn, ideally a lot. If something goes wrong, you could end up owing a lot of money on a high-cost line of credit, rather than a relatively low-cost mortgage. In extreme cases, you also risk losing your home.
While the gadget does offer a few lessons in how mortgages work and how to make yours work for you, in practice it is an incredibly risky game of what professional investors call arbitrage. or take advantage of small price differences or, in this case, interest rates. .
“How financially capable and savvy are you? Ask Nicole Rueth, a mortgage consultant who leads a team for Fairway Mortgage in Denver. While the strategy works in some cases, if not applied correctly, the results can be “devastating,” she says. “The moment you stumble is the moment the house of cards crumbles.”
How the speed bank is supposed to work (and what could actually happen)
Step 1: Take out a mortgage.
If you have a $ 300,000 mortgage with a 30-year payment term and a fixed interest rate of 3%, you’ve agreed to pay your lender $ 1,265 per month for 360 months. That’s a total of $ 155,000 in interest if you see the loan end.
(Kwak was not wrong when he told his viewers, “You basically bought another house from the bank while paying for yours.”)
Still, borrowing money for a house has never been cheaper. Benchmark mortgage rates averaged 2.68% in December, a record high. For context, rates peaked at 18.45% in the 1980s. So if you can afford your monthly payment and where you decide to leave, rest assured that you are historically getting a good deal.
Step 2: Take out a HELOC.
Next, you would apply for a Home Equity Line of Credit, better known by the acronym HELOC. Like a credit card, a HELOC is a revolving line of credit, but the debt is secured by your home. Borrowers typically use HELOCs to pay for home improvement projects or other major recurring expenses.
HELOCs have much lower interest rates than credit cards, but that doesn’t mean they’re risk free. Right now, the average interest rate on a home equity line is around 3.92%, but the range of potential rates is wide. The interest rate on a HELOC is also variable, meaning that the rate is reset after a fixed initial period.
Considering the current low rates, there is a good chance that your rate will rise later, which could complicate the calculations behind the speed banking strategy. Lenders have also been known to close lines of credit when the economy is bad, although this did not happen during the current recession. Finally, the line usually takes a second lien position behind your primary mortgage, so your lender can grab it if you can’t pay.
Step 3: Use your HELOC to pay off your mortgage.
The game begins once you have both loans in place. Instead of using your HELOC to, say, renovate a bathroom, advocates for speed banks say you should use it to pay off part of your original mortgage. Supporters sometimes call this “chunking”.
So if you borrowed $ 10,000 from your HELOC and used it to pay off your mortgage, you would reduce the amount you owe from $ 300,000 to $ 290,000. That extra payment alone would save you about $ 14,000 in interest and allow you to pay off your mortgage 18 months sooner.
How? ‘Or’ What? The interest you owe on a mortgage is calculated monthly. To determine how much you owe, your lender multiplies your outstanding balance by your mortgage rate and divides it by 12. So, in the first month of our example mortgage, $ 750 of the monthly payment of $ 1,265 would cover the interest and the remainder would go to capital.
As you reduce your loan balance with regular payments, more goes towards principal each month. This process is called depreciation and you can speed it up by paying extra – in this case with a HELOC.
Step 4: Get your HELOC balance to zero – ASAP.
Of course, paying your mortgage with a HELOC only shifts the balance from one type of debt to another. For most people, that would be a wake-up call, but speed banking supporters see this as the magic of their strategy.
Because a HELOC is revolving – meaning you can pay it off and reuse it at any time – interest payments are calculated using the daily average balance. Kwak says it took him two months playing around with an Excel spreadsheet to realize that it meant you save on interest if you keep a low balance for as many days of the month as possible. To achieve this, he recommends using the money you have available to reduce the HELOC balance.
To keep it low for longer, he says, you can put all of your spending on a credit card. If you pay it off on your credit card at the end of the month, that’s equivalent to one month of interest-free borrowing. (Be very careful. Credit card APRs can be north of 20% – if you miscalculate, you will end up with a large balance on the highest interest debt.) This is the equivalent. financier to juggle three balls – a mortgage, a HELOC and a credit card.
“It’s the math, the way you structure yourself when income comes in and expenses comes out that seems to be the success factor of the strategy,” says Kwak.
However, Kwak admits that this whole process saves a few dollars. To get the results promised in his videos and those of others, you have to repeat the steps over and over again.
Also, for the strategy to work, the amount you owe on the line of credit must actually go down from month to month. This is only possible if you consistently spend less than what you earn. The more you save, the faster the process. So, as a model, many videos use a person with an annual income of $ 60,000, who saves more than 25%.
In February 2020, just before the coronavirus hit, America’s personal savings rate was around 8%. If you’re the rare person who can save a lot more – after putting money aside for an emergency and retirement – this strategy may work for you. But there are much simpler options.
How – safely – to prepay your mortgage
You can replicate the benefits of “chunking” by channeling a windfall like a tax refund, bonus, or stimulus check to your mortgage. Putting, for example, a bonus of $ 10,000 towards a mortgage of $ 300,000 would reap the same benefits as in the HELOC example. Simply confirm with your lender that the funds will be used for principal payment rather than interest.
If you weren’t expecting a big check anytime soon, an extra $ 50 per month on that $ 300,000 mortgage (so $ 1,315 instead of $ 1,265) would take you back to a zero balance in 339 months at instead of 360 (a reduction of almost two years) and save you over $ 10,000 in interest. Ask your lender if you can automate the additional recurring payments so you don’t have to think about it.
Jack Guttentag, a former finance professor at the University of Pennsylvania, has a useful extra payment calculator on his Mortgage Professor blog. “Big savings require bigger payments,” warns Guttentag in an article. “The trick is to find a model of additional payments that you can live with.”
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