The basic idea is to take out a Home Equity Line of Credit (HELOC) with your chosen bank. You use this account like your primary checking account. You will pay all of your bills out of this account and deposit all of your income into it. Any left over money goes to pay off your mortgage.

——

——

The benefit is appealing – you may pay off your 30-year mortgage in as little as 10 years. Of course, if you have any other debt (e.g. credit card debt or car loan), it’s almost certain you should pay that off first.

We’re talking in generalities here; you and your financial planner can determine your best financial move based on your specific situation.

The pluses

We liked that the program we looked at included a great visual that showed you the exact month and year your mortgage would be paid off if you stuck with it. We also liked that you could easily see your money coming in and going out.

Using intuition

The example showed a rate of 6% on the first mortgage and an 8.6% rate on the HELOC. Intuitively, it didn’t make sense to us to borrow at 8.6% to pay down a 6% loan.

So we decided to do some calculations to see if our intuition was right.

New vs. old

We decided to compare this new way of paying down a mortgage to the oldest of the old ways – including an additional amount with each regularly-scheduled payment.

The example we looked at was for a couple who made $5,000 a month and had bills totaling $4,000 each month. They held a $200,000 mortgage, with a 30-year term, and an annual interest cost of 6%.

The main driver – with the old way or the new way – was the $1,000 in discretionary money each month. The new program also accessed the HELOC in the first or second month, but once again that money is being paid back at 8.6% instead of 6%.

Apples to oranges

We found that the new program lived up to its promise – you will pay less in interest over a 30-year period. The problem is that it’s an apples-to-oranges comparison.

Their basic assumption is that you will use ALL of the $1,000 in discretionary money each month to pay down your mortgage if you are on their program. If not, you won’t use ANY of it – that is, you won’t pay down your mortgage OR invest it.

Apples to apples

So we decided to do our own comparison. We used the simple, old, do-it-yourself extra mortgage payments method – we added the $1,000 of discretionary income to our monthly mortgage payment.

The result?

We paid off all of our debt (which consisted of only a first mortgage) eleven months faster than they paid off theirs (which included the first mortgage and the HELOC)!

We found some of the assumptions about the timing of income and expenses questionable. With a more conservative approach, we would actually pay off all of our debt fourteen months faster using our old-fashioned strategy.

As for total interest savings, we would save between $10,989 and $24,210, depending on the timing of income and expenses discussed in the previous paragraph. This takes into account the cost of their software as well as a small annual fee on the HELOC.

Conclusions

In a strictly financial sense, the old-fashioned way is your best bet. However, it’s important to also consider the human side.

That’s where programs like this come into play – some people would be more likely to pay off a mortgage early because they could track their progress so easily.

Of course, you could set up one account yourself. With basic spreadsheet skills, you could set up a chart (or talk a friend into doing it for you) to show the effect of additional mortgage payments.

The bottom line – the old way is the better way if you’re looking to save the most money. But if you’re a little light on financial discipline, programs like this may be helpful.

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Next time, we’ll discuss a resource that great athletes wouldn’t do without … and neither should you. Until then, here’s to your bigg success!

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9 Questions to Answer Before You Make Extra Mortgage Payments 

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Bigg Advice
We can’t give you a direct answer, Randy, but we will give you nine questions that will help you determine if you should make the extra payments.

#1 – Do you have any other debt?
Chances are your mortgage is the cheapest debt you’ll ever find, after taxes are considered. So if that’s the case, you should pay off your other debt first.

#2 – Do you have an emergency cash reserve?
The general wisdom among financial planners is that you should have somewhere between three months to a year of living expenses in an account that’s readily available.

#3 – How good is your credit rating?
The better your credit rating, the better chance you have to borrow in the future at a reasonable cost should the need arise. When you make extra payments, you’re essentially investing in an illiquid asset. So if your credit score needs some improvement, work on that first.

#4 – How do you feel about debt?
Some people don’t like having any debt at all. If you’re one of them, and if you’re happy with the answer to the first three questions, then make extra payments!

#5 – What’s your interest rate?
This question gets you ready to determine your best financial move. There are two things you need to know:

• the interest rate on your mortgage

• your tax bracket (i.e. how much you’ll pay in taxes on your next dollar of income, that’s called your marginal tax rate).

Multiply your interest rate by (1 – your marginal tax rate) to get your after-tax cost of interest.

#6 – How disciplined are you?
If you’re likely to just spend the extra money if you don’t make extra mortgage payments, then by all means just make extra payments. If you’re disciplined
(or set it up so you don’t have to be), then you’re ready for the next question.

#7 – When do you plan to retire?
In general, the longer you have until you retire, the more aggressive you can be. So if you plan to retire in a relatively short time, lean toward extra payments. If you have a relatively long time before you retire, you’re probably better off investing.

#8 – What could you earn if you didn’t pay off your mortgage early?
You figured out your after-tax interest cost in Question 5. That’s your cost of money. Now you’re going to look at how much you can make from your investments. That’s your projected return. If the return on your portfolio is greater than your cost of money, that’s a sign you shouldn’t make extra payments on your mortgage.

#9 – Will your current portfolio support your desired lifestyle?
If you already have enough money to keep you happy for the rest of your life, why do anything risky? Just pay off your mortgage and reduce your risk even more.

We’ve offered some general advice here. Find a certified financial planner or CPA to help you with your specific situation. 

Want to read more? Here are the 9 questions you should ask before paying off your mortgage in more detail.

Our bigg quote today comes from Walter Savage Landor:

But you shouldn’t pay down your principal unless it’s in your best interest.

Next time, we’ll share a love story with lessons. Until then, here’s to your bigg success!

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Bigg Challenge
We received an e-mail from Diane, one of our newsletter subscribers. Diane says her husband has a passion for electronics and their credit card debt just keeps rising. She wants to know how to confront him and get their family finances back in order.

Bigg Advice – 4 tips to stop the bleeding without getting bloody

#1 – Plan for a conversation, not a confrontation.
You want to solve the problem, not have an argument. So use the word “we” frequently and “you” infrequently. Now that may be tough when you’re not the spender. If it’s easier, talk about the “situation”, so you remove yourself, too.

#2 – Make it an event.
Gather up any needed information and go out for cup of coffee or a very inexpensive dinner. This signals that you’re not planning on arguing, so your husband’s defenses will be lower. Find a place that’s private and doesn’t have a lot of background noise, so you can hear each other.

#3 – Agree to this rule, “Pay today or say no way.”
Repeat this rule out loud to each other, over and over again. This is where you have to start. Stop the future bleeding today so you can focus on the problems from the past tomorrow.

Saying it is one easy, doing it is hard. If your situation is really extreme, put yourselves on a cash allowance and agree what expenses that covers. If it’s less extreme, you can use debit cards that draw on separate accounts – one for you, one for your husband.

#4 – Create a fun account.
Set aside an agreed percentage of your incomes into this account. IF, and only IF,   you’re able to pay all of your other bills in full, THEN you get to spend this fun money.

So if you’ve met your goals, your husband gets bonus money for the gadgets he wants. By the way, you’ll get bonus money, too. This is how you get his “buy-in” and keep him from going into withdrawal, which is crucial because you can’t do it alone.

Don’t think you have to be debt-free to trigger any bonus money. You just have to see a reasonable level of progress. Sometimes a small investment in rewards pays bigg dividends.

For example, you may agree that when you’ve reduced your debt by 25 percent, you’ll draw down 10 percent of your fun account.

As you get your financial house in order, check out our article on the five piggy banks. This will help you keep it in order.

Thanks, Diane for sharing your bigg challenge. We wish you bigg success!

Do you have a bigg solution for Diane? Share it with a comment. Are you facing a bigg challenge? We’d love to help! E-mail us at bigginfo@biggsuccess.com.

We don’t know who originally came up with our bigg quote today, but we sure like it!

So give yourself time to get to know your money so it can get to work for you!

Next time, since it’s leap year, we’ll look at leaping from place to place. You can see the world while you work! Until then, here’s to your bigg success!

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More Bigg Challenges/Solutions

More Debt Reduction

More Financial Freedom 

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Which is better – a $100 decrease in costs or $100 increase in income?

It’s always good to increase our income, but more people get in trouble on the cost side. This applies to your business as well as your personal finances.

Your business
Assume that you own a retail store. Every product in your store sells for $100 and costs $40. So you keep $60 every time you sell a product.

Now let’s say you’re able to cut your expenses by $100. You get to keep all of it!

So, which is better? Cutting expenses by $100! That yields $40 more!

Now, you may ask, how do you do that? Here’s something we have learned …

As you get busy running your business, it’s easy for costs to creep in that aren’t increasing sales like you thought they would. Get rid of these costs!

One of the biggest complaints bankers have about small business people is that they are too focused on their top line (sales) and they don’t spend enough time thinking about the bottom line (profit).

In the long run, your profit can only grow as fast as your sales. But in the near-term, your bottom line will grow much faster if you keep a close eye on costs.

Your personal finances
This is the same story, but for a different reason. It’s all about taxes.

Let’s assume that you will pay 30 percent on your next $100 of income. So, if you make $100 more, you get to keep $70 after taxes.

But if you can spend $100 less, you’re $100 ahead because you’ve already paid the taxes on that money!

Let’s say you get a $5,000 a year pay raise. You decide to celebrate by buying a new house … you upgrade! Your mortgage payment is now $4,800 a year higher than it was before. But hey, you have $5,000 more income, so you’re still $200 ahead, right?

That’s BEFORE TAXES.

Once we factor in 30 percent for taxes ($1,500), you’re $1,300 behind!

And the bad news has just started. This new, bigger, more expensive house probably has higher property taxes; it costs more to insure; it requires more repairs and maintenance.

Before you know it, you’re $5,000 in the whole!

What should you do with the raise?

Once again, your specific situation will determine what you should do. Consider giving yourself a SMALL reward – you’ve earned it! Then, if you have any debt – particularly credit card debt – pay that off because your return will exceed almost any investment. And it’s a guaranteed return!

Once you have that debt paid off, the money becomes yours! Now you can invest it in things that will jump start your passive income.

The bottom line is this – you have complete control over your expenses. You have to convince someone to say “yes” to make a sale or get a raise. It’s much easier to control your costs!

You’ve probably heard our bigg quote today, but it was so fitting that we used it anyway. Here’s Ben Franklin –  

And we bet that, if ole’ Ben Franklin was around today, he’d think about the taxes he was paying and modify his quote to – A penny saved is BETTER than a penny earned!

Next time, we’ll continue the money talk, but with a twist. Comedic writer Jake Novak joins us to share his “Top 5 Signs You're Managing Your Money Like Wall Street.” Until then, here’s to your bigg success!

Related posts

Does It Pay To Be Smart?

How To Get Rich

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Freedom Or Security – Which Do You Choose? 

Which is better – a $100 decrease in costs or $100 increase in income?

It’s always good to increase our income, but more people get in trouble on the cost side. This applies to your business as well as your personal finances.

Your business
Assume that you own a retail store. Every product in your store sells for $100 and costs $40. So you keep $60 every time you sell a product.

Now let’s say you’re able to cut your expenses by $100. You get to keep all of it!

So, which is better? Cutting expenses by $100! That yields $40 more!

Now, you may ask, how do you do that? Here’s something we have learned …

As you get busy running your business, it’s easy for costs to creep in that aren’t increasing sales like you thought they would. Get rid of these costs!

One of the biggest complaints bankers have about small business people is that they are too focused on their top line (sales) and they don’t spend enough time thinking about the bottom line (profit).

In the long run, your profit can only grow as fast as your sales. But in the near-term, your bottom line will grow much faster if you keep a close eye on costs.

Your personal finances
This is the same story, but for a different reason. It’s all about taxes.

Let’s assume that you will pay 30 percent on your next $100 of income. So, if you make $100 more, you get to keep $70 after taxes.

But if you can spend $100 less, you’re $100 ahead because you’ve already paid the taxes on that money!

Let’s say you get a $5,000 a year pay raise. You decide to celebrate by buying a new house … you upgrade! Your mortgage payment is now $4,800 a year higher than it was before. But hey, you have $5,000 more income, so you’re still $200 ahead, right?

That’s BEFORE TAXES.

Once we factor in 30 percent for taxes ($1,500), you’re $1,300 behind!

And the bad news has just started. This new, bigger, more expensive house probably has higher property taxes; it costs more to insure; it requires more repairs and maintenance.

Before you know it, you’re $5,000 in the whole!

What should you do with the raise?

Once again, your specific situation will determine what you should do. Consider giving yourself a SMALL reward – you’ve earned it! Then, if you have any debt – particularly credit card debt – pay that off because your return will exceed almost any investment. And it’s a guaranteed return!

Once you have that debt paid off, the money becomes yours! Now you can invest it in things that will jump start your passive income.

The bottom line is this – you have complete control over your expenses. You have to convince someone to say “yes” to make a sale or get a raise. It’s much easier to control your costs!

You’ve probably heard our bigg quote today, but it was so fitting that we used it anyway. Here’s Ben Franklin –  

And we bet that, if ole’ Ben Franklin was around today, he’d think about the taxes he was paying and modify his quote to – A penny saved is BETTER than a penny earned!

Next time, we’ll continue the money talk, but with a twist. Comedic writer Jake Novak joins us to share his “Top 5 Signs You're Managing Your Money Like Wall Street.” Until then, here’s to your bigg success!

Related posts

Does It Pay To Be Smart?

How To Get Rich

6 Easy Steps To Financial Freedom

10 Signs That You Are Ready To Quit Your Job And Start A Business

Freedom Or Security – Which Do You Choose?