Sending extra principal payments against your mortgage is not the fastest way
to pay off your mortgage. In this episode, I'm going to address the question that
I've answered numerous times in different ways.
How to pay off your mortgage faster. It's not what you think.
I'm Doug Andrew and I've been teaching people about how to optimize their
assets and minimize taxes and get their house or their real estate paid off
the quickest smartest way now for more than 46 years. I've written several books
about it. But it's not what you probably think. I'm
here in my radio studio and I've had a weekly radio show now
that's broadcast nationally for 12 years.
Prior to that for 35 years, I help my own clients get out of
debt the quickest smartest fastest way. And it was not any way shape or form
sending extra principal payments to the mortgage company as I'm going to share
with you. But as I began to teach this from 2001 to 2007, I had
4 best-selling books. One became a New York times wall street journal number
one bestseller, my books are over here, some of them. But I'm going to allow you
the opportunity in this episode to click at the link
down below and get a copy of my most recent
best-selling book that retails for 20 bucks.
You contribute $5.95 towards the shipping and handling
and i will pay for the book and send one out to you free. It's 300 pages of
information. But there is a chapter in there that
addresses exactly what i'm talking about right now.
But if you want to know and understand, here we
go. You know, a lot of times there are all kinds of ways and ideas
that people tout how to get out of debt or
pay off your mortgage magically 10 years earlier or 15
years or in 12 years. And every one of them seems to talk
about sending extra principal payments to the mortgage
company. So, let's talk about various ways that people
sort of get duped into doing that. So, let me share with you a story.
I met uh one day with three finance professors
years ago at a major university. And they said, "Mr.
Andrew, we teach all of our advanced finance students here at the university
why when they go out and they purchase their first
home, why they should take out a 15-year amortized mortgage if they can afford
the payment rather than a 30-year amortized
mortgage." I said, "Really? Why do you do that?" And
they looked at me like, "Well, duh?" Maybe they meant
Doug, I don't know." They said, if you just bite the bullet and pay a higher
mortgage payment, you will save yourself a grundle of interest. You'll have your
house paid off in 15 years instead of 30 years.
And then you can begin to sock away the same amount of money into
an investment like a tax deferred ira or 401K."
I said, "Gentlemen..." There were 3 men. I said,
"Gentlemen, your finance professors. Haven't you ever taken the differential
between a 15-year amortized mortgage payment which is higher and
a 30-year mortgage payment which is lower.
Taking that differential plus the tax savings?"
You will achieve on a 30-year mortgage especially the first 15 years of a
30-year mortgage versus the 15-year mortgage.
And with a system socked away that differential
over into an account compounding tax-free.
Well, right off the bat, they go, "What's tax-free?" So, I had to educate him on my
favorite vehicle where I've accumulated accessed
and transferred my money tax-free for 46 years. I call it The Laser Fund.
It is a max funded tax advantaged insurance contract
where i have earned rates of return averaging between 6 to 10 percent.
Many years, I've earned as high as 16 and even 25 percent and more.
But I've averaged the last 25 years 10.07%.
But even if i only earn 6 percent tax free,
it is twice as much as I'm paying net on my mortgage.
They said, "Never heard of that." I wasn't surprised.
But they said, "No, we've never done that math." I go, "I thought so." So, I took out my
HP 11c calculator and right in front of
them I did the calculation and I said, "Look." They were flabbergasted.
By taking the money, they were telling their
students to pay in a higher mortgage payment, a 15-year mortgage.
Now, it could be a 15-year mortgage or you just send extra principal payments
to the mortgage company. I don't care what method you're using. Instead of
doing that, you take that money and put it over here
in this pocket. And you're earning compound interest tax
free. This pocket is the simple interest
declining balance tax deductible on the mortgage.
Don't kill your tax deduction. Every time you send extra principal payments to the
mortgage company, it's like saying, "Hey, here Mr. Mortgage Banker. It's an extra
100 bucks this month. Now, don't pay me any interest on that. If
I want that back i'll borrow it back on your terms and prove there's a need why
I should have it." Now, when I word it that way, it sounds
pretty stupid, doesn't it? Well, see that's what's happening.
You're not accomplishing anything because the amount of money
you put into the house, equity earns a zero percent rate of
return. It doesn't matter if your house is mortgaged to the hilt
or free and clear. It's going to go up or down in value
based upon the real estate market. Has nothing to do with how much
equity is in there. When I separate my equity or keep it separated,
I give it the ability to earn a rate of return.
And I can earn predictably 6, 7, 8, 10 percent
compound interest over here in the my my right hand pocket. This is in the laser
fund that i'm talking about. And the mortgage which is maybe 6 percent tax
deductible is only really 4% in my
33% tax bracket because I can tax deduct the interest.
If I borrow at 4.5% in a 33%
bracket, it's only costing me 3. If I borrow it 3% which I've done
on many real estate properties, it's tax deductible. It only cost me a
net of 2%. So, let me just cut to the chase. Every
million dollars of real estate equity that is not tied up in the property, I
have it over here in what I call my laser fund that you can learn about. I am
compounding and earning a 9 or 10. Let's say to say 9. So,
I'm earning 9% compound interest tax free.
Over here, I am paying 4.5 and a net of 3.
Or I'm paying 3 a net of 2 because I'm tax deducting the interest.
How much more is 9 than 3? How much more is 9 or 10 than 2?
It's 300%. It's 500%. It's 5 times more
money. Again, would you hire an employee
for 20,000 or 30,000 if that employee made you an extra
90 or 100 thousand? If you do the math,
the money you would be tempted to pay to the mortgage company
to pay off your house, if you put it over here in this side fund,
it will actually compound and grow to enough that these finance professors
they were flabbergasted. There was enough money in 12 ½
years to pay off the 30-year mortgage.
2 ½ faster than the 15-year mortgage. And we
actually redirected in the illustration $50,000
of otherwise payable tax that causes they support. In other words,
I was able to use a lot of Uncle Sam's money to get out of debt 2 ½
years faster. But if I get sick, if I get laid off, if I
get disabled and I have my money over here in this
liquid side fund, I can access it with a phone call. If
it's trapped in the property, if I pay off the property,
there's only one way to get my money out of there.
That's solid. And if the real estate market is really bad,
I'm going to lose. And if I pay it in extra principal payments,
I have to borrow it back. And when you need the money the worst, it's the
hardest to get because you can't qualify for the mortgage
if you're hurting. And so, I keep my real estate equity separated for liquidity
safety and i actually get out of debt faster than giving it to the mortgage
company. But you know what? When I have enough money
in my right hand pocket that I can pay it off 2½,
3 years faster, I physically don't do it. Why would I
kill an employee... Why would I fire an employee
that's making me 100 to 500 percent more than they're
costing me? When I do that, I can prove to you in
this book mathematically that you'll end up with 1.8 million more
money. At the end of 30-35 years, you'll have maybe 3.2 million more dollars
in your side fund by not physically paying off the mortgage. Because anytime
you want, you make a phone call you can take the
money out of here and pay off the mortgage.
So, my mortgage is paid off in 10 years, in 12 years.
Actually faster than giving it to the mortgage company anytime I want to.
But when i don't physically do that, it continues
to compound at 100, 200, 300 percent more than the cost of the funds.
It's up to you. If your goal is to get out of debt,
I can get you out of debt much faster than giving it to the mortgage company.
But if you want to continue to make more than the cost of the funds,
this is how banks make money. They pay us low interest and they loan it back
out and earn higher interest. This is what makes the world go around.
This is the parable of the talents in the bible Matthew 25.
When you understand this, you'll begin to understand how wealth is created. And
this is what makes the world go round. And you'll
be able to end up with millions of extra dollars rather than just
paying off the house. In other words, I sleep
way better at night with my house mortgaged and the
equity that I could pay off the house separated over here
compounding tax-free because anytime I want.
I can take the money out of here and pay off the house. On my balance sheet, it is
paid off. This asset will wash out this liability
that fast anytime I want. But this is continuing to grow way
faster than if i take this asset and pour it over here and it earns zero.
Because equity in real estate earns a zero rate of return in the property.
It's going to go up or down in value regardless of whether I pay it off
or whether it's mortgage to the hilt. Does that make sense?
If this is a rousing curiosity, I want you
to learn more. Dive into this book. Watch some of my other YouTube channel
videos on this topic. How to become your own banker.
But again, claim your free copy of this 300-page book. It retails for 20 bucks.
But if you simply go to laserfund.com and contribute $5.95 towards the shipping
and handling because it costs a little bit more than that usually. I'll pay for
the book and fire it out to you. And there's options in there if you like to
listen and learn or watch and learn. But as you begin to understand this
concept and somebody asked you, "Hey, how are you paying off your house
the fastest way?" You'll blow them away when you educate
them on how money really works.