Now, by God, you finally have a piece of property! You did it! So what is the next money move? Now here is the real key to perpetual wealth. Pay off the mortgage as fast as you can.
It is easier than you think. Order the “Loan Amortization Statement” from the bank that holds your loan. This document will give you the full payment schedule for your loan and the bank must give it to you upon request. The bank may charge a fee. Pay it. When you get the loan amortization statement, you will see, for each payment, how much money is going toward interest and how much reduces the principal. The document will be many pages long because it shows what will happen to you every month for the next thirty years. You will be dismayed to see how large the interest payment is, compared the reduction of principal.
The only way to avoid enormous sums being eaten by interest is to make as large of a payment as you possibly can. On the payment stub, indicate the additional amount is to be for the reduction of principle mortgage. Most loan payment stubs have a category for how you want the payment attributed. If not, then write it in on the payment stub that the extra money goes toward principal.
At this point, you are now practicing on a macro economic level the same practice that you have been applying since you began the obeying the laws of wealth: reducing your monthly overhead! You want to do that to a point to where you have no mortgage at all.
That is right! You go back, Jack, do it again! You reduce your monthly overhead on a macro economic level now – by eliminating your mortgage altogether. Repeat: the trick is to make as big of a payment as you can, as often as you can. This is good for every body. The bank gets their original investment back plus the interest, but they don’t get to take an arm and a leg from you. The bank was hoping for an arm and a leg and they hate it when they don’t get all that interest. But no, you get a beautiful house, eventually free and clear.
Don’t Borrow Against Your House with a Home Equity Line for Vacations, Clothes, Cars, etc.
The goal is to have your house completely paid off so that you have as small of an overhead as possible, so that you have a choice on issue of whether you have to work and how you live your life. That means that you should not continually borrow against your house with a home equity line. You should never ever borrow against your house so that you can take a vacation, buy clothes, purchase a car, or buy anything that truly should just be a one time expense.
There are only two times when you should use a home equity line. A home equity line makes sense only to (1) make a major home improvement that will greatly raise the value of the house or (2) to acquire another piece of real estate.
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Rather, you should use a home equity line to build wealth by either making a major home improvement or to buy another piece of real estate. On using a home equity line for a major home improvement, be frugal and get as much bang for your buck as possible. Try to avoid borrowing all the money for the project at once. You should never pay interest on money unless absolutely necessary. So avoid borrowing big amounts. Borrow incrementally; borrow a small amount for each phase of the project. As each phase of the project is completed, you can then borrow the next small installment. Do the project efficiently and have a projected time line for how long it will take you to pay the home equity line back.
A home equity line is like a great big credit card, so be careful! The terms will have an interest rate and you have to pay back the money you borrowed plus the interest. Remember, a home equity line is a loan from a bank, but it is not like your mortgage. In your home equity line, there is no set monthly payment that limits what the bank can demand as a payment. If you borrow all the equity out of your house, and the bank suddenly determines that you are a credit risk and tells you that you need to pay the entire amount back all at once, you could lose your house altogether.
Never forget that a home equity line is not without substantial risk. Banks can get into trouble too and they will call the Note if they think too many of their customers cannot pay back their loans. You must have a game plan for how you would deal with a situation if the bank called the Note up for full payment. A home equity line has only two terms: the amount borrowed and the interest rate. It does not have the third term of a limited set monthly payment. Because of that, the bank can call the Note at any time. So don’t borrow too much at any one time. Have an exit strategy.
Summary:
(1) Make as big of payment, as you can, as often as you can, against the principal mortgage on your house.
(2) Don’t borrow the equity out of your house for things that lose value like clothes, cars, and vacations. You can use the home equity line to make an improvement that greatly increases the value of the house or to purchase more real estate.
(3) Eliminate the entire debt on your home as soon as possible. The goal is to become completely debt free, including paying off your mortgage. Chart a course for your future. Begin today.
You are now a property owner and you are practicing on the macroeconomic level, the process of eliminating debt — on your house! So what is the next move? Read the next chapter to find out!
