The “Speed Equity System” is not all it seems

Harj Gill, M. Ed., has created the “Speed Equity System,” a method for paying off your mortgage early that has been getting some hype recently. What it amounts to is using your home as a bank account.

Gill advocates putting every paycheck directly to your mortgage payment, and then using a home equity line of credit to pay your expenses. He says this will save “tens of thousands” of dollars in interest and years of mortgage payments. Is he right?

Yes and no. The Speed Equity System itself really only gets you a bit ahead. So if you had a 30-year mortgage (360 payments), you would be one month ahead, at most. That is not where the system works.

The system works because it tricks homeowners into paying more towards their mortgage every month than the minimum payment. Most people just make their minimum payment every month. This is obviously pretty inefficient. The better method is to overpay.

But things really aren’t that simple. A mortgage is a low-interest, secured loan. The best way to pay off debt is to start with your highest-interest loan, pay as much as you can afford to pay every month while still satisfying your other minimum payments, living expenses, etc. Once that loan is paid off, move to the next one. Your mortgage should probably be the last loan you pay off, unless you have an especially low fixed rate on school loans.

Once you have paid everything off, you should absolutely pay as much towards your mortgage as you can. Avoid the interest and pay off your loan early. It’s a great plan.

The other portion of the Speed Equity System is more worrisome. The only way to take equity out of a home is using a home equity loan or refinancing. I don’t think Gill advocates refinancing every few years, as that would be horribly inefficient, so he must intend for homeowners to use a home equity line of credit to finance their living expenses. This might work for a frugal person. But for someone who has trouble coming up with the mortgage payment every month, this is a terrible idea. Your mortgage interest is tax-deductible. HELOC interest is notI am not a tax lawyer, so I may be wrong about this one. See below. HELOCs also have higher and more variable interest rates than mortgages, so if you are borrowing more than you should, you will actually accumulate more interest using the Speed Equity System.

Like most schemes, this one sounds better than it is. Look carefully at your own financial situation before you start having your paychecks directly deposited to your mortgage. If this all sounds like gibberish, talk to a financial advisor before doing anything rash.

Edit: NPR Morning Edition recently talked about this same thing. Listen online to “Homeowners Turn Equity Loans Into ATMs.” Also, see Alex Stenback’s excellent comment below.