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.
If you are in Minnesota, contact The Glover Law Firm, LLC, for a free case evaluation. In any other state, you can find a consumer rights lawyer using the National Association of Consumer Advocates lawyer database.
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I’d also add this: This theory (which equates to using home equity as your primary savings, checking, and financial reserve account) requires two very basic assumptions that we happen to be watching fall apart in a real time:
1. There is and will always be access to cheap and easy secured debt/home equity loans.
2. Real estate values always go up, and never significantly down.
Using your home equity in this manner is a risky proposition at best.
1. Home Equity is not Federally Insured. A checking or savings account can’t lose value, and is insured by the FDIC to 100k. If your home loses value, so goes your equity stake.
2. As you mention, home equity is not liquid. You have to borrow against it, which costs money, and tends to be very difficult to do when you really need it (lose a job for instance.) Also, with credit standards tightening, homeowners may find the top 10-20% of their homes equity is impossible to tap into efficiently. The home equity credit markets are contracting rapidly, and the days of borrowing to 100%, or even 90% of your homes value, will likely be gone by the end of they year if not the end of the month.
3. Home values have actually begun to decline, and we may see further deterioration in prices as a result of the credit crunch in the secondary mortgage market.
4. Aaand…Home equity has a zero percent rate of return. That is ZERO. From dollar one. This fact alone outstrips any nominal interest savings one would gain by paying of the mortgage early. Then add to the equation the fact that they are advocating the use of after tax dollars to increase exposure to future taxes (by reducing the size of the mortgage, and therefore, the value of the interest deduction.)
Home equity accelerators are just horrible, horrible vehicles for maximizing net worth, which is what most of us want, at the end of the day.
I understand where you are coming from…that is a valid initial impression. However, when one sees the effect of dollars staying in that account they are able to rid themselves much more quickly of a discounted debt, their mortgage. Nowhere does it make sense to trade one dollar for three and we cannot assume that individual tax rates will go up.
“Most” of us want a quality of life that enables us to maintain our lifestyle and a paid for home does that. We do not have the energy, time, focus or discipline to save those extra dollars and invest them. Plus, you do not pay taxes on interest saved, you pay it on interest earned. Thus, you save dollars you would have paid in taxes on by growth in your invesment vehicles.
When you consider that the average American spends 50% of the income on taxes and interest it really is a no brainer.
A paid-for home is certainly desirable. More desirable should be an absence of unsecured debt like credit cards. If a mortgage is “trading one dollar for three,” a home equity line of credit is trading one dollar for four, and a credit card is trading one dollar for seven.
All the Speed Equity System does is get people to pay more than their minimum mortgage payment. Everyone should do this when the time is right, but nobody should do this while making minimum payments on a credit card balance.
Furthermore, the Speed Equity System advocates some financially harmful ways to trick oneself into making larger mortgage payments. Far better is to pay as much as possible as early as possible, but not to use your HELOC as a credit card, compounding the financial problem.
Sam…interest on up to $100,000 heloc is deductible…correct?
You’ll have to ask an accountant or tax lawyer that question. I can’t answer it.
I am constanly amazed at how people get duped by programs like this. The minute you identify even 1 misleading statement (I call them lies), you should run for the hills. Just read his book and you will see (please don’t pay for it, it is not worth it). I especially like the use of famous quotes on almost every page to aid in his pscyhological manipulation.
Sam you said “Your mortgage interest is tax-deductible. HELOC interest is not.” This is not true. HELOC (my bank for example shows it right on the bioler plate ad) interest is 100% tax-deductable (take a look at the tax laws too – this is tied to your mortgage and if you default the HELOC is second lein so of course you can write off the interest). So I don’t know what you are talking about. The interest write-off is still intact HELOC or not – I agree with everything else you said though. It could be a good option for people with a positive cashflow. But there certainly is no secret about it.
What I like about the program is that is sets up a format to allow one to do, as many have said above, pay more into your mortgage more often. And, if set up properly, this program will concentrate on paying off the high interest cards prior to attacking the mortgage. Also, the concept of reversing the effect of compound interest is very interesting. Using the HELOC to pay monthly bills, “depositing” paychecks to the HELOC to keep the balance/monthly interst down and using the float on a Credit Card to pay daily living expenses, one is able to beat the impact of average-daily-balance interest calcualtions. The balance in the HELOC goes up and down while the loans interest stays relatively constant. This brings the monthly interest fee down due to the varying balance in the HELOC. Check out the web site. I got the software for the first year free and then bought the book and got another free year access to the software. $49 per year there after.
I am just starting to use the speed equity program. More so, I am using the concept of the system. I think it is great, and so far I paid off credit cards with it thus not having to pay that high interest. The HELOC is paid on a variable rate. So the interest is calculated daily. If you can keep as much money in the HELOC…in other words make your payments to the heloc as if it were a checking account, it cancels interest daily. The trick of it is…keeping the money in the HELOC as long as you can. It works and its not a scam, its an idea really more than anything. The bottom line is this though, if you are bad with money to begin with then it could be a horrible thing.
This is a question for both Dan and Ian R who both own the speed equity system:
Were you able to figure out how to use the software and system using their limited customer support without having to pay the extra $595 for more support? Could the average college educated person be able to figure it out without a need for that extra 1-on-1 support ?
Thank you,
Nico
My husband and I use this system. We used to pay our mortgage (15 years @5%) “Biweekly”, which it really isn’t. We will be completely debt free in 4 years.
Also, this program does not “turn your mortgage into a checking account.”
Not only does the Speed Equity system help you pay off your home MANY years sooner, it takes into consideration every debt you have, so you are completely debt free.
If you are financially irresponsible, there is no “program” that will ever help you unless YOU ARE WILLING TO CHANGE.
Do you HAVE to use the coaching service for $595? N0, you don’t. It can be set up quite easily. But the service is nice and very reasonable.
Anybody who tells you this program is garbage, simply hasn’t put it to the test.
Is any body doing this in Canada? Is there any one I could talk to?
regards,
Brian
I am and have been a mortgage lender for 10 years and have a friend who shared this with me. My previous background was in engineering so I worked with numbers a great deal.
I currently don’t use any program described on this blog, although I may upon further investigation and analysis.
I am in favor of ANYONE having their home debt free as they will pay for it AFTER paying off all consumer debt. You home is where your ’shelter from the storm’ for which you will pay for 3 times over during 30 years. The home owner will work to earn enough money to pay for the home 4 times, pay taxes and have enough to pay for the home and mortgage interest.
Anyone considering this or any similar program absolutely MUST be financially responsable and live well within their means. Families or individuals who live on the edge should not even consider this program until they can change their debt to income habits.
The mortgage accrues interest daily based upon the outstanding balance of the mortgage. Picture this like a stair step and then when the mortgage is paid each month, there is a sharp drop off with the new balance slightly lower than the previous balance. Now, imagine this as a saw tooth (electrical engineers should think sawtooth wave form with jagged edges on the positive slope of the waveform)
Imagine that if you are a well paid family with no outstanding consumer debt and your combined pay checks go into the HELOC. The outstanding balance of the mortgage takes a huge drop. the daily interest is now calculated on say, a $5,000 balance reduction vs a $225 balance reduction.
Suppose there were a $200,000 balance and the loan was a HELOC (outside of Texas) with an interest rate of 7.00%. Daily interest is $200,000 X 7.00% with the product divided by 360 days (mortgage industry calculations) then daily interest would be ‘around’ $38.89. Reducing the mortgage to $195,000 by depositing a paycheck into the HELOC will take the daily rate to $37.92 or a delta of $0.97 per day or ‘about’ $29.10 monthly in savings.
The key to maximizing the benefit to this is to delay the payment of household expenses until the very end of the month so as to keep the outstanding mortgage balance as low as possible for as long as possible.
Two things will happen each month; the unused paycheck brings the balance down more quickly AND the daily interest rate drops.
Is the home being used as a “piggy bank”? Yes, it is. Is this a bad thing? It depends.
Is this trickery and deception? I don’t think so if the person using the program has done their homework and has made a competent and informed decision and financial commitment.
The bank will pay about 3-6% yield on a CD and paying the mortgage off, which has a higher ‘negative yield’ of 7% is saving money for the borrower.
About the piggy bank thought: The HELOC is what allows the home owner instant access to funds that is rally “value” that has been converted from liquid Dollars to non-liquid Equity. The home owner pays interest on that borrowed money, but if the home had a higher balance, then they would pay interest anyway and would have had the money in their checking account anyway.
It is NOT good to use the home as a piggy bank if the home owner wants to spend foolishly on vacations, cars and other non-value added, depreciating items/activities. It IS wise to keep putting money into that piggy bank with windows and a door if doing so will quickly get rid of the all enslaving interest charges more quickly.
A person may, at some time in the future find a need for cash and then take out a HELOC – as people already do now and do what they already do with home equity. You just don’t want to be paying interest when you absolutely don’t have to.
Frankly, I would not be opposed to getting the kiddos from in front of the video games and put their little butts to work and let them contribute to principle reduction too! Then the whole family can quickly develop an intergenerational blessing of living mortgage and consumer debt free.
I realize this sound quite ‘odd’ coming from a mortgage lender but I would rather see more people get a mortgage to get into a home but then pay the mortgage off as quickly as possible.
What would be some disadvantages of paying the home off early?
What if the home values drop? Well, you will pay for the home ANYWAY so why not pay 1/3 of the total cost if that were to happen since you would normally have paid the principle balance off plus the total finance charges – regardless of home values.
If you purchase a home and have no debt, then home prices go down, it is of no concern what homes are selling for as long as you aren’t selling. You have to have a place to rest your head at night, to stay warm and dry and to be with your family – so who cares what homes are selling for?
Do you need your tax deduction? NO. You pay $1.00 in interest which buys you nothing of tangible value except the early use of the home and get $0.25 back. You still paid, effectively, $0.75 in interest.
What if you just paid the mortgage off and pay the $0.25 in taxes and keep the other $0.75 for investing or a family vacation?
How about coaching for $595 or what ever the price is? Don’t get greedy or miserly here? If you invest $595 to have someone help you along to save $200,000 then you have received great value. Don’t begrudge another compensation for value rendered. That is a very ugly way to look at the world and it devalues and disrespects the other person. On the other hand, if the ‘coach’ save you some brain cells and frees up your time to do other things besides sitting and reading a book to decipher if you are doing the right thing, have you not received greater value of your time when dollarized? What is an hour of your time worth in dollars and how much of your time was freed up?
There appears to be another mortgage reduction program that is multilevel marketing and they charge a $3,500 fee. Even that large fee is a bargain compared to the savings on a successful mortgage payoff acceleration program.
I just happened upon this site as I was researching the program. I don’t know much about the other program and can’t comment on it.
I have done MLM before and it works OK for some folks, but just not for me so I wouldn’t be attracted to that.
My 10 years experience in the mortgage business leads me to advise that when money – large amounts of it – are concerned, be vigilant against any scams or anything that appears too good to be true.
Check out the quality of the CHARACTER of those involved. If you shake hands with someone and get a sudden urge to take a shower to cleanse yourself, then get away from those people.
I hope my verbose message was of some value and I highly recommend that anyone should pay off the mortgage as quickly as possible some way, some how. Bi-weekly mortgages are only marginally helpful and in most cases, the ‘administrator’ of the plan is holding your money and making a return on investing part of your money while in reality they make a 13th payment each 12 months.
Any time someone wants to put their hand on YOUR money, there is a profit involved. I know because I deal with it all the time.
Good luck!
Great comment. Thanks, Rocky.
Those considering the Speed Equity system should take note of recent events. If your paycheck is tied up in a HELOC and your lender—Citibank, let’s say—decides to suspend your HELOC account, you are screwed.
Rocky, I appreciated your thoughtful response regarding this product. I’m a financial counselor/money coach who constantly searches for strategies to free my clients of debt more quickly. I have a number of strategic alliances, such as yourself, to whom I refer clients when their needs go beyond the scope of services I provide. Please reply with your contact information. I can be reached at robin@budgetwise.net. Thanks.
P.S. I’m also a former engineer.
In reference to Sam’s comment earlier does this system work in today’s environment? Is it still possible to get a Heloc and what does happen if your lender suspends your Heloc? Does this system address these issues and it is flexible?
Thank you,
I recently followed up on this issue for the reasons you mention. Using a HELOC as an ATM was a dumb idea before, and is even dumber now that banks are suspending HELOCs every chance they get.
Was it W.C. Fields who said “It’s morally wrong to allow a sucker to keep his money. ” If you want to reduce your mortgage just pay a little extra each month, whatever you can afford, and don’t rely on a HELOC that could be frozen. Now all you suckers please send me $49.95.
guys. I’m considering this “Speed Equity” system but have some basic questions. I’m confused so my questions are kinda stupid. First. I don’t get it. does the paycheck go into the mortgage or the HELOC? if you put the whole payck into the actual mortgage and borrow from the HELOC to pay monthly expenses (floating a CCard til the last minute). Where do I get the money to pay the HELOC back? Thanks,
HELOCs are getting closed left and right. Doing the Speed Equity system now is asking for catastrophe.
I’ve used the Speed Equity method for a year now. Your receivables get deposited into your HELOC, thus reducing your daily average balance where the interest is applied. Then, twice a month, once a week, or when ever you need to pay your bills, you move money from your HELOC to your checking account and pay your bills, which includes your Mortgage. Record your activities in the Speed Equity program and it will show you which bills to pay off first. After your credit cards are paid off, then you start on your mortgage. Before you buy something big (because we always want something new), you can see if financing it will be a good idea or not. Send me an email if you would like to talk to my financial adviser who was no where near the $600 fee. Compare Speed Equity with UFirst and find out which fits your needs. I picked Speed Equity because of its low cost and have been very happy with the results.
I am just sorry I didn’t hear about this simple system (I don’t think you need any software) years ago. I will have my 15 yr mortgage paid off by the end of the year(less than seven years). I already pay off my cards monthly. As things stand, I wouldn’t assume anything regarding the tax deductibility of home mortgages in the future especially for upper income earners. For jaay above. The Heloc will grow as the mortgage shrinks, but in my example, I expect to reduce the balance radically after the first is paid off by essentially using the same system. The interest rate on the HELOC is half of the first mortgage rate (another plus). As soon as you can rid yourself of your mortgage payments you can take more time off thus reducing your income and taxes possible by at least as much as your prior mortgage deduction.
People who bash the speed equity system simply do NOT understand the underlying premise. As soon as the “scam claimers” start focusing on HELOC rates compared to 30 year mortgage rates WITHOUT illustrating the costs side by side are just plain missing the whole point. A 200k mortage at 6% costs 1200/month…a 10k HELOC at 6% costs 60/month. Even if the HELOC went to 12% the fact that you DO NOT pay for the house TWICE (or more) well outweighs the cost of SIMULTANEOUS USE OF $ FOR TWO TASKS (bills and mortgage debt).
READ THIS AGAIN: The SIMULTANEOUS use of $ in two SIMULTANEOUS tasks (bills and mortgage reduction) while still maintaining emergency cash liquidity can ONLY be accomplished using a parallel account. Yes…there is a cost….just keep focused on the fact that you the HELOC is a very small $ total compared to the mortgage…but the RESULTING AFFECT on what you do NOT pay is immense.
I do agree that if you are an idiot and you have NO discipline to stick to a plan….that is YOUR fault…NOT speed equity’s fault. The claim that the SYSTEM is flawed is bullshit…it’s PEOPLE that fuck it up.