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.
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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.
Harj’s system works so long as you WORK the system. The numbers don’t lie.
The system works and if your smart enough to stik to the plan. You could even build your savings if you truely know what your doing . Good luck
The trick is to do it with a proper account where the entire balance is a line of credit. That way you have access to it as needed and can afford to put every cent into the account. I’d be extremely worried if the only way to get the money back was to refinance. Especially if your saving property taxes and such for the end of the year to pay out of the account. That being said in a years time when my credit is high enough to do this all my other bills are paid for so that helps out even more.
The program works if you can control your expenses. If you feel temted to buy big screen tv’s and the like because you have access to the HELOC, then you will get deeper into debt and will never get out. If you follow the program and can stay away from superfluos purchases until you can really lower your mortgage then you may use the extra money for whatever you want.
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