I had a client ask me “Have you heard of 101 Financial?” I had not, but I was curious because the client said “This is the best thing since sliced bread! I’m going to save massive amounts of money on my mortgage without paying anything extra.”
I thought “Wow – sounds too good to be true, but sure, I’ll check it out.” Turns out it’s a new spin on the Mortgage Accelerator Program concept. Mortgage Accelerator Programs have become more and more popular in the US, but how exactly do they work…and do they work?
The short answer is yes; they can work. They’re not easy to execute, however. Perhaps this is why companies like 101 Financial are in business. Mortgage Accelerator Programs are pretty complicated and require intense discipline to stay on track.
If you can follow the Mortgage Accelerator Program process, you can save a lot of interest expense by paying your mortgage off faster. Sounds great in theory, right? Who wouldn’t want to pay off their mortgage faster while saving tens—or hundreds—of thousands of dollars in interest?
In this article, I’ll breakdown the Mortgage Accelerator Program. I’ll show you how it works, and how you can do it on your own without engaging a company like 101 Financial to structure it for you.
Let’s start by taking a look at a Mortgage Accelerator Program example similar to what 101 Financial would prepare. I’ll review the 101 Financial process and how you can benefit from it PLUS some of the pitfalls to avoid!
A 101 Financial Mortgage Accelerator Program Example
In this example, we will assume that we have a $200,000 mortgage and a monthly income of $5,000 with a $1,000 monthly mortgage. We will also assume that positive cash flow is $2,000/month, meaning there is an additional $2,000 worth of expenses for discretionary income and utilities after the mortgage.
- Income – $5,000
- Mortgage – $1,000
- Expenses – $2,000
- Free Cash Flow – $2,000
The first thing you need to know is you MUST have positive cash flow. In other words, your monthly income is greater than your monthly expenses. If this is not the case, STOP READING! In the 101 Financial Mortgage Accelerator Program, the more positive cash flow you have, the more interest you can save (and the faster you can pay off your home.)
Here’s how the 101 Financial process works:
1. Deposit your entire paycheck directly into your mortgage. You’re not reading that incorrectly; you will deposit your entire $5,000 paycheck into your mortgage. Interest on mortgages accrues daily, not monthly. By lowering your balance to $195,000 on the first of the month, interest will accrue on $195,000 – not $200,000. So you’re already saving money! But the big question is, how do you pay your bills?
2. Get a credit card and put all of your monthly expenses on it. You’ll want to find a good credit card with rewards like cash back or airline miles because you’ll be racking up benefits quickly with the 101 Financial/Mortgage Accelerator Program! Also, you’ll want to find a credit card with a grace period of up to 45 days. You must pay off your credit card every month, or the entire 101 Financial system falls apart.
This is really where the rubber meets the road. You must have the discipline to use your credit card for the $2,000 in expenses ONLY. If that $2,000 balloons to $2,500 or $3,000, this will not work. If you lack the discipline this strategy could easily put you in a worse position than without having tried it because credit card interest rates are substantially higher than mortgage interest rates. By now you’re probably wondering how you pay off your credit card each month if your paycheck went towards your mortgage?
3. Get a Home Equity Line Of Credit (HELOC). Simply put, this is how you’ll pay off your credit card in full every month in addition to your mortgage payment. You’ll want to find a HELOC that has a debit card rather than HELOC checks.
This part of the 101 Financial strategy does have some risk because HELOCs are variable rate loans. Theoretically, the interest rate associated with the HELOC can go from, say, 3% or 4% to double digits (higher than your current mortgage). Also, because a HELOC is a line of credit, banks can put a freeze on it, just as they did with many during the Great Recession (this actually happened to me). If the banks did it once, they can easily do it again.
You must meet a few requirements to qualify for a HELOC:
- Equity in your home of at least 15-20%
- A good credit score
- A good history of paying your bills, and
- A debt-to-income ratio somewhere between 43-50%
With a HELOC, you’ll be able to borrow approximately 80-90% of the equity in your home.
As things stand now, your new mortgage balance stands at $195,000. Your HELOC stands at $3,000 (the $2,000 of monthly expenses + $1,000 mortgage payment). Therefore, the total mortgage and HELOC debt is $198,000 (195,000+3,000)
4. Next, you’ll want to pay off the HELOC. Rather than putting your paycheck back into your mortgage like you did the previous month, you’ll divert your positive free cash flow ($2,000) into paying down the HELOC. Your next $5,000 paycheck will go as follows:
- $1,000 mortgage payment,
- $2,000 for expenses, and
- The $2,000 remainder goes towards the HELOC.
But there’s still a $1,000 balance on the HELOC! The $1,000 remaining on it will be paid from positive cash flows next month. At that point, you’d pay the mortgage payment, your expenses, and finish the HELOC payment and still have $1,000 remaining.
5. Repeat the process. If done correctly, you will have four payments of $5,000 applied throughout the year. Meaning, rather than paying $12,000 per year ($1,000 x 12), you’re paying off $20,000 ($5,000 x 4) off your loan.
The 101 Financial Review
As great as this sounds on paper, rarely do things work out this simple in real life. There are too many moving pieces and too many things both within and outside of your control where if one thing goes wrong, the entire plan goes up in smoke. If it goes up in smoke you’ll have to pay off debt with money you don’t have access to or with credit cards.
What happens if you incur a huge medical expense or a large unexpected financial event occurs? Or what if we go through another significant financial downturn where the banks decide to freeze your HELOC. Odds are, when “life” happens, this will have to be abandoned.
There are other ways to pay down your home faster and save interest. You might not pay it off as fast or save as much mortgage interest as through the 101 Financial Program, but there are far fewer risks and much less that can go wrong.
Pay more each month towards your principal. There’s always the option of paying more each month than your regular mortgage payment. This will simply require you to use extra cash flow for the month and apply it to the principal of your mortgage.
You’ll want to be careful though. Sometimes mortgage companies will automatically apply extra payments to the interest and not the principal. Always ensure that your extra payment will be “applied to principal” with your mortgage company.
Make bi-monthly mortgage payments. Ask your mortgage holder if you can make the same mortgage payment just every two weeks instead of once per month. This will pay more principal down quicker AND add an additional payment each year without you really “feeling the pinch” too much. Just make sure you structure this new payment method with your mortgage company so you can rest assured it’s working properly.
101 Financial Review Summary
I’ve seen a lot of people over the years who’ve sadly been suckered into paying thousands of dollars for some sort of “once in a lifetime” program. For their fee, 101 Financial promises to guide you in how to execute this system.
At the end of the day, it’s just a shell game. You move money around in a specific order to take advantage of how interest is accrued and leverage that fact as much as possible.
Can the 101 Financial Program work? Sure it can! But as I said, the moment something goes wrong, it’s not the company you just paid thousands of dollars to that is going to be left picking up the financial pieces of your life – it’s YOU!
So proceed with extreme caution, and consider additional principal payments or making bi-weekly mortgage payments first which will allow you greater flexibility if something works against you.
101 Financial Frequently Asked Questions
101 Financial is a company that claims will guide you how to reduce your mortgage (and other expensive revolving debt) faster by saving you interest expense. They offer this service for a fee, and also offer to teach you how to coach others in this process.
The 101 Financial concept involves moving money between your paycheck, your mortgage, your credit card, and your HELOC based on how interest accrues with each of those accounts. The concept is valid in theory, however, there are many things that can go wrong in the process such as unexpected large expenses, the inability to stick with a disciplined process, soaring HELOC interest rates, and banks potentially freezing your HELOC as they did in 2008/2009.