A good friend of mine asked me my thoughts on the “101 Financial Program”. He described it as some new way of paying down your debts much faster and saving interest expenses along the way. I was curious so I did a little digging.
I found out the 101 Financial concept has been around a while in various forms. They’re typically referred to as “mortgage accelerator programs”, and they’ve become more and more popular in the US.
But do they work? And if so . . . how do they work?
The short answer is yes, a mortgage accelerator program—like the general concept 101 Financial presents—can actually work. Unfortunately, they are fairly complicated to implement. They also require a net positive monthly free cash flow and intense spending discipline. Without those things, there’s a high probability you’ll end up worse off!
The goal of a mortgage accelerator program is to save a lot of interest expenses on your mortgage by paying off your mortgage faster and in a certain order. It sounds great in theory and it’s certainly a great goal to have! But it’s not quite that simple.
I’ll walk you through an example and explain the basic 101 Financial mortgage accelerator concept. You can decide for yourself if it will work for your situation.
How The Mortgage Accelerator Program Works
Let’s assume you have a $300,000 house and owe $200,000 on your mortgage. Your mortgage payment is $1,200 per month and you net $5,000 per month in income. This leaves you $3,800 to pay for food, utilities, and other living expenses which typically run $2,000 a month, ultimately leaving you free positive cash flow of $1,800 per month.
Step #1: You MUST have positive cash flow. In other words, your monthly income must be greater than your monthly expenses. If you don’t have positive free cash flow, STOP READING! The more positive cash flow you have, the more interest you can save and the faster you can pay off your home.
Step #2: Deposit your paycheck into your mortgage. You’re not reading that incorrectly; you will actually deposit your entire $5,000 paycheck via direct deposit onto 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 the $195,000 amount and not $200,000. So you’re already saving money, but the big question is how do you pay your bills?
Step #3: Get a credit card and put all of your additional monthly expenses ($2,000) on it. Be very careful in selecting this credit card because they all have different perks and benefits.
If you travel a lot, get a card with travel perks. If you eat out a lot, get the card with the best dining perks. If you’re like me and just want the most cash back, check out the Capital One Quicksilver card as it’s got some great benefits. Make sure your credit card has a grace period of 45 days.
Step #4: You must pay off your credit card every month or the system falls apart (we will get into the logistics of that in Step 5). Credit card interest is not deductible (your mortgage interest may be if you itemize) and is substantially higher than your mortgage interest.
This is really where the rubber meets the road. If you lack the discipline to keep your spending under control and stay cash flow positive the wheels will quickly come off the bus and put you in a worse position than if you hadn’t attempted the mortgage accelerator program in the first place.
Sit tight however, because we’re not even at the complicated part yet . . . how do you pay off your credit card if your paycheck just went to pay down your mortgage?
Step #5: Get a Home Equity Line of Credit (HELOC) with debit card privileges. Simply put, this is how you’ll pay off your credit card in full and your mortgage payment for Month 1.
There are risks associated with the HELOC. HELOCs are variable rate loans so the interest rate associated with the HELOC can go from 4% or 5% to double digits (higher than your current mortgage).
Also, because a HELOC is a line of credit, banks have the ability to put a freeze on it, just as they did to me during the Great Recession in 2008.
In order to qualify for a HELOC, a few requirements will need to be met.
Generally, you will already need equity in your home of around 15-20%, good credit, 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.
Here’s Where Your Mortgage Accelerator Program Stands…
As things stand now, your new mortgage balance stands at $195,000. Your HELOC stands at $3,200 (the $2,000 of monthly expenses + $1,200 mortgage payment). Therefore, the total of mortgage debt and HELOC is $198,200 (195,000+3,200)
Step #6: Next, you’ll want to pay off the HELOC. Rather than putting your paycheck back into your mortgage like you did in Month 1, you’ll divert your positive cash flows ($1,800) for Month 2 into paying down the HELOC.
The $5,000 check from February will go as follows: $1,200 mortgage payment (not HELOC debit card), $2,000 for expenses (still put on the credit card, but paycheck from Month 2 will pay it off), and the $1,800 remainder goes towards the HELOC. Note: HELOC won’t be fully paid off until Month 3.
But there’s still a $1,400 balance on the HELOC! The $1,400 remaining on it will be paid from positive cash flows from Month 3. Therefore, for Month 3, the $5,000 check breakdown is as follow:
- Pay $1,200 monthly mortgage from cashflow, not HELOC debit card.
- Pay $2,000 of additional expenses on the credit card (but will still be paid from Month 3 paycheck.
- Finish paying off $1,400 on HELOC.
- You will have $400 left over at the end of Month 3.
Step #7: REPEAT! This way, if done correctly, you will have 4 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) of your loan.
As great as this sounds on paper, rarely do things work out this simple in real life.
There are just way too many moving pieces and too many things both inside and outside of your control where if one thing goes wrong, the entire plan goes up in smoke, and then 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 major financial downturn where the banks decide to freeze your HELOC?
Odds are, when “life” happens, this will have to be abandoned.
The good news is that there are other ways to pay down your home faster and save interest. Maybe not quite as much, but there’s far fewer hoops to jump through.
Tip #1: Pay extra! 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.
Tip #2: Refinance to a shorter loan. Rather than deal with the hassle of using a HELOC to pay off your new credit card and mortgage payment, simply refinance your loan to a shorter length.
This way, you’re accomplishing all that you want with the extra cash flow you have, which is paying off your home faster and saving money on interest.
The Mortgage Accelerator Program In Summary
As you can see, there are things outside of your control that make a mortgage accelerator program difficult to implement. Don’t bother trying this if you can’t stick to a budget and don’t have free positive cash flow each month.
The 101 Financial program costs nearly $4,000. They also want you to be a trainer, helping other people pay off their debts early which has an additional expense.
There’s really no need to spend that $4,000 and certainly not to become a trainer. That $4,000 would be better off paying down your debt than learning the nuances of the system I just broadly described.
Can a mortgage accelerator program like 101 Financial work? Sure it can! But your ultimate financial benefits will vary greatly from the glowing testimonials they provide in their sales pitch.
If things go against you (rates rise on your HELOC, you can’t stick to a budget, etc.) it’s not the company you just paid thousands of dollars to that is going to be left picking up the financial pieces . . . it’s YOU!
In order to find out which mortgage payoff strategy is best for you, make sure you meet with a fee-only fiduciary financial advisor to see if paying off your mortgage faster makes sense for your financial plan.
Yes, but there are many things that can happen that are entirely out of your control which can derail the program.
Mortgage accelerator programs have been around for a long time, with different companies championing the concept. The gist of the program is paying down your home faster while saving mortgage interest. In theory, this makes sense. Although, there are far easier ways to go about executing this.
NO! Mortgage accelerator programs tend to be very expensive and are far too complicated for the average person to comprehend. There are better – and less expensive – ways to go about doing this, such as, refinancing to a shorter-term loan and simply paying off a larger amount of principal to your current loan.