The question on everyone's mind at this point is: How could I possibly pay off my mortgage quicker without affecting my cash flow?
It's really very simple.
Most people think there are only two easy ways to pay off a mortgage quicker—by inheriting money or winning the lottery. But these are not things you can factor into your financial planning easily.
You could, of course, make extra payments on the mortgage, but if what we've written on these pages has sunk in at all, you know we are dead set against making extra payments.
Many people come into our office and say: ''I want to pay off my mortgage faster.''
We ask them why. Sometimes the person tells us: pride of ownership. Sometimes they tell us they want to be debt free; or, to get a better cash flow.
''Great answer,'' we say in reply, but we then note, ''We can show you how to accomplish that and never make a principal payment. Are you interested?''
We then run through a scenario for them, what we call a Total Cost Analysis:
Let's say that you have a property that is valued at $262,500. You have taken out a negam loan of $210,000. So you will not make any principal payments, but will pay primarily interest-only payments. Points are 1%; the index is 2.17%; the margin is 2.6%; and the life cap is 9.95%.
The monthly mortgage payment on the $210,000 loan is $675.
If we compare that to a 30-year fixed rate mortgage, which would have a rate of 5.75%, the monthly mortgage payment would come to $1,226. Hence, there is a spread in payment between $675 and $1,226 of $551.
The banks are going to be more than happy to take the $1,226. They will clear that money in a day and keep the funds you just gave them. This is why we never see a bank lodged in a tent, only in a beautiful building. There are no poor bankers, believe me. Your goal should be to become the bank. You want to maximize your return on investment.
The largest difference in the amount of monthly payments is $986.
Here's how you can become the bank. You use the $986 you have saved by taking the New Smart Loan™ or the option ARM
rather than the 15-year fixed, and deposit it in a compounding mortgage savings account, earning an average return of 5%.
We discussed a question earlier: How do you repay a mortgage quicker without it affecting your cash flow?
Here's how it's done:
If you were in a 15-year fixed mortgage, you would pay $1,600 monthly. But if you took the smart loan at $675 a month and used the $985 difference wisely, you could pay off the mortgage in 12 years—three years less than if you paid it all off in the course of the 15-year fixed rate mortgage. You can then decide to pay off the mortgage in 12 years, or keep that money earning compounded interest at 5% for the next three years—an extra $34,000.
What have you become? You have become the bank. You've done what the bank does. You've just loaned your money to yourself.
You certainly don't want to give the bank the chance to lend your own money back to you.
If you have access to that $900, isn't it better in your pocket when you take into account what was said earlier?
If you had $1 million on the table, which is the equivalent to having no mortgage on your property, if you had that equity sitting in your property and you could not convert that into cash, what's going to happen to you? You are going to starve to death. It's plain and simple.
And whether you believe it or not, there are many people out there that are doing the same thing. They live in a $1 million house and they are starving to death because they did not plan; because they bought into the nonsense that they have to have a debt-free property; because it makes them feel good to be free of debt.
And don't think it isn't that basic. Go two days without eating. You're not going to think of anything else but whether you have money to buy food. That's why it's very important to convert equity to cash.
If you put money into an interest-bearing account as opposed to in a home, you can pay off a 15-year mortgage without making extra mortgage payments.
This is one reason why the negam mortgage is the best available for new real estate investors: it gives them the most flexibility and the greatest management of cash. And that is one thing that no one talks about: the management of cash. It should be discussed, widely, loudly, often, for cash is what enables us to buy commodities—those things that we feel are necessities.
If someone says, ''I want to lock into a 15-year, or a 30-year mortgage'' or, ''I want to pay off my mortgage,'' what they are doing effectively is creating a void in their cash management. They are essentially making their cash position worse instead of better.
If the monthly payment on a 30-year loan is $1,200 a month while the minimum payment on a negam mortgage is half that, $600, there is nothing preventing the borrower from making the $1,200 payment. There is just no obligation to make the $1,200 payment. The only obligation is to make the $600 payment.
So if you are paying attention to your cash position, you will want to maximize the use of your money by setting up your own savings account with a bank, instead of giving that equity component back to the bank. You can either set up a Certificate of Deposit (CD) or make payments to a Roth IRA Account; you can buy more real estate, take out insurance policies, or buy annuities.
By making smaller mortgage payments, you are empowering yourself to use your own money in a more intelligent manner, as opposed to turning it over to the bank in principal payments. When you give it back to the bank, it has these options—to lend that money to someone else or—worse yet—to lend it back to you.
The most important thing you need for financing property is leverage. The mortgage is the key to that. And to have a properly structured mortgage, you need a payment strategy. To develop that strategy, you must ask yourself certain questions:
Let's talk about the positive cash flow that comes from a negam mortgage.
Here are the great advantages of this type of mortgage: The money comes to you. You pay the bank. But you pay the bank very little because you are involved in either a negam mortgage or an interest-only one.
Having a positive cash flow gives you a couple of great benefits: you pay less money to the bank, which means lower debt-to-income ratios, which in turn means you can purchase more investment property.
What are the advantages of a negam loan over an interest-only loan?
The negam option enables you to manage the best possible mortgage payment or the lowest possible mortgage payment because you are making what is considered a minimum payment. By using the negam mortgage instrument you would be able to pay off your mortgage in 12 years as opposed to 15 years.
So in other words you would actually have more money at the end of that period of time than you would if you were to use a conventional mortgage.
Can the new investor use a New Smart Loan™ program (including the negam option) to do real estate transactions?
The answer is yes in many instances, primarily for residential homes: single-family homes, condos, and town houses. The program can also be used on a modified version of the multifamily home and for apartment buildings.
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