How to Payoff your Loan in 5-7 years, is that possible?

Common perception has it that the way to get the best deal is that you should get the lowest rate on your 30 year fixed loan. The problem is the darn loan takes 30 years to payoff if you make the min monthly payment for 30 years!

The advantage of 30 year fixed loans are that they have predictable fixed rate, but the downside is the interest is typically calculated month to month so any early payment or payments prior to the start of the new month (usually the 1st of the next month) do not lower your daily interest cost. This causes you to pay compound interest at the expense of your peace of mind, peace of mind being the fact that its a "fixed rate." 

This interest calculation method results in a very slow pay down of your balance and why your average 30 year fixed loans end up only about 20% lower relative to your starting balance after 10 years of payments (assumes borrower makes just the min payment for 10 years straight).

I work with a lot of refinance and new purchase clients and when they say they got their loan 10 years ago at X rate their balances typically are 20% lower so this has been proven many times in the past years.

The daily calculation or simple interest calculation on LOC's and HELOC's make it so that when you pay a payment it lower's your balance immediately and tomorrow's portion of interest (rate/365) is applied to the new lower balance right away instead of waiting till the next month start date/reset date.

This allows your payments to chip away at your principal balance faster even if you pay once per month but, obviously to exponentially speed it up you can use your LOC/HELOC as a checking account to park all your short term savings or make multiple payments per month. This is strategy is the one you'll see guys like Clayton Morris from Memphis invest talk about on his youtube channel. There are also other prominent investors and finance people who talk about this on how to payoff your mortgage in 5-7 years instead of 30 as an example. Its definitely possible and this strategy takes the "focus," from rate and getting the lowest rate to how much the interest is calculated or the "volume of interest." The strategy can work with higher rates too so much so that a higher rate while utilizing this strategy could pay substantially less interest than a comparable fixed rate mortgage loan with a so called "lowest rate."

This is why I ask my clients if they want the lowest rate or the lowest cost of financing their home?

I like this question since it challenges the stereotypes of financial beliefs that lower rate is always the best. 

It is the best, but not the best for you in most cases.

Its the best for the bank as it keeps the balance high as long as possible and keeps the volume of interest going to the bank high for as long as possible while deceptively its done under the marketing guise of lower rates.

Let me know what you think of this strategy or if you have any questions. I'd love to start a discussion.