George Kamel - Why This Viral Mortgage Hack Is a Terrible Idea

Episode Date: September 18, 2023

Today, I react to one of the most insane viral videos that I've ever seen. More insane than the new Crispy Chicken Crisper Combos at Chilis. So tie that napkin around your neck and get your moist towelettes ready, because we’re about to dig in to this video to understand what exactly it's proposing, why it’s actually a terrible idea, and what you should do instead to pay off your mortgage faster.  Links: Ramsey Real Estate Hub Mortgage Payoff Calculator Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't try this mortgage check, mortgage check, mortgage check, mortgage check, mortgage, don't try this mortgage check, mortgage check, cringe Instagram rules. Don't try this mortgage, mortgage, mortgage, mortgage, mortgage, I'm sorry, or you're welcome, and I don't have any regrets, but I also have a little bit of shame. But the reason why we're talking about not trying this mortgage hack and cringy Instagram reels and barbecue sauce,

there's really no reason to talk about barbecue sauce, although I'd love to do an episode on that. Oh, barbecue. We're talking about this velocity banking hack from an Instagram reel that went viral, where this financial literacy advocate, and I put that in very strong air quotes, explains how she used credit cards to pay off her mortgage faster. And no less than 4 million people sent this to me asking, what is she saying?

Is this true? Have you seen this? Is this crazy? And I'm going to get to all of those answers. And I get why you would be asking, if there's some secret way to pay off your mortgage faster, I want to know too. So I watched it, and this is one of the most insane videos that I've ever seen. more insane than the new crispy chicken crisper combos at Chili's.

Hashtag not sponsored. But open to it, Chili's a bold strategy, cotton. Let's see if it pays off for them. So tie that napkin around your neck and get your moist towelettes ready because this one's juicy, juicier than a baby back rib, and we're about to dig into it to understand exactly what she's talking about, why it's a terrible idea, and what you should do instead to pay off your mortgage faster. But first, take those little riblets of yours and click the like and subscribe button and share this video with the last person you went to Chili's with.

And hey, no shame if you went alone. I prefer to eat my baby back solo. I get it. Things get messy. And what happens at Chili's stays at Chili's. Right, Kevin, behind the bar? Those $1 margaritas will get you. So let's take a look at this video that everyone's been sending me and break it down to see if we can make sense of this convoluted payoff scheme.

So I had a credit card. Credit card is the only account that they give you money off GP. Every other account you opened up, you had to put your own money in it, right? So my Amex card, my favorite card, had a balance or a limit of $18,000, okay? My bills around that time was roughly $3,000. My cash flow around that time was about $5,000 a month. Okay, let's pause right here.

Don't love that she has a favorite credit card, but all that aside, she's saying her monthly income is $5,000, her monthly expenses are $3,000. This is about the only thing good in this video so far, because she's living on less than she makes. That's great. That means you don't need to use debt to pay your bills.

All right, let's keep going. So I took $12,000 off my credit card and applied it to the principal of my mortgage. Now, everybody who has a mortgage, no, you cannot pay it with a credit card. So what you need to do, you need to write a check to yourself, okay? $12,000 on my principal of my mortgage. I still pay all of the rest of my bills, include my mortgage again, $3,000 on my credit card, okay? So now my credit card is about $15,000. Damn near maxed out, right?

I'm going to put all of my positive cash flow on my credit card. All $5,000 I get that month goes on the credit card. So five times three is $15,000. I don't paid off that initial $15,000 in three months. So now $12,000 of the principal of my mortgage is paid off in three months, a fraction of the time. What the bank going to do? Increase your credit limit. And then what you're going to do?

Do it again. But you have to have that discipline. You got to make sure all of your positive cash flow go back. on your credit card. Okay, that was like listening to someone read the ingredients on the back of a slim gym. It makes my brain hurt, and it makes me question everything in life. What even is mechanically separated chicken? Separated from what?

And why do you need a mechanic to do it? This is a concept called velocity banking, and it's a strategy where you use a line of credit to pay off debts faster, aka using debt to pay off debt. And if you're thinking, that doesn't make sense, you'd be what's known as right. Now, why would someone do this? Well, the whole goal behind Velocity banking is to get out of debt faster and to decrease the amount of interest you pay over time. So good intentions, bad methodology.

Love that you're trying to pay off debt, but you need to do it with your own money. So let's walk through exactly what she was telling you to do. First, she used her credit card to write a check to herself for $12,000 and applied that to the principal of the mortgage. Side note, most credit cards won't allow you to do this. And if they do, there's a huge fee in order to do it. According to the FDIC, the transaction fee for these convenience checks is typically 5%, which means she likely had to pay around 600 bucks extra just to do this. And if there was a cash advance fee, the interest is triggered immediately.

Beyond that, no credit cards are going to give you a 0% APR on balance transfers, purchases, and cash advances, which means that cash advance likely cost you another fee and can trigger interest immediately. Now with the average credit card interest at 22%, that sucks. That's a lot of money wasted trying to play a really stupid game. Not to mention, this balance transfer game she's playing is going to trigger another 3 to 5% fee every time she does it. So then she used her credit card again to pay all the rest of her bills for the month, including her mortgage payment, which apparently totals $3,000. So she's got a balance of $15,000 on this card.

Then she puts all of her cash flow. I don't know why you just don't call it income. Is that just a sexier word? It's my cash flow, baby. $5,000 a month toward the credit card balance. She claims after three months, the initial $15,000, is paid off. Math here doesn't add up. Remember, her monthly bills are $3,000. So $5,000 of income every month, she could really only put $2,000 a month toward paying off the credit card balance, because she

has bills to pay every single month, but she still has debt to pay from months past. That means the card's not going to get paid off in three months. It would be closer to like eight months. So that's eight months and a whole lot of fees and interest just to pay $12,000 on your mortgage principle. Now, let's take a look at what would happen if she had just paid extra on her mortgage every month without playing the stupid credit card game. If she really has $5,000, $1,000,000, 5,000 of income and 3,000 of expenses, that leaves 2,000 a month she can throw onto the principal of her mortgage, extra. 2,000 a month times eight months is $16,000 extra on the principal.

So she could have actually paid off $4,000 more of her mortgage principle in those eight months by simply making extra payments without a credit card and without more debt and without more risk. So this just doesn't work. And even if it did, why add all this complication or risk to paying off your mortgage? If you have the cash, just use that to make extra payments. That begs the question. But why?

Why would you do that? Why would you do any of that? Well, part of the appeal of crazy tactics like this is that people are always looking for a shortcut, even if that shortcut is super complicated. Another thing that people seem to love is this concept of OPM, other people's money. And the thought behind it is,

why use your own money when you could use other people's money? Well, here's why other people's money always ends up requiring YOM, your own money. with interest. Yikes. Which means you're going to be paying a whole lot more in the long run and putting yourself at risk and locking up your future cash flow, aka your income. And if you're not careful, debt shuffling schemes like this can get you in a whole lot of

trouble. And the people pushing this stuff will say things like, it's not for everyone, you've got to be really disciplined, most people can't do this. Yeah, real convenient. Now you can dodge the blame when your advice doesn't work. No. Now hear me say, financial literacy is super important. But it's not about gaming the credit card system.

It's about understanding how money. works so you can make good financial decisions and build wealth over time. And any financial literacy advocate teaching you that you need to use debt to build wealth is not someone you should be listening to. Bottom line, this hack is complicated, risky, and doesn't make any mathematical sense. Kind of like common core math. I'm sorry, teachers, you deserve better. Better pay and better math. I'm for real. I'm for real. And by the way, I call BS on her entire story. I think she did it for a bunch of clicks and views, and I don't think any of this is actually possible in real life. That's my take.

Hey, and if she wants to come at me, come at me with some receipts, okay? I don't want to see the receipts. Show me the money! Now, don't get me wrong, paying off your mortgage early is absolutely a great financial move. This is just the wrong way to do it. And I'll tell you that, as someone who actually paid off his house early. My wife and I did this back in 2021, and here's how we did it. It was real simple and didn't involve any credit cards or debt.

We just made extra payments toward the principal every single month. But for some reason, nobody wants to see that TikTok video. Hey guys, momentum banking mortgage hack. Here's what you do. Make extra principal payments until the mortgage is paid off. That's it. That's it. That's the hack. Follow for more financial tips. I'm a viral sensation. So here's our story. We paid off our 15-year mortgage almost 13 years early. My mortgage didn't even have time to grow up into a toddler. Okay? It didn't even know English. It did know fluent Arabic, though. And you don't have to bust out the Pythagorean theorem here.

Keep it simple. Just make extra payments toward the principal. Here's an example. Let's say you have a $220,000, 30-year mortgage with a 4% interest rate. Your monthly payment would be $1,050. Making one extra payment every quarter will get your mortgage paid off 11 years early and save you more than $65,000 in interest. That's huge.

You know how any baby-back ribs you could buy with that kind of dough? Too many. Don't do it. I care about your health. So all you need to do is make extra payments the old-fashioned way. With your money, not other people's. money. And if you don't have the margin in your budget to throw extra at the principal, get creative here. Pick up a side hustle, eat out less, cut some expenses, whatever it takes to throw extra money

at your principal. If you've got credit cards, car loans, student loan debt, pay that junk off to free up the income to throw your mortgage instead of giving it to lenders. But before you start making extra payments, here are three things you've got to watch out for. First, check with your mortgage company before you send them extra money. Some companies only accept extra payments at specific times or they might charge prepayment penalties. You don't want that. Second, remember to have your extra payment applied to the principal balance, not to the following month's payment. Now, if you make your payments with the mortgage company app or website, this will be super easy, and it's probably the default option. If you make your payments the old-fashioned way, through snail mail, just include a note with your payment, telling them to apply it to the principal balance,

before you press your signet ring into the wax on your parchment and send out your carrier pigeon. Third, don't pay for one of these mortgage accelerator programs, okay? These are a scam and a complete waste of money. You can accomplish the same goal all by yourself. You can accelerate that mortgage payoff just by making extra payments. Another way to get rid of your mortgage sooner is to refinance a longer-term mortgage like a 30-year into a shorter 15-year loan. Now, to be fair, interest rates have gone up quite a bit in the last few years,

so this won't make sense for most people. But here's a little trick. Pretend you refinanced. That's right. Pretend. Here's what I mean. If you already have a low interest rate, skip the closing cost of a refi and simply pay your 30-year mortgage like it's a 15-year mortgage. Heck, pay it off like it's a 10-year mortgage or a five-year mortgage.

And here's what we found. The average millionaire pays off their mortgage in 10.2 years. Sure, this is going to take some discipline, but it will be so worth it when you make that last and final payment. So skip all the shuffling around borrowed money and all the fees, a hassle, and the risk, and just pay off your mortgage early with your own dang money. And before you jump into the comments like, why would you pay off your low-interest mortgage? How dumb are you? Cimmer down, Sally.

Let me ask you a question. Why are you so scared to pay off your mortgage? Hmm? Afraid your net worth might go up a little? Afraid you might build too much wealth? Afraid you won't know what to do with no payments? No, no, no. You do you.

It's fun. All right, I hope this video was helpful and maybe even slightly entertaining. If you want more info on mortgages, check out the Ramsey Real Estate Hub with tons of tools and resources to help you make smart decisions about home buying and mortgages. I'll drop a link in the description below so you can check that out. And if you want to see how quickly you can pay off your mortgage, we've got a free calculator, to help you do that. That link will be down in the description as well. As always, make sure to subscribe to this channel, like this video, and share it with all your

friends and family so they too can have that baby back rib song stuck in their head the rest of the day. Thanks for watching. We'll see you next time. Barbecue sauce. Barbecue sauce. Barbecue sauce.