Avoid This Mortgage Interest Trap with Sam Kwak

Sam Kwak grew up in poverty after arriving in the country as an illegal immigrant. As an adult, Sam drove Uber until he discovered real estate. Sam is now a serial entrepreneur, real estate investor, and certified credit counselor who assists people in making or saving money in real estate. Sam and his brother Daniel began their real estate business in 2015, quickly acquiring over 75 rental units in less than a year. During his real estate journey, he discovered a hidden strategy that allows homeowners to pay off their mortgages in as little as 5-7 years, saving them up to 70% on mortgage interest. He now assists people in repaying their mortgages and purchasing rental properties as an investment vehicle.

Sam and his brother currently run an online financial education company, along with a Youtube channel (The Kwak Brothers) that currently has around 200k subscribers.

Sam Kwak has appeared on several podcasts, including Dropping Bombs with Brad Lea, Creative Real Estate Podcast, A Millennial’s Guide to Real Estate Investing, and others. He is also a co-author of 0 to 75 Units in 1 Year. Sam is the founder of Miotti Partners Capital and a keynote speaker at Real Estate Domination 2021.

Episode Highlights Here:

Sam Kwak:

Here’s the argument that I get all the time as well, Sam, why would you want to pay off your mortgage when you know the interest rate is super low inflation set at 7.5%. A lot of this thinking comes from bond investing during a high inflation environment. When you’re locked in with a 10-year bond, you’re kind of out of luck, because inflation kind of chews what you’re supposed to earn.

Brett Swarts:

What’s the number one secret, Sam, to avoiding that mortgage interest trap and or avoiding these never-ending interest payments from the banks.

Sam Kwak:

So I got into this thing a while ago. You know, you and I both, like we go to seminars and conferences, and we just learned from a lot of people who are the best. One thing that I’m always curious about is how the banking system works, right? The United States and pretty much any country that has a central banking system follow a very similar pattern. But I got really fascinated with banks, because by and large, banks have a lot of power, not just politically, and financially, but they have a lot of power. so I began studying, like, how does the bank make their money, especially you look at back in the 80s. Like, the late 70s, interest rates were like 16%, right? You got a mortgage, you’re paying 16% to 17%, mortgage, CDs and savings rates were like 12%. Compare that to like, now these days where yeah, the Fed just raise rates, but like, still interest rates pretty low, like three, four or 5%, it’s still lower than the 80s. So my question started with like, how are the banks still making money, in fact, base or make actually making more money than ever before? I would argue in the history of the last 100 years. So when I start with the statement of like, you should pay off your mortgage, a lot of people call me Dave Ramsey and all that. I’m like, No, not necessarily. Here’s the argument that I get all the time as well, Sam, like, why would you want to pay off your mortgage when you know, the interest rate is super low inflation set at 7.5%. A lot of this thinking comes from bond investing during a high inflation environment when you’re locked in with a 10-year bond like you’re kind of out of luck because inflation kind of chews what you’re supposed to earn. So that’s kind of the thought process from that. the other argument I get all the time, as was Sam, like, when I take any extra money that you’re throwing in your mortgage and invested into S&P 500 Dow Jones was like last year, we got a nominal return of eight to 12%. All those are valid and true like there’s definitely truth in that. But one thing that they miss all the time, is that they come up with that argument based on technical readout, but not necessarily the social-economic changes that we’ve experienced in the last 40 years. What I mean by that is, if you look at the social-economic patterns, how often we move, and what are some of the for those that are married, like, what are the gender roles or like now, how does that ultimately translate to fiscal differences between 40 years ago now, so for those that been around for a while you’ve lived through the 80s, and maybe even the 90s, the days of you working for a company for 40 years and retiring and you’re expecting the company takes care of you is long over? That’s like the 50s and 60s thinking, right? I think Goldman Sachs is one of the companies that kind of broke that. So now these days, I think there’s an HR survey that was done a couple of years ago that the average person changes seven careers in their lifetime. Which is insane, right? You know, a long, long time ago, we used to do this thing where you stuck with that one career, you mastered it, you got really good at it. then like that was the pride and joy of your life. But now these days, especially like in 2022, and 2023. The characteristics of success, I think now are how well you adapt and how well you change. Same thing with this fact that the US Census Bureau says that the average US adult moves 11.7 times their lifetime. So if you extrapolate that data to where if you live to be about 80 years old, you would essentially move or so every seven to eight years. So here’s the problem when it comes to your mortgage and how that all kind of fits together.

Sam Kwak:

If you were able to look at mortgage lending in the mortgage lending industry almost 40 to 50 years ago, you weren’t really seeing a whole lot of people borrow on a 30-year amortization. It was often 5 years, 10 years, 15 years max. People thought back in the day, that 15 was a long time. So most people borrowed using five-year amortization, there was like 50% down. It was characterized by a big downpayment. Short amortization gets paid off as soon as possible. It wasn’t until the 70s and 80s when some of these savings and loans established mints now, which are Fannie Mae and Freddie Mac, started to come up with securitizing mortgages and offering refinances making the amortization longer. Now, in some places in California, you got 40-year amortizations, which is insane to me. But here’s what I’m getting at. I just laid out all the ingredients to make a sandwich here. I’m gonna put the sandwich together. So if I were to explain this fact of the average person moving every 7 to 10 years or 7, 8 years, I would say. Most people like 90% of today’s lenders borrow on a 30-year amortization. If you look at a 30-year amortization chart, the vast majority of the interest that you pay happens where? The first 10 years, right? We call it the front-loaded interest zone. You don’t have to believe me, just go look at any mortgage calculation. You’ll notice that the bulk of the interest you do pay happens in 10 years, most people think it happens linearly, meaning they pay an equal amount of interest every year, which is not true, you actually pay a substantial amount of interest the first 5 to 10 years in any given mortgages. So try this, 7 to 10 years you move, the first 10 years you pay most mostly interest. What is the combination of that? Well, what it looks like is if you live in that you buy a house, you live in it, you’ve been paying mostly interest. In the seventh year, you decide to list your home, sell it, get another house, get a brand new mortgage, a brand new 30-year mortgage, guess what you just did? You made it to that critical point where you’re almost out of the interest heavy point on your mortgage. But now you cycled all the way back to the beginning where the vast majority of your new interest on your mortgage payment is now yet again, interest.

Brett Swarts:

It’s like playing Monopoly, and you just went all the way around, and you got Boardwalk and Park Place and you’re like sitting pretty good. All of a sudden, you’re like, you go to jail and you lose your houses that you have on there.

Sam Kwak:

So most people buy a home, get a mortgage, sit on it for seven years make their payments. They’ve been focusing a lot of money over for the interest and then they sell a home, get a new house start all over. They do this every 7 to 10 years. Now, if it isn’t that, if you’re lucky to be around the same place forever. What most people did the last few years, especially when the Fed dropped the rate down to zero. They went out and got a refinance loan. Now, if you look at the situation, most people have spent already three to five years paying down their mortgage. Then 2020 came, and we had a massive Refi boom. But the trap there also is if you do decide to refinance into another 30-year mortgage, you’re starting that process all over back to square one albite that you have a lower interest rate and a smaller payment. But you just push back. You know you’re in this that you’re in that first tenure of your mortgage amortization schedule all over again.

Brett Swarts:

If I hear, Sam, you said you got to understand what’s actually costing me so you define like really what’s happening here. Don’t be lured by what you think inflation is going to do for you or that your payment is just X, Y, or Z and it’s really you got a heavy interest.

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About Sam Kwak

Sam and his brother currently run an online financial education company, along with a Youtube channel (The Kwak Brothers) that currently has around 200k subscribers.

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