What Is A Home Equity Line of Credit?
A Home Equity Line of Credit (or HELOC) is an instrument offered by the bank that will allow you to withdraw funds at any time for any purpose. Each withdrawal increases the amount due back to the bank. You can make payments to the bank at anytime that will bring the balance down.
Think of it as a big credit card! With a credit card you can make direct purchases with a merchant, like Walmart. With a credit card, you can also get “cash advances.” But these cash advances usually have high fees and a higher interest rate.
A HELOC is a huge credit card that only allows for cash advances… BUT… WITHOUT THE FEES OR HIGH INTEREST RATES!
Credit cards are based on your overall credit profile while HELOCs are secured by the equity in your home. So they are very easy to get.
Our Bills, Expenses, and Income…
Monthly Income = $6000
- Car Loan $10,000 ($350 Monthly)
- Student Loan $3,000 ($90 Monthly)
- Credit Cards $7,500 ($250 Monthly)
- Medical $18,000 ($400 Monthly)
- Home Mortgage $115,000 ($2,000 Monthly)
- Other Expenses ($1,000 Monthly)
So based on our budget, our estimated cash flow was
Step 1: Go Get A HELOC From The Bank
The first thing that we did is we went to the bank and got a HELOC with a $50,000 limit.
Although the limit was for $50,000 the balance due at the time is $0. Remember, it’s like a credit card. So you don’t owe anything until you actually use it.
Step 2: Withdraw And Pay Off Debt
Next,we withdrew about $20,500, and paid off our Car, Student Loan, and Credit Cards.
At this point, we owe $20,500 on the HELOC… BUT our cash flow has increased from $2,000 to $2,700. That’s because we no longer have to pay our car note, student loan, or credit card bills.
Step 3: Pay the HELOC Off
To pay the HELOC off, we just simply used the HELOC as our new checking account.
Let me repeat… we stopped using our regular checking account, and just started using the HELOC as our new checking account.
How did we do this? When we got paid, we immediately took 100% of our paycheck and deposited it against the HELOC. This brought the balance down by $6000.
To pay for all of our bills and living expenses we just withdrew the amount from the HELOC, and paid them. This amounted to approximately $3,400.
This means that the HELOC was reduced by $2,600 each month.
At this rate, the HELOC was paid off in 8 months (20,500 divided by $2,600)
Step 4: Repeat
We repeated the process for the Medical Bill and the Mortgage. For the Mortgage, we withdrew $20,000 at a time.
All debt, including our Mortgage, was paid off in 4 years!
Doing it the traditional way, it would have take us 20 Years.
In summary, your home is your biggest asset. So long as you are living in the house, the equity is “dormant.” It doesn’t benefit you.
Yes, it looks and feels good to know that your home is worth more that what you owe. But why not use it to your advantage!