What is a home equity line of credit?
A home equity line of credit (or HELOC) is a bank-offered instrument that allows you to withdraw money at any time for any purpose. Each withdrawal increases the amount to be returned to the bank. You can always make payments to the bank that reduce the balance.
Think of it as a great credit card! With a credit card, you can shop directly from a retailer like Walmart. You can also get “cash credits” with a credit card. But these cash advances usually have high fees and a higher interest rate.
A HELOC is a giant credit card that only accepts cash advances… BUT… WITHOUT FEES OR HIGH INTEREST RATES!
Credit cards are based on your overall credit profile, while HELOCs are backed by your home’s equity. So they are very easy to get.
Our bills, expenses and income…
Monthly income = $6000
$10,000 car loan ($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 $2,000
Step 1: Get a HELOC from the bank
The first thing we did was we went to the bank and got a HELOC with a limit of $50,000.
Although the limit was $50,000, the balance due at this point 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 for the HELOC…BUT our cash flow has gone from $2,000 to $2,700. That’s because we no longer have to pay our car registrations, student loans, or credit card bills.
Step 3: Pay the HELOC Off
To cash out the HELOC, we 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 that? When we got paid, we immediately took 100% of our paycheck and deposited it with the HELOC. This reduced the account balance by $6000.
To pay all of our bills and living expenses, we simply drew the amount from the HELOC and paid. This amounted to about $3,400.
That means the HELOC was reduced by $2,600 every 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 mortgage. We took out $20,000 at a time for the mortgage.
All debts including our mortgage were paid off in 4 years!
In the traditional way it would have taken us 20 years.
In summary, your home is your greatest asset. As long as you live in the house, the equity is dormant. It’s no use to you.
Yes, it looks and feels good to know that your home is worth more than what you owe. But why not use it to your advantage!