My wife and I have been “homebuyers” in our current residence for at least 7 years. Note that I said “home buyer” and not “home owner.” There is a common misconception that when you take out a mortgage, you immediately “own” the home.
Assuming you have a 30-year mortgage, you are actually simply buying the house over a 30-year period. The bank is the true owner of the property. If you don’t believe me, try missing a few mortgage payments and see what happens.
3 months ago we paid off our 30 year mortgage (in 7 years or 23 years early). Now we are true homeowners. In this article I will show you step by step how we were able to achieve this. With our existing income and without additional debt.
Let’s talk about “equity”. Equity, or appreciation, is the difference between the value of your home and what you owe the bank. So if you owe $100,000 and your house is worth $300,000, you have $200,000 of equity in your house.
We had about $250,000 equity on our house. We owed the bank $115,000 and our house was worth $367,000.
That $250,000 is dormant. That said, it looks good, but it hasn’t done anything for us.
Home Equity Line of Credit (HELOC)
So the first thing we did was tap into that equity. We went to the bank and took out a home equity line of credit for $50,000.
What is an equity line? A home equity line of credit, also known as a HELOC, is a liquid line that you can withdraw money from at any time for any purpose. It’s like a giant credit card.
Even though the HELOC had a $50,000 limit, the amount we owed on it was $0 when we took it out. This is because, similar to a credit card, you don’t owe anything until you actually use it.
Use HELOC to pay off a mortgage
Immediately after receiving the HELOC, we withdrew $20,000 and applied it to our mortgage (additional principal payment).
So at this point we have $20,000 due on the HELOC, but our mortgage has been paid off by $20,000 (from $115,000 to $95,000).
Use HELOC as a “new” checking account
Before I continue, let me mention that after we used the $20,000 to pay off our mortgage, we still had the same $115,000 in debt ($20,000 for HELOC and $95,000 for mortgages).
To cash out the HELOC, we simply used it as our new checking account. When we got paid, we took 100% of our paychecks and applied them to the HELOC.
Now you may be wondering, “How did we pay our bills when all our money went to the HELOC?” Remember that the HELOC is a “liquid” conduit. So at the end of each month we made 1 withdrawal from the HELOC to pay our bills (including our mortgage).
100% of cash flow
For us, our monthly paychecks came out to about $6,000. Our bills, including our mortgage, and all of our living expenses (gas, groceries, etc.) came to about $3,500. So by feeding 100% of our monthly checks into the HELOC and then using the HELOC to pay our bills, we were able to use 100% of our monthly cash flow to pay the $20,000 HELOC.
With an estimated cash flow of $2,500 ($6,000 minus $3,500), the $20,000 was paid off in 8 months.
repeat the process
We repeated this process until the remaining $95,000 was paid off (about 2 years).
What do you need?
1. Cash Flow – You must have positive cash flow in your household budget
2. Credit – A decent credit score (650 or more)
3. Equity – Positive equity in your home.
what you should know
VERY IMPORTANT: The HELOC should be used to pay off your mortgage. It should not be used to fund a vacation, buy a car or boat.
ALSO IMPORTANT: The HELOC is not a Home Equity Loan (HEL). A home equity loan is a second mortgage and is treated the same.