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What is a home equity line of credit?
A home equity line of credit (or HELOC) is an instrument offered by a bank that will allow you to withdraw funds for any purpose at any time. Each withdrawal increases the amount payable to the bank. You can pay the bank at any time which will reduce the balance.
Think of it as a big credit card! With a credit card, you can shop directly at merchants like Walmart. You can also get a “cash advance” with a credit card. But these cash advances usually have high fees and high interest rates.
A HELOC is a great credit card that only allows 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 it is very easy to get them.
Our bills, expenses, and income…
Monthly Income = $6000
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Car loan $10,000 ($350 monthly)
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student loan $3,000 ($90 monthly)
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Credit card $7,500 ($250 monthly)
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Medicare $18,000 ($400 monthly)
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Home mortgage $115,000 ($2,000 monthly)
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Other Expenses ($1,000 monthly)
So based on our budget, our estimated cash flow was $2,000
Step 1: Get help 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 for $50,000, the balance was $0 at the time. Remember, it’s like a credit card. So you are not owed anything until you actually use it.
Step 2: Withdraw and Pay the Loan
After that, we took out about $20,500, and paid off our car, student loans, 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 notes, student loans, or credit card bills.
Step 3: Pay the HELOC Off
To pay off the HELOC, we used the HELOC as our new checking account.
Let me repeat… We stopped using our regular checking account, and started using the HELOC as our new checking account.
How did we do it? When we got paid, we immediately took 100% of our paychecks and deposited it against the HELOC. This reduced the balance by $6000.
We just took out and paid off the HELOC to pay all our bills and living expenses. This amounted to approximately $3,400.
This means that the HELOC was reduced by $2,600 per 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 bills and the mortgage. For the mortgage, we took out $20,000 at once.
All debts including our mortgage were paid off in 4 years!
It would have taken us 20 years to do it the traditional way.
Summary…
In short, your home is your biggest asset. As long as you are living in the home, the equity is “passive”. You don’t get any benefit from this.
Yes, it’s nice and nice to know that your home is worth more than you are paying for it. But why not use it to your advantage!
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