100% Debt Free… Using a HELOC
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 owed to the bank. You can make payments to the bank at any time, which will reduce the balance.
Think of it like a big credit card! With a credit card, you can make direct purchases from a merchant, such as 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 cash advances…BUT…NO FEES OR HIGH INTEREST!
Credit cards are based on your overall credit profile, while HELOCs protect the equity in your home. So they are very easy to get.
Our accounts, 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 ($1000 per month)
So based on our budget our estimated cash flow was 2000 dollars
Step 1: Get a HELOC from the bank
The first thing we did was go to the bank and get a HELOC with a $50,000 limit.
Although the limit was $50,000, the balance owed is currently $0. Remember, it’s like a credit card. So you don’t owe anything until you actually use it.
Step 2: Draw down and pay off the debt
We then withdrew about $20,500 and paid off our car, student loan and credit cards.
We currently owe $20,500 on the HELOC…BUT our cash flow has increased from $2,000 to $2,700. This is because we no longer have to pay car, student loan or credit card bills.
Step 3: Pay the HELOC Off
To pay off 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 a 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 reduced the balance by $6,000.
To pay all of our bills and living expenses, we just took the amount out of the HELOC and paid them off. This amounts to approximately $3,400.
That means the HELOC is 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 took out $20,000 at once.
All debt including our mortgage was paid off in 4 years!
Doing it the traditional way would have taken us 20 years.
In summary, your home is your biggest asset. While you live in the house, the equity is “dormant.” It is of no use to you.
Yes, it looks and feels good to know your home is worth more than what you owe. But why not use it to your advantage!
#Debt #Free #HELOC