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 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 great credit card that only allows cash advances… BUT… NO 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 per month)

• Credit cards $7,500 ($250 monthly)

• Medical $18,000 ($400 monthly)

• Home mortgage $115,000 ($2,000 per month)

• 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 go to the bank and we got a HELOC with a limit of $50,000.

Although the limit was $50,000, the balance due at that time is $0. Remember, it’s like a credit card. So you owe nothing until you actually use it.

Step 2: Withdraw and pay off the debt

We then withdraw about $20,500 and pay off our credit cards, student loan, and car.

At this point, we 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 the car note, student loan, or credit card bills.

Step 3: Pay the HELOC

To pay for the HELOC, we simply use the HELOC as our new checking account.

Let me repeat… we stopped using our regular checking account and started using 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 reduced the balance by $6,000.

To pay all of our bills and living expenses, we simply withdraw the HELOC amount and pay 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 repeat the process for the Medical Bill and the Mortgage. For the Mortgage, we withdraw $20,000 at a time.

All debt including our mortgage was paid off in 4 years!

Doing it the traditional way, it would have taken us 20 years.

Summary…

In short, your home is your greatest asset. As long as you live in the house, the equity is “inactive.” It doesn’t benefit you.

Yes, it looks and feels good knowing your home is worth more than it owes. But why not use it to your advantage!