What is a home equity line of credit?
A Home Equity Line of Credit (or HELOC) is an instrument offered by the bank that allows you to withdraw money at any time for any purpose. Each withdrawal increases the amount due to the bank. You can always make payments to the bank that lower the balance.
Think of it as a big credit card! A credit card allows you to make direct purchases from a merchant like Walmart. With a credit card, you can also receive “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… WITHOUT THE FEES OR HIGH INTEREST RATES!
Credit cards are based on your entire credit profile, while HELOCs are secured by the equity in your home. So they are very easy to get.
Our invoices, 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 cards $7,500 ($250 monthly)
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Medical $18,000 ($400 monthly)
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Home Mortgage $115,000 ($2,000 monthly)
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Other expenses ($1,000 per month)
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 get 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 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 the HELOC $20,500… BUT our cash flow has increased from $2,000 to $2,700. That’s because we no longer have to pay our car note, student loan, or credit card bills.
Step 3: Pay for the HELOC Off
To pay off the HELOC, we simply used the HELOC as our new current account.
Let me repeat… We stopped using our regular checking account and have just started using the HELOC as our new checking account.
How did we do that? When we were paid, we immediately took 100% of our paycheck and deposited it against the HELOC. This brought down the balance by $6000.
To pay all our bills and living expenses, we simply withdrew and paid the amount from the HELOC. This amounted to about $3,400.
This means that the HELOC has been reduced by $2,600 each month.
At this price, the HELOC was paid out in 8 months (20,500 divided by 2,600 USD).
Step 4: Repeat
We have repeated the process for the medical bill and the mortgage. We withdrew $20,000 each for the mortgage.
All debts, including our mortgage, were paid off in 4 years!
If we had done it the traditional way, it would have taken us 20 years.
Summary…
In summary, your home is your greatest asset. As long as you live in the house, the equity is “dormant”. It doesn’t help 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!
car loan interest rate 2022
#debtfree #HELOC
Wendy is now a financial analyst and writer. Wendy has been writing about finance and personal finance since she was a sophomore in high school. She has also been writing for several online publications and published in The Huffington Post, and Forbes Woman.
Wendy is a credentialed financial analyst and has experience working with financial institutions and businesses. Wendy is also a certified financial planner. When Wendy's not writing, she enjoys tending to her many plants, watching TV, and spending time with her family.
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