My wife and I were “homebuyers” for at least 7 years at our current residence. Note that I said “buyers” of homes and not “owners”. There is a common misconception that when you get a mortgage, you immediately “own” the home.
Assuming you have a 30-year mortgage, the reality is that you are simply in the process of 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 some mortgage payments and see what happens.
3 months ago, we paid off our 30-year mortgage (in 7 years or 23 years earlier). Now we are true “owners” of home. In this article, I will show you step by step how we were able to achieve this. Using our existing income, and without incurring any additional debt.
Equity
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, then you have $200,000 of equity in your house.
We had approximately $250,000 of equity in our home. We owed the bank $115,000 and our house was worth $367,000.
This $250,000 is idle. I mean, it looks good, but it wasn’t doing anything for us.
Home Equity Line of Credit (HELOC)
So the first thing we did was ‘leverage’ this equity. We went to the bank and took out a $50,000 home equity line of credit.
What is a home equity line of credit? Also called a HELOC, a home equity line of credit is a liquid line from which you can withdraw funds at any time for any purpose. It’s like a giant credit card.
Although the HELOC was capped at $50,000, the amount we owed was $0 at the time we withdrew it. This is because, just like with a credit card, you don’t owe anything until you actually use it.
Use HELOC to pay the mortgage
Immediately after obtaining the HELOC, we withdraw $20,000 and apply it to our Mortgage (additional principal payment).
So at this point, we have $20,000 owed 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 go any further, 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 in HELOC and $95,000 in mortgage).
So, to settle the HELOC, we simply use it as our new checking account. When we got paid, we took 100% of our paychecks and applied it to the HELOC.
Now you may be wondering, “with all our money going to HELOCs, how do we pay our bills?” Remember that the HELOC is a “liquid” line. So at the end of each month we made 1 HELOC withdrawal to pay our bills (including our mortgage).
100% of Cash Flow
For us, our monthly paychecks totaled approximately $6,000. Our bills, including our mortgage and all of our living expenses (gas, groceries, etc.) totaled approximately $3,500. So by applying 100% of our monthly checks to 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.
So, 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 repeat this process until the remaining $95,000 is paid (approximately 2 years).
What do you need?
1. Cash Flow – You must have a positive cash flow in your household budget
2. Credit Score – A decent credit score (650 or higher)
3. Equity: Positive equity in your home.
what you should know
VERY IMPORTANT: The HELOC must be used to pay your mortgage. It should not be used to finance a vacation, buy a car or a 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 way.