My wife and that I were “home buyers” for a minimum of 7 years on our current residence. Notice that I said home “buyers,” and not home “owners.” there’s a standard misconception that once you remove a mortgage, you’re immediately a home “owner”
Assuming that you simply have a 30 year mortgage, the truth is that you simply are simply within the process of shopping for the house over a 30 year period. The bank is that the true owner of the property. If you do not believe me, try missing a couple of mortgage payments, and see what happens.
3 months ago, we paid off our 30 year mortgage (in 7 years, or 23 years early). Now we are true home “owners.” during this article, I’m getting to show you step by step how we were ready to accomplish this. Using our existing income, and without incurring any additional debt.
Let’s mention “Equity.” Equity, or appreciation, is that the difference between what your house is worth and what you owe to the bank. So if you owe $100,000 and your home is worth $300,000, then you’ve got $200,000 of Equity in your home.
We had roughly $250,000 of Equity on our house. We owed the bank $115,000 and our house was worth $367,000.
This $250,000 is dormant. Meaning, it’s good, but it wasn’t doing anything for us.
Home-Equity Line of Credit (HELOC)
So the very first thing that we did was we ‘tapped’ into this equity. We visited the bank and took out an Home Equity Line of Credit for $50,000.
What is an equity line of credit? Also called a HELOC, an home equity line of credit may be a liquid line that you simply are ready to draw funds from at any time for any purpose. It’s sort of a gigantic mastercard .
Although the HELOC had a limit for $50,000, the quantity that we owed thereon was $0 at the time that we took it out. this is often because, almost like a mastercard , you do not owe anything until you really use it.
Use HELOC to Pay Down Mortgage
Immediately after we got the HELOC, we withdrew $20,000 and applied it to our Mortgage (additional principal payment).
So at now , we’ve $20,000 due on the HELOC, but our mortgage has been paid down by $20,000 (from $115,000 to $95,000).
Use HELOC as “new” bank account
Before i’m going on, let me mention that after we used the $20,000 to pay down our mortgage, we still had an equivalent $115,000 of debt ($20,000 on HELOC and $95,000 on Mortgage).
So to payoff the HELOC, we just used it as our new bank account . once we got paid, we took 100% of our paychecks and applied it to the HELOC.
Now you’ll be wondering, “with all of our money getting to the HELOC, how did we pay our bills?” Remember the HELOC may be a “liquid” line. So at the top of every month, we made 1 withdrawal from the HELOC to pay our bills (including our mortgage).
100% of money Flow
For us, our monthly paychecks totaled roughly $6,000. Our bills, including our mortgage, and every one of our living expenses (gas, groceries, etc.) totaled approximately $3,500. So by applying 100% of our monthly checks to the HELOC, then using the HELOC to pay our bills, we were ready to use 100% of our monthly income to pay the $20,000 HELOC off.
So with and estimated $2,500 of money flow ($6,000 minus $3,500) the $20,000 was paid off in 8 months.
Repeat the method
We repeated this process until the remaining $95,000 was paid off (approximately 2 years).
What does one Need?
- income – you want to have positive income in your household budget
- Credit Score – an honest credit score (650 or above)
- Equity – Positive equity in your home.