My wife and I were “home buyers” for at least 7 years on our current residence. Notice that I said home “buyers,” and not home “owners.” There is a common misconception that when you take out a mortgage, you are immediately a home “owner”
Assuming that you have a 30 year mortgage, the reality is that you are simply in the process of buying the home over a 30 year period. The bank, is the true owner of the property. If you don’t believe me, try missing a few 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.” In this article, I’m going to show you step by step how we were able to accomplish this. Using our existing income, and without incurring any additional debt.
Let’s talk about “Equity.” Equity, or appreciation, is the difference between what your home is worth and what you owe to the bank. So if you owe $100,000 and your house is worth $300,000, then you have $200,000 of Equity in your home 88카.
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 looks good, but it wasn’t doing anything for us.
Home-Equity Line of Credit (HELOC)
So the first thing that we did was we ‘tapped’ into this equity. We went to 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 is a liquid line that you are able to draw funds from at any time for any purpose. It’s like a gigantic credit card.
Although the HELOC had a limit for $50,000, the amount that we owed on it was $0 at the time that we took it out. This is because, similar to a credit card, you don’t owe anything until you actually 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 this point, we have $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” Checking Account
Before I go on, let me mention that after we used the $20,000 to pay down our mortgage, we still had the same $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 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 of our money going to the HELOC, how did we pay our bills?” Remember the HELOC is a “liquid” line. So at the end of each month, we made 1 withdrawal from the HELOC to pay our bills (including our mortgage).