Are you one of the many people today who are property-rich, but cash-challenged? If you have equity in your home but are still paying off your mortgage, you may be thinking about using a home equity line of credit (HELOC). This might be to finance the purchase of your next home, for example, or to pay down your mortgage debt.
As mortgage debt is the largest debt that most people will ever have, paying down your mortgage faster with a HELOC has become a popular, albeit complicated, strategy.
What Is a HELOC?
A HELOC is a loan that allows homeowners to borrow against their home equity and save thousands on interest over the life of the loan. When applied to your mortgage, the goal is to optimize your home equity to refinance higher interest mortgage debt. You use your home equity as collateral, automatically shifting your debt from the mortgage into a HELOC at a lower interest rate.
A HELOC is similar to a credit card in that it has a credit limit, based on your home equity. It has the advantage of reducing monthly mortgage and interest payments and helping to pay off your mortgage faster. What you will be doing is taking money from the HELOC (simple interest) to pay off your mortgage (amortized interest). The point is to pay down your principal faster, saving significant money on interest over the period of the loan.
Paying Off Your Mortgage with a HELOC in Five Steps
In this strategy you move your expenses between a HELOC and a credit card so that you can use your existing income to pay down your loan principal.
- Evaluate Your Financial Situation
First, take stock of your current balances and overall financial situation to make sure a HELOC is the right choice for you. Make sure to ask and answer the following questions:
- Is your credit score the required 620 or higher?
- How much home equity do you have?
- Does your monthly cash flow exceed your expenses?
- How much positive cash flow do you have?
- How much extra can you spend to retain a positive cash flow?
- Do you have other financial priorities, such as paying for your children’s college tuition?
To calculate your monthly positive cash flow, total all your monthly expenses and subtract them from your monthly income. What is left will be your positive monthly cash flow. The greater that amount, the faster you can pay off your debt.
- Develop a Cash Flow Plan
After calculating your positive monthly cash flow, you will be able to calculate the frequency and amount of payments you can make, from quarterly to annual, based on the need to retain your cash flow.
- Get a Credit Card
Make sure to get a credit card that will be good for paying bills – in other words, one that will give you a 45-day grace period.
- Apply for a HELOC
Plan to use the HELOC to make your mortgage payments and pay off your credit card balance each month.
Tip: Having a debit card attached to your HELOC will make it easier to make payments.
- Use Your HELOC to Make Your Monthly Payments
Each month you are going to use your HELOC to pay off your credit card bill and monthly mortgage payment.
Let’s say you put your full paycheck of $5,000 into your $200,000 mortgage, leaving a mortgage balance of $195,000. Meanwhile, all of your monthly expenses ($2000) are going on a credit card, to be paid in full each month. This means you will have a total of $3000/month payments to your mortgage and credit card companies coming from your lower-interest HELOC.
Repeat until you pay off your loan. While there are other variations on the strategy involving different degrees of financial sacrifice and discipline, it doesn’t have to be any more complicated than that.
But while using a HELOC might work for some, it’s not for everybody:
Downsides of Using a HELOC to Pay Off Your Mortgage
While it may seem attractive, there are downsides to using a HELOC to pay your mortgage early. The most notable are:
- HELOCs come with variable interest rates
- Paying off your mortgage with a HELOC can take a long time
- It can take a lot of discipline
Looking for alternatives?
EasyKnock has introduced two new alternative products that tap into your home equity: Sell & Stay and MoveAbility.
Sell & Stay
Sell & Stay is an alternative if you want to be free of your mortgage but prefer not to use the HELOC approach.
EasyKnock created Sell & Stay to provide homeowners with a new way to release their equity without having to move. Sell & Stay is the first program in the USA allowing homeowners to sell their home, accessing the money they need, while remaining in their home as a tenant. People have the ability and flexibility to repurchase their home or move at any time.
Sell & Stay is a good option for people who:
- Are in danger of losing their home and can’t get a line of credit from a bank
- Can’t pay their mortgage or have defaulted on their mortgage
- Are independent business owners or freelancers
- Do not have a documented income history
- Are divorced
EasyKnock’s latest program, MoveAbility, is designed specifically for homeowners who need cash to buy their next home and either need extra time to sell or want to take a bit longer to find their forever home.
With MoveAbility, you get access to up to 75% of your home's value while paying rent to EasyKnock, staying in your home for up to 18 months while looking for your next dream home, with the funds for your down payment already sitting in your bank account.
MoveAbility eliminates the stress of the typical home selling and buying process by letting homeowners use their equity to buy a new home. In 13 days, you can tap up to 75% of your home's equity to better manage your next home purchase, without having to relocate at a breakneck pace.
Because it does not have any credit score, debt-to-income ratio or W2 requirement, MoveAbility is suitable for:
- People who want to sell their existing home to finance the purchase of their next home
- People selling single family homes, condos and apartments
- Individuals and small business
- People who are renovating their current home before selling
- People buying a fixer-upper
Don’t worry! Contact EasyKnock and find out how you can qualify for Sell & Stay or MoveAbility and put your home equity to work for you.