What is home equity line of credit or HELOC?
If you have used a credit card, you'll easily understand the concept of the home equity line of credit or HELOC. In simple term, a HELOC is a revolving credit, like the credit limit with your credit card. The difference is that a HELOC uses your home's equity as a collateral. Basically, it's a credit card secured with your home's equity.
How to use your HELOC to pay off your home loan super fast?
The nice thing about a HELOC compared to a regular loan is that once you pay down the balance, you'll have more money to use again. You can keep using the line until the end of the draw period, which is usually 10 years. At that time, you can either pay off the remainder balance with a balloon payment, or refinance into another HELOC or home mortgage.
The advantage of the HELOC over home mortgage is that a HELOC uses simple interest, so you can pay down your home A LOT sooner than the standard 30 years AMORTIZED home mortgage.
Let me give you my example. I had a $247,000 home mortgage with 4.25% interest rate. Not bad right? I was paying about $1,300 per month to the bank. Of the $1,300, about $900 is interest charge. So only about $400 goes to pay down my principal, about $4,800 in a year.
I later applied for a HELOC of $250,000 to pay off my existing $247,000 home mortgage. My HELOC has an introductory rate of 1% the first year. If I continue paying $1,300 a month, I would have paid off $13,200 in principal in ONE YEAR because my monthly interest in now only $200 a month.
The best of all, the HELOC acts as my emergency fund too. As I pay off more of the balance, more money is available to use.
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