Can You Be Cash Flow Positive Before Paying Off Debt How To Pay Off Your Mortgage In 5 Years

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How To Pay Off Your Mortgage In 5 Years

My wife and I have been “home buyers” for at least 7 years in our current residence. Note that I said “home buyers” not “home owners”. There is a common misconception that when you take out 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 a home over a 30-year period. The bank is the real owner of the property. If you don’t believe me, try missing a few mortgage payments and see what happens.

We paid off our 30 year mortgage 3 months ago (within 7 years or 23 years early). Now we are the real “owners” of the home. In this article, I will show you step by step how we did it. Using our existing income and without any additional debt.

Justice

Let’s talk about “Ownership.” 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 home.

We had about $250,000 in equity in our house. We owed the bank $115,000 and our house was worth $367,000.

That $250,000 is dormant. That said, it looks good, but it didn’t do anything for us.

Home-Equity Line of Credit (HELOC)

The first thing we did was to ‘leverage’ this capital. We went to the bank and took out a $50,000 Home Equity line of credit.

What is a home equity line of credit? A home equity line of credit, also called a HELOC, is a liquid line from which you can draw funds at any time for any purpose. It’s like a giant credit card.

Although the HELOC had a limit of $50,000, the amount we owed was $0 at the time we took it out. This is because, similar to a credit card, you don’t owe anything until you actually use it.

Use a HELOC to pay off your mortgage

Right after we got the HELOC, we took out $20,000 and applied it to our mortgage (additional principal payment).

So we have $20,000 in HELOC at this point, but our mortgage has been paid off by $20,000 (from $115,000 to $95,000).

Use a HELOC as a “new” checking account

Before I go any further, I should mention that after spending $20,000 to pay off our mortgage, we still had the same $115,000 in debt ($20,000 on the HELOC and $95,000 on the mortgage).

We just used it as our new checking account to pay off the HELOC. When we got paid, we took 100% of our paychecks and applied them to the HELOC.

Now you may be wondering, “how did we pay our bills when all our money went to the HELOC?” Remember that a 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).

100% cash flow

For us, our monthly salaries were about $6,000. Our bills including the mortgage and all of our living expenses (gas, groceries, etc.) came to about $3,500. So by using 100% of our monthly checks for 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 down on the HELOC.

So with an estimated $2,500 in cash flow ($6,000 minus $3,500), $20,000 was paid out in 8 months.

Repeat the process

We repeated this process until the remaining $95,000 was paid (about 2 years).

what do you need

1. Cash Flow – You must have positive cash flow in your household budget

2. Credit Score – 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 off your mortgage. It must not be used to finance a holiday, buy a car or boat.

ALSO IMPORTANT: A HELOC is not a home equity loan (HEL). A home equity loan is a 2nd mortgage and is treated the same.

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