Today’s post is a follow up from my acceleration post I wrote in detail about last week. In that post, I showed how someone could wipe out their debt and home mortgage in 7 -9 years by robbing Peter to pay Paul.
My up front disclaimer – this is not traditional and if you are new to the personal finance world I would recommend starting with learning how to pay off debt by understanding how interest works and getting on a budget. I also like to add that I am not a financial planner. For matters pertaining to paying off debt, saving more and spending less I may offer some strategies, but if you are looking to get really far ahead you can always consult a professional.
If you are like my wife and I – you want to pay off your student loans, cars and have money for savings – then keep reading. We had just one problem… or actually 300,000 problems. The interest on student loans was killing us. We were using the debt to income repayment plan and we saw our payments doing nothing to the principal.
What is a HELOC?
Terms like debt to income ratio, principal, interest, and amortization get thrown around in the finance world so loosely, that often times they are handicapping the every day person. Throw in HELOC (Home Equity Line of Credit) or equity optimization and people’s heads really start spinning.
So my first shot at posting about how we used a HELOC as a debt acceleration program was just an introduction. My purpose today is to really expand on the process of how we implemented our HELOC and generate some discussion.
The entire concept revolves around equity optimization, essentially the same way the banks earn their income. Using your deposits, banks leverage your income into interest bearing accounts that earn for them. It’s the same reason why some banks can give 1% on savings and others give .01%.
Using the same approach, instead of spraying your money, you can leverage 100% of your income against your debt with the use of a HELOC, saving thousands among thousands in interest (Don’t believe me, click here and scroll to the bottom).
At first glance it seems risky and by all means it is absolutely unconventional. But, when you have $295,000 in student loans just on your soon to be wife’s side of the ledger, anything is better then what we were doing. Obviously, home ownership and equity is where it all starts… but don’t stop reading just yet if you don’t own. One day when you do decide to buy, reading this article could save you thousands in interest.
Here is how we did it:
Between my car loan, my wife’s ESCI & Naviant Loans, and then her Great Lakes Student Loans (which consisted of 15 individual loans) we needed to be strategic. We linked up with a financial planner who is the longest tenured in the country with this sort of program. The education was worth every penny and we were able to generate cash flow immediately with his help!
*Disclaimer, I am not a certified financial planner so with anything, I do not recommend doing anything until you consult a professional. This is just what we did and how*
Step 1: Create an emergency fund with Ally Savings. Goal: 4-6 months worth of expenses. We live in the D.C. area, so $10,000 was the goal. Ally is currently at 1.2%.
Step 2: Figure out the best HELOC for your needs. In our case, Pen Fed was our best bet, and to make life easier we ran our checking through them as well. Streamlining accounts is vital since your manually moving money, and Penfed is no nonsense with transfers. Our HELOC rate was 3.5%, and that is variable, but can only raise a quarter point every 6 months (AKA it would take 4 years to get to where our student loans were at in terms of %)
Step 3: Take a line out that meets your goals and budget. Our’s happened to be $40,000 increments, so we took out a $50,000 line to always make sure we had a buffer (This I will expand on – the correct HELOC is vital).
Step 4: Attack loans that can be paid off and create cash flow first. By paying off the remaining balance on my car, the ESCI loan, the Naviant loan, and $16,000 in undergrad Great Lake loans, we had over $500 to put towards the line.
Step 5: Pay the line down and run everything through it. Essentially treat it like a checking account. We set up bill pay dates of the 1st and 15th. We have solid financial discipline so we put everything, except our student loan and mortgage payment on our credit card, and pay it off on the 15th. We keep as much income in the line at all times. That is the magic – keeping the line as low as possible at all times since that is what the interest is based off of.
Step 6: Wash rinse and repeat. Once you get the HELOC down (it does not need to be at 0), then transfer an amount back to your checking account and make a huge principal payment again. Repeat as necessary to eliminate consumer debt, student loans, then the big bad mortgage.
Step 7: Use the same concept to pay your mortgage, and you can save $200,000 in interest over the life of your mortgage in interest. If you are a nerd like me, look at these amortization schedules.
Step 8: Create wealth using the same concept by investing ( insurance, stocks, real estate, bonds). Another article for another day :).
So if you are new to personal finance this all might seem a bit out of the norm… that is because it is. I wouldn’t recommend using this sort of process unless you have consulted with a professional and you have been operating on a budget for sometime. My first piece of advice would be to actually get on a budget
, start paying down some debt, and create a savings emergency fund. That is what we did for about 10 months before we considered using a acceleration program.
Q: Would you use the HELOC acceleration plan ? What concerns or questions would you have before you did?