Debt Reduction Strategy

Posted by Carolyn A. Capalbo on Friday, June 22nd, 2018 at 10:14am.

When you have no outstanding debts, life is quite liberating and much less stressful.  Do you dream of the day when you are debt free?  There is tremendous power and wealth building opportunities for those that are committed to removing debt from their lives and building passive wealth through multiple investment vehicles, including real estate.  Sometimes utilizing debt to remove debt can be a great strategy.  This is a unique debt consolidation strategy that uses a revolving equity line of credit to accelerate debt payment.  Here’s an example of how it works.  For your specifics, please reach out to me and we can come up with a winning plan for you.  This is a great strategy for those that wish to buy a new home and are not able to afford more or find a way to develop equity for their next down payment.

Current Home’s value:  $400,000

Current Mortgage balance $300,000 ($2000 monthly payment) 30 years to pay off

Current Car debt balance $35,000 ($700 monthly payment) 5 years to pay off

Current Credit Card Debt $12,000 ($500 monthly payment) 2 years to pay off without adding balance

Current Student Loans $35,000 ($500 monthly payment) 8 years to pay off

Current monthly take home pay $10,000

Utility, food, and entertainment outlay $4500 per month

There is typically $1500 to $2000 per month available for incidentals, clothing, and indulgences that is usually spent or saved. However, this money is not typically utilized for debt reduction or wealth development. 

In the above scenario, the homeowner would obtain a $75,000 equity line of credit collateralized against their home.  They would pay off the car loans, credit card debt with the equity line of credit.  All other bills and expenditures would be paid from the equity line of credit, approximately $4500 per month.  100% of the take home pay and household income will be applied to pay down the equity line of credit.  100% of the car debt and credit card debt will be paid in full in 9 months’ time.  At the end of 9 months, I would recommend paying off the student loan debt by using the line of credit.  It would take an additional 7 months to pay off this debt.  In this case, 15 years of debt is eliminated in 16 months.  Pretty powerful!  With the reduction in debt, there are numerous options available to the homeowner.  Perhaps, a new home or an investment property.  Perhaps, a continuation of this rapid debt reduction process 6 more times to payoff their current mortgage completely in 5 years.  To avoid pitfalls, it is important to make sure that all income is applied to pay down the equity line of credit.  It takes discipline and dedication not to allow your home to become an ATM; however, imagine the wealth that can be built when you are debt free! 

Give me a call and let’s get started today!

Carolyn Capalbo,
Northern Virginia REALTOR®

 

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