Line of Credit home loan

How to escape the endless debt trap

A line of credit is a home loan that allows you to access the equity in your home. It’s like having a large bank account that you can take money out of, put back in and take out again and again.

The bank will require you to pay interest on the loan balance each month. But, there’s no requirement for you to make principal payments to the loan each month like a normal home loan.

This may sound like a great thing, because your loan payments will be lower, but here’s a huge word of caution. Thinking a line of credit will help pay off your loan quickly, or even at all, is a big mistake, because it won’t.

The Big trap with a Line of Credit

A line of credit is essentially an interest only loan, with a few differences. Payments you make into your line of credit during the month are available for you to spend again, each and every month. Consequently most people who have a line of credit home loan, never pay them off. Or, at the very least struggle trying to reduce the amount they owe.

Line of credit loans have higher interest rates than normal principal & interest loans. The difference can be up to 3%. This is huge. Say you had a $350,000 line of credit rather than a normal principal & interest home loan. You could be paying $10,500/year more interest than necessary.

How to Escape the Line of Credit debt trap

You can do one of two things;

1. Talk to your current bank or lender quickly and ask them what options you have to change to a low cost principal & interest loan. They will most likely want to reassess your financial situation to make sure you can repay a normal ‘term’ loan.
2. Better still speak to a mortgage broker, ask for a mortgage makeover. Find a low cost principal & interest loan, then make the change. Set the term of the loan as short as you can afford to help you pay off your loan quickly.

Either way, you will notice a change in the amount you owe very quickly. Within two or three months your loan balance will be noticeably lower. Then, simply keep going adding on any additional payments you can and watch your once invincible loan balance be battered into submission.

Zero debt here we come.