Cancel Debt Using a HELOC

Are you ready for the financial equivalent of the golden rule? Here it is. Your money should always be doing one of two things: cancelling interest or earning it. Which is yours doing?

This post will be useful for a very specific group of readers: homeowners who have a Home Equity Line of Credit (HELOC). What do HELOCs have to do with canceling debt or interest? Quite a bit, if you use them right. In fact, there are several ways to utilize a HELOC for this purpose, some more advantageous than others. I'm going to concentrate on what in my opinion is the simplest.

Do you have a balance on your HELOC? The answer is probably yes. I certainly do. Do you have a checking/savings account? Almost definitely yes, right? And how much of a return are you getting in your checking/savings account? Not much. Probably not even enough to keep up with inflation (which, incidentally, was 2.7% over the last year). If this is the case, you have broken the golden rule. Essentially, money in a checking/savings account is stagnant. It's not doing anything for you. This is where the HELOC comes in.

Most HELOCs carry interest rates that are in the 8-10% range. Thus, every cent of your HELOC balance is costing you 8-10% in finance charges while money that could be doing you a lot of good sits idly in your checking/savings account. The solution is simple - move as much as you can of your checking/savings account funds into your HELOC. Monthly HELOC payments are calculated based on the account's average daily balance. So, by moving your funds into the HELOC account you will offset the amount of money on which the bank can apply finance charges. It can add up to a couple hundred dollars a month depending on your situation. And since HELOCs are so liquid, you can take those funds out in an instant if needs be, just as easily as you could from your checking/savings account.

Simple, right? Take as much of the checking/savings account money as you can out and let it sit in the HELOC account, canceling interest. This is just the beginning. There are a PLETHORA of other things you can do with your HELOC to make your money work more efficiently for you. These tools have many more uses than just the second mortgages most people use them for. Chances are you could be managing your HELOC more profitably...