A line of credit (LOC) works a little like a giant credit card in that you only pay interest on the balance of the line of credit. A LOC has a limit and a balance, also like a credit card.

With a traditional mortgage, interest is calculated daily on your loan and then paid at the end of the month in the form of your mortgage repayment. You can see that you will end of paying interest on top of interest! An LOC works differently. If you can put $1000 into your LOC, you are effectively paying off $1000 of principal and therefore saving the interest you would otherwise have to pay on that $1000.

Put another way, imagine your LOC has a limit of $100,000 and a balance of $80,000. At the end of the month, providing nothing is deposited in the account, you will pay interest on $80,000. If you get paid fornightly, say $2,000, and put that money into your LOC, then at the end of the month you would pay interest on $76,000.

But you have to pay bills you say!

You can use a credit card for your bills and expenses and then pay off that credit card from your LOC. Basically, the longer you can leave as much money as possible in your LOC, the less interest you will have to pay and the faster you can pay down your debts.

Using an LOC can be a powerful tool that can literally save years and shave thousands of dollars off the life of your loan.

But remember that an LOC can also be a dangerous thing. If your balance is $80,000 but your limit is $100,000, you can technically spend $20,000. It can be accessed like cash from an ATM! But bear in mind that if you start taking holidays and buying flat screen TV's with your home equity you will run in BIG problems. A LOC is not suitable for someone who has trouble controlling their spending habits.

Think of a chainsaw. Is it a good tool or a bad tool? Depends on who is using it. In the hands of an experienced logger it can be an amazingly useful tool. In the hands of a four year old, it can be another story.