Is It Better To Get A Home Equity Loan or Refinance A Property? – Episode 277

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[00:00] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Welcome to another episode of the Prosperity Podcast. Today we are taking a listener question. This is having to deal with refinancing and home equity loans. Kim, are you there with us? Absolutely. Well, wonderful. This is something that is actually popping up more common and I’ll give some context to this question. So currently, right now, as we are entering a hot real estate market, people are in a transitionary phase. They’re either buying new houses or they’re looking at the rates and they’re saying,

[00:57] maybe it’s time to lock in for the next 30 years. And when they do that, they’re also looking at possibly getting a hold of some of that cash and that’ll either be a refinance or a home equity loan. So here’s the question. We have a listener and they purchased a home within the last five years and it’s appreciated significantly. And I think for most of our listeners, they can relate to that. So what they’re trying to do is they’re trying to decide if they should be able to get this cash, if they should get a home equity loan or refinance the property because the rates are below 5% and then we can get into the additional details of that. So Kim, let’s first hear some big picture thoughts on this.

[01:48] Absolutely. So we want to be very, very careful with the home equity loan environment because home equity loans are typically done as lines of credit and they can be pulled. In other words, the bank can come to you and say the entire thing is due right now. And if somebody had, let’s put some numbers on it, let’s say they had a half a million dollar home and they put a $300,000 regular mortgage and a $100,000 home equity line of credit on it. And then we had a real estate correction and the value of that home went down. The bank could come to them and say your home equity line of credit is due right now. We don’t want to carry this anymore. If they chose to put a full $400,000 line of credit on it, that would be a very

[02:38] scary thing. If it’s 100 grand, you’ve got some equity, some other investments, et cetera, you can probably deal with it. If it’s 400 grand and it’s your home, that is a scary step. So we really, really want to be careful with what we’re doing with these home equity lines of credits, be very careful with the fine print and the bank’s ability to pull them, et cetera. Now that being said, a full 30-year mortgage, absolutely. Love that fixed rate all day long and yet we’ve got a secondary question that’s going on there, which is, do I refinance with a new 30-year mortgage and pull literally some equity out in order to do that? So that’s where I want to dig a little bit deeper. Are we good so far?

[03:27] Yes, we are. Let’s dig deeper into that. And so I think what that question is and where we’re going to have to figure out is you have to not look at it as a short term. This is actually a long-term problem or a challenge that’s going to be happening. So how would you approach that? Well, there’s two directions because if the family is planning on staying in that home for a long, long time, they have stable employment or maybe they own a business, that’s a completely different direction than the family that might end up leaving if employment changed or family situations changed, et cetera, because let’s use our same numbers. Let’s say your home is now worth half a million dollars. You have a current mortgage, whatever it is, that’s 300,000.

[04:13] You could do a brand new mortgage of 30 years for $400,000. Now some states won’t even let you do that. You can’t borrow home equity and go invest it, but others will. So depending on your state, let’s assume that you’re in a place where you could do that. So here’s the risk. You take that $100,000, you go invest it. Obviously, if that investment doesn’t go well, then you now have a $400,000 mortgage for 30 years and you better be prepared to stick with it, make the higher payments, et cetera, et cetera. If the investment goes well, obviously that’s awesome. And yet when you are borrowing for investing, you will want to be very, very careful. In fact, many regulators, many broker-dealers, many of the powers

[05:04] that be out there say, absolutely not. You should not do that. You can’t recommend that. That’s a no, no, no. And yet clearly some clients want to do that. One of the things that I ask clients to consider, and I don’t necessarily recommend this per se at all, but I do ask them to make sure that they’re thinking about if they’re going to invest borrowed money, that whatever they invest in has some cashflow because borrowed money requires payments. It might be interest only once a year. It might be monthly payments like a typical mortgage would be. And so they want to be looking for investments that create cashflow. Well, typically those are going to be real estate related investments. And so you’ve got a tricky environment here where you’re looking at an

[05:50] increased real estate market that is giving you the ability to get the money out, and yet that’s not a time that you want to be buying real estate because we’re on the upside of things. So again, this is an area that’s so tempting for people, and yet something that we need to be super, super careful about. And you said it well, it is a very long-term decision that people are making. It is. So the word that I think of is speculation. And so that’s the thing that scares me in any of these deals. But there’s another word in your response as, you know, we saw this listener question and, and, and for listeners, here’s something that I want to say, this is a little side note. Um, you can send your questions to Kim, hello at partnersforprosperity.com.

[06:38] And she will answer those through email. And then also some of those we choose to answer here on the podcast. So, you know, I’ve been privy to see some of this, there was a keyword in your email, your response, and it was the word liquidity. How does that apply to this situation? No, that’s a great question. So liquidity, in other words, having cash in your emergency slash opportunity fund. So listeners will know that I really impress upon us all that liquid cash is not just for emergencies. It’s for opportunities as well. When you have liquidity, you have so much more control going on in your financial life. Number one, you can use that liquidity to make payments if necessary. Number two, if an investment doesn’t do what it’s supposed to do in the

[07:29] timeframe that it’s supposed to do it, you can use your liquidity to balance out any true emergencies like, you know, the air conditioning needs replaced or something like that, as well as whatever may be required of the investment, because one of the things we have to be aware of is a lot of good investments have the potential for what’s called a capital call. In other words, they have the potential that you may need to actually add more money to that investment to make it do its job. And of course, real estate is one of the ones that is guilty of this as is the case on some others, but just if we’re looking at using real estate to do our investing, we must make sure that we have our liquidity and that we have more and more and more liquidity.

[08:17] You know, I often say cashflow problems don’t go away. They just get bigger zeros on them because, you know, your person that’s spending a hundred grand on, let’s say, you know, maybe two or three properties is going to have cashflow problems at one level, your person that’s spending say a million dollars as a down payment on some huge commercial building is going to have cashflow problems at a completely different level with a lot more zeros on them. That’s zeros to the left of the decimal point, right? So it’s something that we just want to be aware of as we’re pursuing our opportunities is this position of liquidity, because not only does liquidity give us peace of mind, the ability to take advantage of

[08:58] opportunities, the ability to solve emergencies, it also enables us to have a more prosperous mindset, which is so important when we are making investment decisions. I’ve come into investment decisions with a scarcity of money, I’ve made investment decisions with a scarcity mindset before, and it’s wicked, ugly, you just don’t make good decisions when you have a scarcity mindset, and liquidity enables us to have a more prosperous mindset. So for all those reasons, it’s something that should be checked and really looked at, and not only from the main investment decision maker, but also the spouse, because I think a lot of times one spouse is a little bit more capable from a risk standpoint. I don’t mean capable of picking good investments, I just mean

[09:45] capable mentally of taking on more risk and emotionally, where another spouse may not have that capability. And so all of these things have to be looked at in all circumstances, but especially heavily in the circumstance that we’re talking about, where you are deciding if you want to borrow to invest. Yes, great point there. And especially the other point is it’s your primary residence. And so on your primary residence, you have to treat it differently. So, so well said. Yes, it’s the family’s home. Yes, it carries a whole different set of decision points because of it. And too often we forget the cycle, the financial cycles that we’ve all been through in life. And there are prosperous cycles and there are times when we may be

[10:36] caught up and wish that we had more savings. And I tell you what, if you have the savings, the times that are tough, there’s actually more opportunity. And that’s great because you have a prosperous abundance mindset. Now, one thing I’ll say for our listeners is this, and I mentioned earlier, this is a question that came to us and Kim is answering it here on the podcast, and you can send your questions in at hellouppartnersforprosperity.com. Some people don’t have questions and they just want to say, Hey, I love the podcast. Or maybe they want to ask a simple question. And another way to do that is in the reviews inside of iTunes. And so for our listeners inside of the show notes, you can just

[11:17] click the link at the bottom of the show notes and you can leave a review or ask a question. We always love hearing your feedback about the podcast and it helps us spread the show out to more people so they can learn about it. And they can also increase their knowledge around this prosperity type of thinking. Any other, any other tips, Kim? Well, I’m just grateful that the question came up and I think the biggest tip I want to leave people with is to think, and it is our first principle of prosperity. And so this is one of those areas that you really do want to take the time, think carefully about what’s important to you, what you want to do and act accordingly. Thank you for listening to the Prosperity Podcast.

[12:09] To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.