How Does a Home Equity Line Affect Your Finances – Episode 311

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[00:01] Welcome to the Prosperity Podcast. On this episode of the Prosperity Podcast, we’re going to be talking about the home equity line and how this is going to affect your finances. And we’re even going to see if this is something you should be doing. So let’s dive into this, Kim. Well, this is a really interesting area that comes up in the society. Society, I’m going to say, like, you know, nationwide, we see it kind of come and then go, come and then go. And it’s the home equity credit line, not just used as a second mortgage for improving a home or, you know, borrowing against the equity of your home to pay your taxes or buy a car or something like that. There’s nothing wrong with using a home equity credit line, heckle, they’re typically

[00:48] called, for that type of thing. What we’re speaking of today is when the home equity credit line is used as your first mortgage and or as a way to pay down debt on your home, whether it’s actually a first mortgage or a second mortgage is not really relevant to the discussion. What’s relevant is that there are a lot of advertisements out there about using a home equity credit line to get the debt, the mortgage paid down on your home. And again, first, second combination thereof, whatever, home equity credit lines are typically second mortgages. But in this instance, oftentimes they’re suggested to completely refinance a first mortgage, sometimes combined with a second mortgage, into a new first mortgage using

[01:39] this home equity credit line. That in and of itself may or may not be that big of a deal. Where my challenge comes is what they’re doing afterwards. Have I set the stage clearly enough? I know there’s a lot of moving pieces and parts to that. You have set the stage and I think there’s a lot of people that have either read a blog or watched a video and it’s piqued their interest, but the water is so muddy that they don’t know what to do. So I’m so glad that you’ve set the stage and we can dive into it. Yeah, it’s really well said, the muddy water part, because the presentations that we’ve seen, so I include my husband, Toddling, on this subject, Truth Concept Software, he’s the one that took a deep dive into this probably about, I don’t know, seven to

[02:24] ten years ago and we realized some pretty disastrous consequences. And then more recently, he took a deep dive again saying, well, you know, maybe I’m missing something. And he came up for air and said, absolutely not. I am not missing something. And there are some really detrimental things that are going on here. And so he got mad enough to take the time to type them up into a report that we’re still working on, but we’ll have available at some point to help people that need to read, speaking of various ways to learn, like we’ve talked on our podcasts recently, for those that need to read instead of just listen and maybe even somebody that needs to take a deep dive into the numbers, Todd was able to use

[03:14] the Truth Compensators to prove the not only just ineffectiveness, but the detriment that these programs are causing. So let me get specific. The first detriment is that many times there is a fee. Now, not always, but we’ve seen fees as low as $17 and as high as $3,500 dollars to get involved in these quote programs that enable you to have a home equity line of credit and supposedly reduce your debt faster. That’s a major problem. That’s a problem. First of all, you’re out $3,500 for not a good thing. Second of all, if you truly wanted to just focus on reducing your debt, assuming that you wanted to now, I can prove to you that’s not a good thing to do with your money, but set that aside for a minute.

[04:08] If you just wanted to focus on reducing your debt, then just pay extra principal against your mortgage or your home equity credit line. You don’t need to pay somebody $3,500 to do that. That’s so true. Secondly, then they are having you refinance your mortgage at a higher interest rate. That is a huge problem. So here you are with decent debt. We talk about good debt, bad debt, efficient debt. Here you have a first mortgage with a decent interest rate, maybe 4% or 5%, which by the way, you can refinance a first mortgage today at 4% or 5%. And the home equity credit lines that I’ve seen in these programs are at 6% or higher. That is a problem. I take it you- Absolutely. Absolutely a problem. And that’s where the waters get muddy.

[04:55] And so what you’re saying now, I think it’s common sense for all of us, but it’s the mathematical gymnastics that they start to play after this second step where everything goes crazy. Yep. So first step, fee. Not so good. Second step, higher interest rate. Not so good. Third step, extra payments. And here’s how they muddy the water. They encourage you to run all of your life and your monetary lifestyle through this supposedly magical home equity credit line. And they talk about instead of compounding your interest monthly, they will then be able to compound it daily. And there may be some truth to the ability to compound daily versus compound monthly, but that is not what is making the difference.

[05:51] And the difference that they are making is not a good difference. The difference that they are making is that they are truly using extra dollars. Well, of course, anytime you add extra dollars to something, you’re going to get a different result. Again, we could argue better or worse, but if you add extra dollars, you’re going to get a different result than if you don’t add extra dollars. And in these presentations, they are not making clear that they are having you add extra dollars. Now, how are they having you add extra dollars? By, quote, running your life through the home equity credit line all the time. So your electrical payments and your car payments and everything else that you can think of,

[06:37] they have you run that through the credit line, through some supposedly fancy software, which then supposedly takes that extra money and decreases the balance of your loan with which then the next payment is supposed to then take that supposed lower balance and do more with it. Well, of course, if you added extra money, you would decrease the balance of your loan. You don’t need a fancy program worth $3,500 of a fee that goes to nobody, especially not to you, in order to do that. But again, this is predicated on the idea that paying off your home mortgage is a good strategy. So let’s cover that. But I want to just pause and make sure I’ve made clear the third problem, which is the extra payments.

[07:22] Absolutely. And extra payments is that’s the variable that, of course, conveniently is kind of covered up or forgotten about. Absolutely. So, you know, and I think about it, this is the parable or the scenario that I’m thinking that’s really close to it. I remember seeing a YouTube video years ago and as a psychologist talking about a person, the two different types of people in traffic. And it’s the one person that drives their car fast and they’re always changing lanes and they’re trying to beat out and find the quickest lane. And then you’ve got the other person that just stays in the lane that they pick. And ultimately, they end up at about the same time. But the person that drove around more used more gas

[08:03] and they had a lot more stress. This kind of sounds like a car that’s driving a lot faster, moving a lot more with a lot more stress. Doesn’t it sound like that to you? It does. And you know what? I’m guilty of that. Long time ago, I took a little personality quiz and that was one of the questions. Are you the one that’s zipping in and out of traffic trying to make things better by doing so? My answer was totally yes. And they viewed that as a good thing. That’s the funny part. That’s funny. Yeah, maybe it isn’t from a personality standpoint. Well, I think of it like that. And so now we’ve kind of cleared up what to expect and how to look at this. Now the next step of that financial picture is going to be looking at paying off the debt early,

[08:52] like paying off a mortgage early. And then if we have time, I would love to talk about how to use life insurance as a better vehicle than doing something like this. So let’s first jump over to that first one. Okay. So yes, the idea that paying off your mortgage early, it doesn’t matter how you do it. Extra principal payments, 13 payments a year, 24 payments a month. You know, 15 other programs out there that supposedly get you out of debt early, which I’ve done, like admittedly bad. So I know for sure that these are not effective. It is not a good thing because the bottom line is you’re building something called home equity, which you do not control. So it goes against like five of the seven principles of prosperity.

[09:37] You can’t move the money. It isn’t multiplying. It’s stuck in this thing called home equity, which the bank controls. You don’t control it. So it’s not multiplying and it’s causing you lost opportunity, which is number three, measure. And it’s not helping you think from a prosperous mindset because having equity in your home can disappear the next day if you have a real estate correction in your area. And so in the Busting the Interest Rate Lies book, I go over very carefully, both conceptually and numerically, the proof that building equity in your home is not a good strategy. Now, there are people whose peace of mind overrides pure financial effectiveness. And so if that’s the case, that’s fine.

[10:24] But don’t call it a good financial strategy just because your peace of mind needs to have a paid off home in order to sleep at night. And so Spencer, this is the perfect transition into how could you possibly use whole life to be better. You as a family would be so much better building up equity in a whole life insurance policy where you can control it, where it does do a whole bunch of job, where you have the opportunity to use it, where it is movable. And if any day of the week you all of a sudden wake up and absolutely positively have to have your house paid off or a more likely scenario need help making your payments on said home, then your whole life insurance cash value can do that for you instead.

[11:15] So it’s so much more effective and efficient. You’re in so much more control. You cannot lose the equity that you build in cash value of life insurance, unless you accidentally cancel the policy or brawl against it and don’t pay it back. Whereas market forces could cause you to lose home equity. And so you’re so much better, so much more efficient, effective. You then are able to take advantage of efficient debt, which is the mortgage debt and more control on the asset called cash value of life insurance than having your asset be equity in a home. That was a mic drop moment. That was pretty good. I liked that. That explains efficiency. This is how I think of it. If you pay off your house, there’s only two ways to get your money.

[12:08] You’re going to have to sell it or you’re going to have to get some type of loan from the bank. And if you don’t have a job or if extenuating circumstances don’t allow for whatever that may be, then you are totally lost. You have no resources. Whereas if you have your money in a smart plan, like your life insurance plan like this, well, guess what? You now have access to it. You have control. You live the principles of prosperity. I mean, how awesome is that? It makes a world of a difference. Our family has done it that way for almost 30 years. And we are now starting our millennial children on the exact same program because this whole life insurance is the equity and the asset. I was trying to put those two words together

[12:58] that people want to be building. And it’s the first asset that young people should build. And if you’re not a millennial and you’re just starting out to build assets, no matter what your age is, you want to build an asset that helps you. We’ll just run through the seven principles quick. Helps you think from a prosperous mindset. Helps you absolutely make sure that you are seeing the big picture because you can’t see the big picture if all you have is equity in your home. That you’re measuring opportunity costs. So you want to keep those monies available for opportunities that you have flow and cash flow from and to equally important. The whole life insurance cash value is much more controllable principle number five

[13:45] than any other asset, which then you can move it. And when you move it, it multiplies. So that was a super fast run through of the seven principles of prosperity comparing cash value of whole life insurance to equity built in your home. Wonderful, wonderful explanation, Kim. And we will make sure also to put the seven principles of prosperity inside the show notes so that you guys can look at those and glance at them and start to make that a part of your everyday thinking. Thank you for sharing this wisdom with us today, Kim. It was amazing. Happy to do. All right, listeners. And we want to thank you for spending time with us on the podcast. If you like what you hear, make sure you are subscribed.

[14:24] And honestly, one of the best things you could do is click that share button on your phone and share this episode with someone and your family or a friend. Doesn’t matter what their financial situation is. If you think that this conversation will help them, we would love for you to continue to spread that prosperous mindset with everyone else. So thank you for being on the podcast with us today. Thank you for listening to the Prosperity Podcast. 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.