E68: What Happens When You Turn Your Home into an Asset

Nate: In this episode we will continue our discussion on mortgage myths and focus on how it’s possible to turn your house into an asset and completely switch positions with the bank. She’s Holly and she helps people find financial freedom.

Holly: He is Nate, he makes sense out of money. This is Dollars and Nonsense. If you follow the herd you will be slaughtered.

And we really want to thank you for tuning in today. If you’re new, please go back and subscribe and listen to the one previous because we’re going to build off our last episode and for those of you who have already subscribed, please leave us a comment or tell us how this has helped you. We’d love to hear your feedback and be able to respond and help you in any way possible. We hope that what we shared last time we can really build off of this time into really understanding how you can switch positions with the bank.

Nate: We’re talking about mortgages mainly. The average person’s relationship, unless you are maybe a real estate investing or in business in one form, most of us have only had the bank make money off of us. We have never used the bank as an asset to us and made money off of their money. They’ve always been making money off of our deposits, they’re making money off of the loans we’ve got with them they make money, a lot of times there is a discrepancy between how much you’ve used the bank to profit and how much they’ve used you to profit.

With that being said we want to try to switch the scales here. Start making back some money by turning them into an asset and using their money to profit us. And so that’s where we’re at. Talking mainly with mortgages. As Holly just mentioned we did one previously where we kind of itemized some of the pitfalls people fall into and different ways to think about it.

Today we’re going to talk about what you can do. For those of you who already own a home and if you’ve built up equity great. We’re going to focus on, just a couple of ideas of what you may want to focus on and we’re also going to talk about for those of you who are looking to buy a home how you can apply for a mortgage and get it done and build your financial situation around it.

Holly, I guess we can get going today. Let’s start by helping those listeners that have a home already and let’s say they’ve already got some equity built up into it and it’s all sitting there. As we talked about last time, that’s not the best thing for you because it’s idle money. It’s not working for you. It’s not putting money in your pocket. How can we help those people turn their house from just a stagnant financial position into something that’s flourishing and producing value in a lot of different ways?

Holly: Well, I think one of the very first ones and not obvious because most of us just don’t realize it is a HELOC, which is a home equity line of credit. Often we associate a HELOC that the only thing it can be used for or to benefit you from is to add onto your house or to update your house or to remodel or do something with that and so we often don’t think maybe, and I’ll use me for an example, I have a six year old house. What do I need to redo in my house and it’s only six years old? Why would I actually want to find out the benefits of a home equity line of credit?

I think for myself I just was in so much fear of having this equity and what do I do with it? You don’t have to use it. It’s what you could qualify for. What benefits you. And it actually means that the equity in your house isn’t just sitting there earning you zero percent interest.

Nate: We’re here to present ideas and if something sticks and makes sense to you that you want to pursue, run with it. None of these are something you have to do to work with us in any way or anything like that. I think we’re so used to getting screwed by banks and we have such a distaste for most of what they do, that walking in and asking them for money against our house like getting a HELOC is an intimidating thing because we think there’s no way we’re going to make out on this deal good. That we’re going to be on the bad side of this and the bank’s going to make out like a bandit.

The whole goal of this conversation is to put you guys into a position where it may not always be the case. Where you can confidently walk into a bank and let’s say open up a HELOC because you have a plan and you have a strategy and you know what interest you have to pay on a HELOC. You know what you’re going to do with the money and you know how it’s going to profit you. I just wanted to mention at the very beginning, we’ve all got a bad taste with banking relationships. At least for the most part. But we have to start thinking of ways to utilize them as an asset instead of just being concerned about it.

You’re right Holly, one of the things that people can do if you have equity to start unlocking some of that is to just go in and open up a home equity line of credit, a HELOC. Which typically doesn’t even cost very much money if anything. Maybe a tiny origination fee. Maybe zero dollars to walk in. Maybe you have to get your house appraised and pay for an appraisal but very inexpensive way to get a line of credit on your house that is usually a fairly reasonable, fairly cheap interest rate and you only have to pay interest on when you pull money from it. Just having it open is not a bid deal.

But what we do with it, we have a couple ideas that we think you can unlock this idle money that’s not doing anything for you, not putting food on the table, not creating a ton of value and we can pull it out and make profit on it. Obviously I think for those of you who have listened to us many times, you probably know where we’re going with this but one of the main things that we found works really well is to pull money out of the house and use it to fund one these of infinite banking policies.

Holly: There’s a process. You don’t just do it because we told you to do it. Really, like we keep telling you guys, research and find out for yourself if this is something you wanted to do. I actually just went through this experience about nine months ago. I went in and asked, “Hey, can I do a HELOC?” And the sole purpose of why we wanted to do it was number one, see what we qualified for, but number two, how can we use this equity in our house?

Now the growth of the equity shocked me by the worth of our home but the value of us being able to do this really allowed us the opportunity for myself and my husband, we used it to start another policy. Because it was just sitting there. It wasn’t doing us any good. And if we’re not going to use it, the bank’s going to use it. It didn’t do us any benefit just leaving that equity sitting earning nothing for us. At least we had a way where we could put it in a tax free growth environment where we’re not paying taxes on it and we had a guaranteed growth rate and it was better for us to do it that way than not.

Now we didn’t take all the money and just be like, “Hey, let’s go wild and spend it.” We actually consciously considered how we were going to use it and what we were going to use it for.

Nate: Yeah, I think that’s the missing piece for a lot of people is we all lived through that financial crisis mortgage meltdown and people were pulling out money from their house, using it like a bank, just pulling it out and spending and living on it and that’s when they got hit. When the housing market stopped going up in value and lost value, they were upside down, the issue wasn’t just that the were upside. The issue was that they were upside down and they were broke.

There’s a big difference between being upside down in a mortgage because you pulled the money and you had placed it somewhere else where it’s guaranteed to grow and is making money tax free. That’s a different position than those who pulled money out of their house and the market collapsed and they didn’t have any money. And now their house was worth less than they owed and they were broke because they spent it all. I do think that’s a good point Holly that of course what we’re teaching you to do is not just, it’s a great idea to pull money from your house. It’s a great idea to use the equity in your house wisely if it makes sense to use it.

And not every time does it make sense to use it. But what we found a lot of times in today’s low interest rate environment as Holly you just did recently and my last blog as I mentioned I have an interest only loan. I don’t have a lot of equity by design in my house and I don’t live in Carlsbad, California like you do Holly where the appreciating is skyrocketing like mad. Here in the Midwest it’s a bit more neutral. But all of that to say, yeah, it’s something that if you have stagnant equity, we can separate it from the house and what this is going to do for you, if we move it into a policy is immediately we’re going to have a tone of death benefit aren’t we Holly?

Holly: Death benefit and cash but death benefit.

Nate: Let’s say you borrow a hundred thousand out or fifty thousand out of the equity the death benefit could easily be over a million.

Holly: Well I just have to say that it actually helped our financial … If something happened to me and it was on my life or my husband, either one of us, the death benefit more than made up for what we borrowed at. What you get in cash doesn’t even compare to what was borrowed out. It’s okay, that loan can be paid back. It’s paid off in full as well as the house and there’s excess.

Nate: I know. It’s like we borrowed a hundred thousand out and we die. Suddenly the family owes a hundred thousand dollars more than if we had just left the money in there. Oh no. Well, if we use it to buy a policy or we invest it somewhere else, Holly and I are just very keen on the [inaudible 00:09:25], and we use it to buy a policy and they get a check for eight hundred thousand dollars. We borrowed a hundred thousand to buy a policy, the death benefit’s eight hundred thousand, do you think the family’s going to be too upset that there’s a hundred thousand dollars more owed on the house when they’re going to get a check for eight hundred to pay that off and they can walk away with an extra seven hundred thousand tax free?

There’s a huge advantage … actually, I call that legacy money. That what we’ve done we’ve taken the money that was sitting in the house that if you die, your heirs hopefully get that equity. That’s nice. But what if we took the equity out and created something bigger with it? Which one do the heirs really want? And most of the time they’ll say, “We want more money.” Let’s go ahead and pull it out and create more money. Create it with the asset you have available to you.

We do have the death benefit legacy implications but on top of that, in today’s low interest rate environment many times we’re making profit on that money Holly. Where the policy, the cash value growth over the next five years, ten years, is going to outpace the interest that we owe in the bank so every year we can actually make a profit by moving the equity out. That’s why we’re talking about turning the bank’s money into an asset for you. Instead of a house just holding equity and we’re hoping it does something. We don’t plan on ever using it. If we use it we can now have all the money working someplace and actually make more money than it cost to pull it out. That’s what I’m talking about. That’s a win win.

One more point I’ll make is that’s going to provide a lot of liquidity. Inside the policy we’ll have all this cash value building up that used to be money that was sitting in the house. And now we have all this money liquid so that if something happens to you, if you lose your job, you become disabled, something traumatic happens, you now are flush with cash as opposed to flush with equity. And as we talked about last time, when something bad does happen to you, banks don’t like to lend money to people who need it. They like to lend money to people who don’t need it.

And as soon as you actually are in a desperate situation where you need money, it’s going to very hard to find a bank that will provide you money. My suggestion is always get the loans at least approved while you still can. And if we can use it to make a profit on it and to provide liquidity and provide a legacy for our family, then we’re turned something that was idle, something that wasn’t doing anything or much for the family, we’ve turned it into a very valuable asset in many different fronts. If we just move into a policy.

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Nate: Well once we have the policy we have all the cash value, what are some things we can do with the cash value on top of what we’ve already talked about?

Holly: Well I think you can use it for your own real estate investing if you want to do that. You can use it for any type of investment you think, hey, it’s going to earn you better than 3%. It opens up the spectrum to allow you the opportunity to use the money the way you want to do it and in something that you’re passionate about and you enjoy. I’m not big on real estate investment but I know many people that the reason they use the HELOC is specifically so they can put a down payment on another house or buy something as an investment for real estate and turn a profit.

Nate: I call that the velocity of money. The velocity is how much they can make money move, the more money they can make. We are so used to just having money sit that it’s almost unknown to us but what we’ve done is we’ve moved money from an idle asset into a policy where it’s producing all of this value in and of itself.

But then we can even further leverage the policy if we wanted to and invest elsewhere like we’ve talked about with real estate investment or maybe in your business or maybe just paying off high interest credit card debt or something like that. And now what we’ve done is we have our dollars that used to just be sitting in the house not doing anything. There’s idle money. We’ve turned it into something that’s able to buy a policy. Produce value there. Leverage that out to pay off debt or to buy new assets or invest money elsewhere in other assets that we’re comfortable with and suddenly we’ve got our money doing many different things instead of just sitting in the house.

And for whatever reason, a lot of financial people think that it’s a great idea, a lot of us grow up, let’s get our house paid off, owe nothing. And I know that there’s value to that. I’m not opposed to it. Holly, you and I help people do that all the time. I’m not saying it’s a bad idea. I’m just saying let’s be wise about it and think of other opportunities for it to be of value to us. You don’t always just have to have the house paid off. What I would like to do is use my policy to pay off my first mortgage and then open up a HELOC to where I can utilize the money to invest elsewhere and buy new policies but that way I own the first mortgage and the HELOC I have through the bank is operating money.

There’s way you can get the best of both. There’s a lot of money to be made actually if you do own a policy already and want to take over your mortgage with it. There’s a lot of value in doing that transaction too and paying yourself the mortgage payment but just because we do that, doesn’t mean that pulling that back out is a terrible idea. Depends on what you do with it once we do move it out.

Holly: Yeah, and I think that’s just one example is that you do have equity in that home equity line of credit, the HELOC, and if it’s something you’re considering or you’re like, “I don’t know what that takes,” please feel free to call or ask or go with a plan and decide, “Hey, I want to use this for something.” I think the second way we can really look at turning your house into an asset and switching positions is with a reverse mortgage. You have to be over, or age 62 or older, but really sometimes there’s a negative connotation with a reverse mortgage instead of a positive connotation. I think Nate can explain it really well the benefit of what is a reverse mortgage and what are the benefits to using it.

Nate: For those of you who are listening and are older than age 62 or maybe you have parents that are over the age 62 and even grandparents. I don’t care, you know somebody, and maybe they have their whole house paid off lets say. A lot of times a reverse mortgage, you’re only allowed open one up after age 62 so it’s certainly a tool that’s used for an older individual. Many times it’s kind of a last ditch effort. And a lot of times it can actually be used to pay off a mortgage.

Essentially what they do, instead of like a normal mortgage where you pull out money to buy a house and you borrow, essentially what you do is you own a house already and they actually send you money but the balance, instead of you paying it down to zero with your monthly payments, there is no monthly payments with a reverse mortgage and instead, to the bank’s eyes or to the financial institutions’ eyes, what happens is it just compounds with the mortgage interest because you’re not paying it down ever.

And so whenever you die, either bank gets the house and then sells it to make a profit or the heirs have to pay whatever the balance at the time. If you borrow two hundred thousand and die in ten years later, pass away, maybe the balance now is at two seventy-five or something like that. The heirs either have to pay two seventy-five or give the house to the bank.

But how this works in our mentality Holly, I guess what I’m trying to get to, is the reverse mortgage is very nice because unlike a HELOC we don’t ever have to make a dime of payments back towards it. We don’t have to pay any interest ever towards it. And so it’s very flexible for those of you who are in that position over the age 62 or have parents that are doing it to potentially unlock this house with very little value in it other than the fact that it’s got the equity but I’m talking it’s not producing any value for you. It’s not helping you put food on the table in retirement and things like that. It can make sense. You do have to be wary in some reverse mortgages because sometimes the terms are a bit awkward and crazy but to actually pull money out into a reverse mortgage, knowing you don’t have to make any payments on it, and then use that money to buy a policy.

And what is very cool about it is that most of the time, whenever you buy the policy, let’s say we pull out our reverse mortgage for two hundred thousand dollars and our house is worth four hundred thousand, so we’ve got this loan for two hundred thousand. They write us a check for it. They can either write you monthly payments, kind of an annuity style or they can just write you a check, and if we go out and buy a policy, many times the policy death benefit is going to be larger, much larger than the lein on the house due to the reverse mortgage.

Whenever you do die, pass away at some point in the future, many times the heirs are actually going to get more money than if you just left them the house. And now they can say, “Well, we really like Mom and Dad’s house so we’re going to take our cash check from the interest company and pay the house off and keep the house,” or they can say, “We don’t really care about the house. The bank can have it. We got the cash instead.” And that’s what you actually find many people choose to do. But then also for you as a parent or grandparent, you now have all this capital inside of a policy instead of the equity of a home and we can go back to that same idea with the HELOC if we want to invest that money elsewhere to produce more profit.

Or maybe you want to take the money that you now have in a policy and lend it to one of your children as a mortgage for them and they make mortgage payments back to you and you can use it to supplement your retirement income. There’s a lot of things to do but once again it just goes back to using what’s available to you but knowing the numbers. Come talk to Holly or me or something like that. We’ll help you run it. It doesn’t make sense in every situation but it is an idea that can help you if you are over 62 and have a ton of equity in your home. It can make a lot of sense to pull that money out and utilize it in a way that most people just die with the home and they leave so much money on the table just because they were scared to move it out. And many times you’re just scared because you don’t know what you can do and that’s why we encourage you to chat with us about your own situation and we’ll let you know if it makes sense.

Holly: Our goal is not to create more risk in your life. Our goal really for you guys is to really be able to use your houses as assets and make a profit with less risk. We’re taking all the risk because we’re paying the bank all the money and we have nothing to show in return.

Nate: Exactly right. That’s what’s interesting I think, some people don’t understand and you brought that up Holly is that we fear that any time we use the bank’s money we’re putting ourselves at risk. It can be true. Especially if you spend the money. But if all we do is use the bank’s money, set it aside and are earning more on it in a liquid place like a policy than what we’re paying on it, it’s no longer a real risk because we can pay the bank off whenever we want. We can take money out of our policy, the cash values, and just pay the bank off whenever we want to Holly.

We’re hopefully not going to increase your risk of anything. All we’re trying to do is change what you’re doing with the equity that’s sitting around not doing anything and hopefully make a profit on it and actually put you in a better position. As I said at the very beginning of this episode, we’re so used to the bank profiting from us and making money off of and being in the best position, there are ways to flip the scales to use the bank’s money to put yourself in a better position. Without having to take a whole bunch of risk.

Holly, you and I wouldn’t tell someone to borrow money from a bank to invest in the stock market. Unless I guess maybe if you really understood what you were doing. But even then that sounds like a risky proposition but using it to buy a policy, now we’ve got a possibility here where we’re not taking a ton of risk and hopefully we’re actually putting ourselves in a better position.

Holly: Yeah, and I think that’s the goal is if it doesn’t work for you, I think you’re going to get an honest answer of, “Hey, this isn’t your best option.” And so we really want you to understand that we really want the best for you.

Nate: The first two ideas were for those who already have a home. This last one is if you’re looking to buy a home or maybe refinance a home or something like that and you’re trying to decide between getting a 30 year mortgage or a 15 year mortgage, always consider … This is the fundamental essence that sending more money back to the bank as fast as possible, especially on a low interest rate mortgage, is typically not the best thing. We talked about that in the last episode. It puts them in a better position and it gives you less money to invest elsewhere and to do other things with.

I’d always suggest using the 30 year option but what I would suggest doing is running the numbers for what 15 year mortgage would be and actually pay yourself the difference. If the 15 year mortgage was a thousand a month and a 30 year mortgage was six hundred, go ahead and treat it like you’re doing the 15 year mortgage. Do a thousand a month. Six hundred a month would go for the 30 year mortgage on the loan and the four hundred a month go to you. And work with that money.

One thing that I’ve done with my own life is I’ve actually gone even further crazy with the interest only mortgage so I’m not paying any principal to the bank. My payment’s as low as I possibly get it and I’m taking all the principal money that I would have normally sent on one of these mortgages to a bank and I’m putting it into my policy and in 15 years I’m actually going to have enough money in that policy to pay the bank off anyway if I want to. I may not want to though for some of the reason we’ve talked about but regardless, what we’ve done is separate the equity so we can control it instead of the bank and honestly I am a firm believer the more money you can control, the better off you’re going to be in so many ways. Emotionally but also mathematically.

I think what you can do with it is going to just blow everything out of the water as opposed to just sending it to the bank, paying down the mortgage faster where it’s really not going to do much for you and reduce your taxes, increase your risk. All these sorts of things that people just don’t, we’re not taught in school, we’re not taught from day one.

Holly: Don’t just take our word for it. Go and look at what’s out there. And even on the 30 versus 15 year mortgage, ask us if we can run the numbers for you and show you pros and cons and the benefit of it. If there’s a con we’re going to show you that and if there’s a positive, we want to show you that as well. Most of the time the bank is so keen on getting you in and in that paying off the mortgage more quicker at a lower interest rate that we don’t see what the downside is to that.

Nate: And that’s what we wanted to do. We hope that these past couple of episodes for those of you who still had lingering questions … I think that’s probably the one that I get the most Holly as far as questions go because it happens to be a huge decision for a lot of people. A lot of you who already have been living in a home and have moved a couple of times. May have built up a decent amount of equity. And have thought deep down, “There’s got to be something I can do with it,” but didn’t know. I’m here to tell you that there is something you can do with it and the less money you give to the bank and the more money you keep in your pocket I really think is going to behoove you to do so. Puts you in a better position and allows you to work with more money. I think that’s always an exciting opportunity.

We have an idea. We have a process to help you with that. These policies can be very uniquely set up so that it helps you very much. And if you wanted to see what it looks like, as Holly said, go ahead and give us a call.

Holly: And we really thank you for your time and for visiting with us today. This has been Dollars and Nonsense. If you follow the herd, you will be slaughter. For free transcripts and resources please visit livingwealth.com/e68