WEBVTT 00:00:00.000 --> 00:00:01.620 You know, I was walking through my living room 00:00:01.620 --> 00:00:03.759 this morning, tripping over a slightly uneven 00:00:03.759 --> 00:00:06.519 floorboard, staring at a hairline crack in the 00:00:06.519 --> 00:00:10.720 plaster near the ceiling, and I had this sudden, 00:00:10.960 --> 00:00:15.000 weird realization. Oh, yeah. We spend so much 00:00:15.000 --> 00:00:17.160 of our lives thinking about our homes purely 00:00:17.160 --> 00:00:20.160 as shelter. It's where we sleep. It's where we 00:00:20.160 --> 00:00:23.719 make toast. It's where we argue over whose turn 00:00:23.719 --> 00:00:26.000 it is to do the dishes. The important stuff. 00:00:26.120 --> 00:00:28.559 The really important stuff. But we rarely stop 00:00:28.559 --> 00:00:30.179 to think about the fact that we are physically 00:00:30.179 --> 00:00:33.409 living inside a financial instrument. It is a 00:00:33.409 --> 00:00:35.549 bit like living inside a high -yield savings 00:00:35.549 --> 00:00:38.189 account that you also have to vacuum and paint 00:00:38.189 --> 00:00:40.310 every few years. Right. A high -maintenance savings 00:00:40.310 --> 00:00:43.070 account that occasionally leaks water. But that 00:00:43.070 --> 00:00:45.170 really is the core of what we're exploring today. 00:00:45.390 --> 00:00:47.549 For millions of people, the house isn't just 00:00:47.549 --> 00:00:50.189 a home. It is the hidden piggy bank. For sure. 00:00:50.250 --> 00:00:52.109 For the vast majority of the middle class, it 00:00:52.109 --> 00:00:54.270 is the single largest asset on their personal 00:00:54.270 --> 00:00:56.920 balance sheet. It dwarfs everything else. But 00:00:56.920 --> 00:00:59.399 unlike, you know, a ceramic piggy bank, you can't 00:00:59.399 --> 00:01:01.679 just smash it open on the kitchen counter when 00:01:01.679 --> 00:01:04.099 you need cash for a vacation or a medical bill. 00:01:04.219 --> 00:01:08.680 Well, you could try, but the repair costs would 00:01:08.680 --> 00:01:11.180 essentially negate the withdrawal and your neighbors 00:01:11.180 --> 00:01:13.799 would probably call the police. Exactly. So the 00:01:13.799 --> 00:01:17.280 question becomes, how do you get the value out 00:01:17.280 --> 00:01:20.780 without selling the thing and moving into a tent? 00:01:21.540 --> 00:01:23.640 And that is our mission today. We're doing a 00:01:23.640 --> 00:01:26.819 deep dive into the world of the home equity loan. 00:01:27.040 --> 00:01:28.980 And I think it's important to say right up front, 00:01:29.040 --> 00:01:30.739 if you're listening and thinking, oh, I know 00:01:30.739 --> 00:01:33.459 about these, maybe stick around. Why is that? 00:01:33.939 --> 00:01:36.879 Because the entire landscape of borrowing against 00:01:36.879 --> 00:01:39.700 your home has completely shifted beneath our 00:01:39.700 --> 00:01:41.760 feet. It's a whole different ballgame than it 00:01:41.760 --> 00:01:44.239 was even a decade ago. It really is. I was surprised 00:01:44.239 --> 00:01:46.000 looking through the research. If you bought a 00:01:46.000 --> 00:01:48.079 house 10 or 15 years ago and you think you know 00:01:48.079 --> 00:01:50.989 the rules of this game. You might be in for a 00:01:50.989 --> 00:01:54.150 rude awakening. The tax laws have changed. The 00:01:54.150 --> 00:01:56.370 structures have evolved and the risks. Well, 00:01:56.430 --> 00:01:58.650 the risks are always there, but they look very 00:01:58.650 --> 00:02:01.310 different in today's economic climate. We have 00:02:01.310 --> 00:02:04.170 got a massive stack of source material here covering 00:02:04.170 --> 00:02:08.090 everything from ACLSEs to federal tax regulations. 00:02:08.569 --> 00:02:11.639 Our goal is to move past the jargon. We're going 00:02:11.639 --> 00:02:14.259 to explain LINs and LTVs so they actually mean 00:02:14.259 --> 00:02:17.000 something to you, not just acronyms on a piece 00:02:17.000 --> 00:02:19.259 of paper. We want to get into the nuts and bolts. 00:02:19.479 --> 00:02:21.379 We want to understand the reality of putting 00:02:21.379 --> 00:02:24.300 your shelter on the line for cash. And that is 00:02:24.300 --> 00:02:26.259 the key distinction to start with. We're talking 00:02:26.259 --> 00:02:29.379 about liquidity, yes, getting access to spendable 00:02:29.379 --> 00:02:31.419 money. But we are also talking about collateral. 00:02:31.879 --> 00:02:33.879 That's the word. This isn't a credit card where 00:02:33.879 --> 00:02:35.960 the worst case scenario is a bad credit score 00:02:35.960 --> 00:02:38.810 and some angry letters. This is your house. The 00:02:38.810 --> 00:02:40.389 stakes are literally the roof over your head. 00:02:40.509 --> 00:02:42.210 That puts a bit of a chill in the air, doesn't 00:02:42.210 --> 00:02:45.289 it? But it's the necessary context. Okay, let's 00:02:45.289 --> 00:02:47.430 unpack this. Let's start with the absolute basics. 00:02:47.629 --> 00:02:50.409 Section one, the fundamental mechanics. Let's 00:02:50.409 --> 00:02:52.530 do it. When we say home equity loan, what are 00:02:52.530 --> 00:02:54.770 we actually defining? What is this beast? At 00:02:54.770 --> 00:02:58.169 its absolute core, it is a secured loan. You, 00:02:58.449 --> 00:03:01.469 the borrower, are using the accumulated equity 00:03:01.469 --> 00:03:04.409 in your property as the collateral to guarantee 00:03:04.409 --> 00:03:06.710 the debt. Okay, equity. Let's break that down 00:03:06.710 --> 00:03:08.030 first. That's just the part of the house you 00:03:08.030 --> 00:03:10.729 actually own, right? The value minus what you 00:03:10.729 --> 00:03:13.389 still owe on the mortgage. Precisely. If your 00:03:13.389 --> 00:03:17.770 house is worth $400 ,000 and you owe $250 ,000 00:03:17.770 --> 00:03:21.050 on your mortgage, you have $150 ,000 in equity. 00:03:21.870 --> 00:03:25.870 That's your piggy bank. And collateral. It's 00:03:25.870 --> 00:03:27.610 such a heavy word. It sounds like something from 00:03:27.610 --> 00:03:30.680 a spy movie. It's the ultimate leverage. You 00:03:30.680 --> 00:03:32.919 are telling the bank, I promise to pay you back. 00:03:33.000 --> 00:03:35.699 And I am so confident that I will pay you back 00:03:35.699 --> 00:03:37.800 that if I don't, you can take my house. Wow. 00:03:37.979 --> 00:03:40.620 When you put it like that. That security is why 00:03:40.620 --> 00:03:42.699 the interest rates are generally lower than an 00:03:42.699 --> 00:03:45.719 unsecured personal loan or credit card. But it's 00:03:45.719 --> 00:03:47.500 also why the process is so much more invasive. 00:03:48.080 --> 00:03:49.759 They want to know everything. Right, because 00:03:49.759 --> 00:03:52.039 the bank isn't just looking at you and your credit 00:03:52.039 --> 00:03:54.800 score. They are looking at the asset. They need 00:03:54.800 --> 00:03:57.180 to know what the house is actually worth. Exactly. 00:03:57.360 --> 00:03:59.479 And from the research, it seems the bank doesn't 00:03:59.479 --> 00:04:01.460 just take your word for it. You can't just print 00:04:01.460 --> 00:04:04.800 out his estimate. No, definitely not. You can't 00:04:04.800 --> 00:04:07.400 just say, well, Zillow says my house is worth 00:04:07.400 --> 00:04:09.400 a million bucks and my neighbor sold his for 00:04:09.400 --> 00:04:12.360 a fortune, so cut me a check. The bank relies 00:04:12.360 --> 00:04:16.000 on a gatekeeper, the appraiser. The person with 00:04:16.000 --> 00:04:18.500 the clipboard who decides your financial fate. 00:04:18.839 --> 00:04:21.939 Essentially, yes. The lending institution sends 00:04:21.939 --> 00:04:24.720 an independent third -party appraiser to determine 00:04:24.720 --> 00:04:26.800 the fair market value of your home. And what 00:04:26.800 --> 00:04:29.279 are they looking for? Are they like checking 00:04:29.279 --> 00:04:31.540 for dust bunnies? Not exactly. They're looking 00:04:31.540 --> 00:04:33.529 at the big picture. The condition of the roof, 00:04:33.730 --> 00:04:36.970 the age of the HVAC system, the square footage, 00:04:37.250 --> 00:04:39.730 the number of bedrooms and bathrooms. I hate 00:04:39.730 --> 00:04:42.629 the hard facts. And crucially, they look at recent 00:04:42.629 --> 00:04:45.350 sales of similar houses in your immediate area. 00:04:45.410 --> 00:04:47.910 They call them comps or comparables. So if three 00:04:47.910 --> 00:04:50.269 houses like mine on my street sold for around 00:04:50.269 --> 00:04:53.670 $400 ,000 in the last six months. Then your appraisal 00:04:53.670 --> 00:04:55.589 is probably going to land right in that ballpark. 00:04:55.730 --> 00:04:57.850 They're trying to establish what a willing buyer 00:04:57.850 --> 00:05:00.269 would pay for your house today. That number. 00:05:00.810 --> 00:05:03.610 The appraisal value is the hard ceiling. It doesn't 00:05:03.610 --> 00:05:05.829 matter what I think the house is worth or how 00:05:05.829 --> 00:05:08.029 much sentimental value it has because my kid 00:05:08.029 --> 00:05:10.350 grew up there. None of that matters to the bank. 00:05:10.829 --> 00:05:13.410 The loan limit is strictly determined by that 00:05:13.410 --> 00:05:15.670 cold, hard number on the appraiser's report. 00:05:15.970 --> 00:05:18.069 Okay, so let's say the appraiser comes in, looks 00:05:18.069 --> 00:05:20.790 at your new backsplash, nods approvingly, and 00:05:20.790 --> 00:05:22.709 gives you a number you like. You move forward. 00:05:23.329 --> 00:05:25.889 Now we run into this legal term that I see everywhere 00:05:25.889 --> 00:05:30.569 in the fine print. The lien. L -I -E -N. It sounds 00:05:30.569 --> 00:05:33.029 almost predatory, like a lion waiting in the 00:05:33.029 --> 00:05:36.310 tall grass. What is a lien? It is a very serious 00:05:36.310 --> 00:05:38.949 legal concept. When you close on a home equity 00:05:38.949 --> 00:05:42.310 loan, the lender places a lien against your property. 00:05:42.879 --> 00:05:45.740 Think of it as a legal claim or a neon sticky 00:05:45.740 --> 00:05:48.459 note super glued to your property deed at the 00:05:48.459 --> 00:05:50.459 county recorder's office. Public record. It's 00:05:50.459 --> 00:05:52.879 a public record that says this property has a 00:05:52.879 --> 00:05:55.779 debt attached to it. The owner cannot sell this 00:05:55.779 --> 00:05:58.540 house or transfer the title cleanly without paying 00:05:58.540 --> 00:06:01.579 us, the lien holder, first. So it's basically 00:06:01.579 --> 00:06:03.759 a flag that tells the whole world, hey, the bank 00:06:03.759 --> 00:06:05.779 has a piece of this property. That's exactly 00:06:05.779 --> 00:06:08.279 what it is. It secures their interest. And that 00:06:08.279 --> 00:06:10.699 leem thin has a mathematical consequence, right? 00:06:10.800 --> 00:06:12.759 It's not just paperwork floating in the ether. 00:06:12.879 --> 00:06:15.139 Correct. It is a direct subtraction from your 00:06:15.139 --> 00:06:18.779 ownership. Your equity is simply the value of 00:06:18.779 --> 00:06:21.899 the home minus what you owe. The moment that 00:06:21.899 --> 00:06:23.639 leem thin is recorded and the money hits your 00:06:23.639 --> 00:06:26.980 account, your equity drops. So if I had $150 00:06:26.980 --> 00:06:30.339 ,000 in equity and I take out a $50 ,000 loan. 00:06:30.680 --> 00:06:33.899 Your equity is now $100 ,000. You've effectively 00:06:33.899 --> 00:06:36.319 transferred that ownership stake. to the bank 00:06:36.319 --> 00:06:39.339 in exchange for cash. You own less of your home 00:06:39.339 --> 00:06:41.620 than you did five minutes ago. Which brings us 00:06:41.620 --> 00:06:43.939 to the term second mortgage. I've heard people 00:06:43.939 --> 00:06:47.120 use home equity loan and second mortgage interchangeably. 00:06:47.180 --> 00:06:49.279 Is that accurate or is there a nuance I'm missing? 00:06:49.459 --> 00:06:51.339 No, it's very accurate. Yeah. They are called 00:06:51.339 --> 00:06:53.800 second mortgages because of their position in 00:06:53.800 --> 00:06:56.160 the hierarchy of debt. It's all about who gets 00:06:56.160 --> 00:06:58.040 paid first if things go wrong. Like a dinner 00:06:58.040 --> 00:07:00.040 line. It's exactly like a dinner line. If you 00:07:00.040 --> 00:07:02.490 go bankrupt. Or if the house is sold to pay off 00:07:02.490 --> 00:07:05.129 debts, the first mortgage, usually the big loan 00:07:05.129 --> 00:07:07.290 you use to buy the house initially, eats first. 00:07:07.509 --> 00:07:09.810 They are first in line and get paid back in full. 00:07:09.990 --> 00:07:12.009 And the home equity loan. The home equity loan 00:07:12.009 --> 00:07:14.649 sits in the second position. They get whatever 00:07:14.649 --> 00:07:18.089 is left over. The scraps, if you will. Which 00:07:18.089 --> 00:07:19.810 explains why the interest rates on these are 00:07:19.810 --> 00:07:21.730 usually a little higher than a primary mortgage. 00:07:22.290 --> 00:07:24.490 The bank in the second position is taking on 00:07:24.490 --> 00:07:26.709 more risk. Way more risk. If the house sells 00:07:26.709 --> 00:07:28.769 for less than expected and the money runs out 00:07:28.769 --> 00:07:31.029 before they get paid, they're just... Out of 00:07:31.029 --> 00:07:33.009 luck. They're out of luck. They take the loss. 00:07:33.529 --> 00:07:36.170 And because they are taking that risk, they are 00:07:36.170 --> 00:07:38.709 incredibly picky about who they invite to the 00:07:38.709 --> 00:07:41.269 party. This isn't a loan for everyone. No, the 00:07:41.269 --> 00:07:43.550 sources are very clear on this. It's not like 00:07:43.550 --> 00:07:45.730 applying for a department store credit card. 00:07:45.829 --> 00:07:48.350 Not at all. Most home equity products require. 00:07:49.259 --> 00:07:51.860 Good to excellent credit history. We're talking 00:07:51.860 --> 00:07:54.939 scores in the high 600s at an absolute minimum 00:07:54.939 --> 00:07:57.980 and more often in the 700s. So if you're rocking 00:07:57.980 --> 00:08:00.519 a 580 credit score because you missed some phone 00:08:00.519 --> 00:08:02.899 bill payments three years ago, this door is likely 00:08:02.899 --> 00:08:06.040 locked for you. Tightly locked and vaulted. They're 00:08:06.040 --> 00:08:07.860 also going to look at your income, your other 00:08:07.860 --> 00:08:10.899 debts, your whole financial picture. And even 00:08:10.899 --> 00:08:12.720 if you have a credit score, you have to pass 00:08:12.720 --> 00:08:16.240 the math test, the ratios, specifically the LTV. 00:08:17.439 --> 00:08:19.639 Loan to value. This seems to be the holy grail 00:08:19.639 --> 00:08:22.300 metric for lenders. This is the metric that keeps 00:08:22.300 --> 00:08:25.480 bankers up at night. LTV is simply a fraction. 00:08:25.699 --> 00:08:28.779 The amount of loan debt divided by the appraisal 00:08:28.779 --> 00:08:30.899 value of the home. Okay, help me visualize this. 00:08:31.019 --> 00:08:32.779 I want to make sure I get the math right. Let's 00:08:32.779 --> 00:08:35.279 say my house is worth exactly $100 ,000, just 00:08:35.279 --> 00:08:37.919 to keep it simple. Okay, $100 ,000 house. And 00:08:37.919 --> 00:08:41.399 I still owe $80 ,000 on my first mortgage. So 00:08:41.399 --> 00:08:44.840 your current LTV is 80%. You have $20 ,000 or 00:08:44.840 --> 00:08:47.919 20 % in equity. Now, if I want a home equity 00:08:47.919 --> 00:08:49.879 loan on top of that, you said lenders look at 00:08:49.879 --> 00:08:52.440 the combined loan to value or CLTV. Exactly. 00:08:52.559 --> 00:08:54.740 They add the existing mortgage and the new loan 00:08:54.740 --> 00:08:56.759 together. So if you want to borrow $10 ,000. 00:08:57.019 --> 00:09:00.480 My total debt would be $80 ,000 plus the new 00:09:00.480 --> 00:09:04.200 $10 ,000. So $90 ,000. Correct. Your new CLTV 00:09:04.200 --> 00:09:07.360 would be 90%. $90 ,000 divided by $100 ,000. 00:09:07.539 --> 00:09:09.120 And there's a cap on that, right? They won't 00:09:09.120 --> 00:09:11.259 let you go up to 100%. They won't let me borrow 00:09:11.259 --> 00:09:14.379 the full remaining $20 ,000 in my equity. Very 00:09:14.379 --> 00:09:17.159 rarely. In fact, most lenders want a buffer. 00:09:17.279 --> 00:09:21.679 They might cap you at 85 % or 90 % CLTV, depending 00:09:21.679 --> 00:09:24.299 on the market and your credit score. Why? Why 00:09:24.299 --> 00:09:26.419 leave that money on the table? Because they're 00:09:26.419 --> 00:09:29.610 terrified of the housing market dipping. They 00:09:29.610 --> 00:09:31.169 want to ensure that the housing market drops 00:09:31.169 --> 00:09:34.669 by 5 % or 10%. You don't instantly flip underwater. 00:09:34.950 --> 00:09:37.070 Underwater, meaning I owe more than the house 00:09:37.070 --> 00:09:39.509 is worth. The nightmare scenario. They want you 00:09:39.509 --> 00:09:41.529 to keep some skin in the game. They need you 00:09:41.529 --> 00:09:43.370 to have a financial incentive to keep paying 00:09:43.370 --> 00:09:46.470 the mortgage, even if values fall. That phrase, 00:09:46.529 --> 00:09:48.570 skin in the game, is interesting because for 00:09:48.570 --> 00:09:51.409 the homeowner, that skin is actual cash equity. 00:09:51.590 --> 00:09:54.090 It's their savings. It is. It's the portion they 00:09:54.090 --> 00:09:57.360 stand to lose. So we know the mechanics. We know 00:09:57.360 --> 00:09:59.460 the gatekeepers. Now let's talk about the why. 00:09:59.620 --> 00:10:01.919 Why are people jumping through all these hoops? 00:10:01.919 --> 00:10:03.899 What are they doing with this cash? It's not 00:10:03.899 --> 00:10:06.080 just for fun, right? Well, sometimes it is, but 00:10:06.080 --> 00:10:09.500 the data on this is really a mirror of American 00:10:09.500 --> 00:10:11.740 anxiety and ambition, to be honest. It tells 00:10:11.740 --> 00:10:13.980 a story about what we value and what we fear. 00:10:14.080 --> 00:10:16.580 How so? What's the number one reason? The top 00:10:16.580 --> 00:10:19.279 use cited in the source material is home repairs. 00:10:20.460 --> 00:10:22.419 Home improvement projects. That makes sense. 00:10:22.440 --> 00:10:24.460 That's the logical one. You borrow against the 00:10:24.460 --> 00:10:27.179 house to fix the house. New roof, new kitchen, 00:10:27.320 --> 00:10:29.559 finishing the basement. It feels like a closed 00:10:29.559 --> 00:10:31.940 loop, right? Yeah. You pull equity out. You put 00:10:31.940 --> 00:10:34.419 it back in via a renovation, hopefully increasing 00:10:34.419 --> 00:10:36.500 the value of the asset itself. Right. You're 00:10:36.500 --> 00:10:38.720 reinvesting in the asset. It feels productive. 00:10:39.259 --> 00:10:42.480 Ideally, yes. If you spend $30 ,000 on a kitchen 00:10:42.480 --> 00:10:45.559 and the appraisal says it added $30 ,000 to the 00:10:45.559 --> 00:10:49.360 home value, it's a wash. You just converted illiquid 00:10:49.360 --> 00:10:51.620 equity into granite countertops and new appliances. 00:10:51.919 --> 00:10:53.980 But then look at the other two common uses. They're 00:10:53.980 --> 00:10:57.419 a bit heavier. The second one is medical bills. 00:10:57.720 --> 00:11:00.159 Oof, yeah. That's the dark side of the piggy 00:11:00.159 --> 00:11:02.879 bank analogy. It really is. It's people using 00:11:02.879 --> 00:11:05.320 their shelter as a safety net for a health crisis. 00:11:05.559 --> 00:11:07.639 It's emergency liquidity because they don't have 00:11:07.639 --> 00:11:10.179 the cash on hand to cover a surgery or a long 00:11:10.179 --> 00:11:12.299 -term treatment. So the home becomes the lender 00:11:12.299 --> 00:11:14.360 of last resort for their health. It often is. 00:11:14.659 --> 00:11:17.919 And the third big one. College education. Ah, 00:11:18.200 --> 00:11:21.519 the other massive American expense. So investing 00:11:21.519 --> 00:11:25.340 in human capital. Exactly. You see parents stripping 00:11:25.340 --> 00:11:28.019 equity out of their retirement asset, the home, 00:11:28.100 --> 00:11:31.320 to pay for a degree for their kids, making a 00:11:31.320 --> 00:11:34.320 bet that the degree will generate enough income 00:11:34.320 --> 00:11:37.980 to pay the loan back over time. It's incredible 00:11:37.980 --> 00:11:40.120 when you think about it. It shows you how central 00:11:40.120 --> 00:11:42.799 the home is to the entire financial life cycle 00:11:42.799 --> 00:11:45.419 of a family. It truly is. It funds the house 00:11:45.419 --> 00:11:47.679 itself. It protects the health of the family 00:11:47.679 --> 00:11:50.200 inside. And it funds the future earnings of the 00:11:50.200 --> 00:11:52.200 children. It's doing a lot of heavy lifting. 00:11:52.340 --> 00:11:54.679 Now, I want to clear up a misconception I saw 00:11:54.679 --> 00:11:56.659 in the notes. I think this confuses a lot of 00:11:56.659 --> 00:11:58.899 first -time buyers. Some people think they can 00:11:58.899 --> 00:12:01.639 use a home equity loan to actually buy a house. 00:12:01.840 --> 00:12:03.860 Yeah, that comes up a lot. You hear loan and 00:12:03.860 --> 00:12:05.419 home, and you put them together. Can you use 00:12:05.419 --> 00:12:07.700 one instead of a regular mortgage? I'm glad you 00:12:07.700 --> 00:12:09.519 brought that up because it trips people up constantly. 00:12:09.860 --> 00:12:13.080 By definition, a home equity loan requires equity. 00:12:13.980 --> 00:12:16.879 You have to already own the asset to borrow against 00:12:16.879 --> 00:12:19.610 it. It's right there in the name. It is. You 00:12:19.610 --> 00:12:22.230 cannot use a home equity loan to purchase a home 00:12:22.230 --> 00:12:24.330 initially because you don't own it yet. You have 00:12:24.330 --> 00:12:26.529 zero equity in a house you haven't bought. It's 00:12:26.529 --> 00:12:28.269 like trying to withdraw money from a savings 00:12:28.269 --> 00:12:30.509 account you haven't opened. Perfect analogy. 00:12:30.830 --> 00:12:33.570 You use a traditional mortgage to acquire the 00:12:33.570 --> 00:12:37.110 property. You use a home equity loan to refinance, 00:12:37.129 --> 00:12:39.970 cash out, or leverage the value after you've 00:12:39.970 --> 00:12:42.149 bought it and paid it down for a while. And what 00:12:42.149 --> 00:12:44.690 about the timeline? A mortgage is usually a 30 00:12:44.690 --> 00:12:47.789 -year marathon. You sign the papers and you assume 00:12:47.789 --> 00:12:49.870 you'll be paying it until you have gray hair. 00:12:50.149 --> 00:12:52.950 Are home equity loans the same kind of long -term 00:12:52.950 --> 00:12:56.370 commitment? Not always. While a first mortgage 00:12:56.370 --> 00:12:59.169 is almost always 15 or 30 years, home equity 00:12:59.169 --> 00:13:01.649 loans can be much shorter. Think of it as more 00:13:01.649 --> 00:13:04.289 of a sprint. How short? You might see terms for 00:13:04.289 --> 00:13:07.129 5, 10 or 15 years. They're designed to be paid 00:13:07.129 --> 00:13:09.759 off faster. Which sounds good, right? Yeah. Getting 00:13:09.759 --> 00:13:12.220 out of debt faster is the goal. It is, but there's 00:13:12.220 --> 00:13:14.379 a trade -off. A shorter term means the monthly 00:13:14.379 --> 00:13:16.879 payments can be aggressively high compared to 00:13:16.879 --> 00:13:19.720 a 30 -year amortization. You're squeezing the 00:13:19.720 --> 00:13:21.879 same amount of principal repayment into a much 00:13:21.879 --> 00:13:23.940 smaller window. So your mingly cash flow takes 00:13:23.940 --> 00:13:26.480 a much bigger hit. A significantly bigger hit. 00:13:26.700 --> 00:13:30.460 Okay. So we've established the what and the why. 00:13:30.960 --> 00:13:33.159 Now we have to talk about the how, because it 00:13:33.159 --> 00:13:35.399 turns out when you walk into the bank, there 00:13:35.399 --> 00:13:38.320 isn't just one flavor of home equity loan on 00:13:38.320 --> 00:13:40.720 the menu. There's a fork in the road. The great 00:13:40.720 --> 00:13:43.440 divide. This is where people often get paralyzed 00:13:43.440 --> 00:13:46.299 by choice. We have the closed end loan versus 00:13:46.299 --> 00:13:48.220 the open end loan. Let's start with flavor number 00:13:48.220 --> 00:13:52.070 one. The closed -end loan. The source calls this 00:13:52.070 --> 00:13:54.809 the traditional approach. This is the vanilla 00:13:54.809 --> 00:13:57.110 ice cream of lending, I guess. It's a great way 00:13:57.110 --> 00:13:59.429 to put it. When you sit at the dinner table and 00:13:59.429 --> 00:14:01.850 say, I'm getting a home equity loan, this is 00:14:01.850 --> 00:14:03.690 usually what you mean. So what's the mechanism? 00:14:04.129 --> 00:14:06.610 It's a one -time event. You apply for a specific 00:14:06.610 --> 00:14:08.789 amount, you get approved, you sign the papers, 00:14:08.850 --> 00:14:11.590 and wham, a lump sum of cash hits your bank account. 00:14:11.750 --> 00:14:14.370 So if I need $50 ,000 for a contractor to build 00:14:14.370 --> 00:14:17.519 a deck, I get the full $50 ,000 on day one. The 00:14:17.519 --> 00:14:20.700 full 50 grand. And because it's a lump sum, the 00:14:20.700 --> 00:14:23.519 structure is very rigid and predictable. You 00:14:23.519 --> 00:14:25.440 usually have a fixed interest rate and a fixed 00:14:25.440 --> 00:14:27.440 monthly payment for the entire life of the loan. 00:14:27.659 --> 00:14:29.860 Predictable. I like predictable. Most people 00:14:29.860 --> 00:14:32.840 do. You know exactly what check you have to write 00:14:32.840 --> 00:14:35.440 every month for the next 10 or 15 years. There 00:14:35.440 --> 00:14:37.779 are no surprises. It sounds a lot like a car 00:14:37.779 --> 00:14:40.120 loan or a standard personal loan. Same structure. 00:14:40.360 --> 00:14:42.840 Very similar structure -wise. It's safe, it's 00:14:42.840 --> 00:14:45.450 boring, and it's predictable. You get the money, 00:14:45.529 --> 00:14:47.669 you spend the money, you pay it back on a set 00:14:47.669 --> 00:14:50.549 schedule. It's great for a big one -time expense 00:14:50.549 --> 00:14:53.429 where you know the exact cost up front. But life 00:14:53.429 --> 00:14:55.529 isn't always predictable, is it? That's the catch. 00:14:55.690 --> 00:14:57.710 Maybe you don't need all the money today. Maybe 00:14:57.710 --> 00:14:59.950 you need some now, some in six months. Maybe 00:14:59.950 --> 00:15:03.090 the contractor says the deck is $50 ,000, but 00:15:03.090 --> 00:15:05.590 then lumber prices drop and it's only $40 ,000. 00:15:05.649 --> 00:15:08.190 Now I have $10 ,000 sitting around that I'm paying 00:15:08.190 --> 00:15:10.769 interest on for no reason. And that is the perfect 00:15:10.769 --> 00:15:13.629 entry point for flavor number two, the open -end 00:15:13.629 --> 00:15:16.580 loan. Or, as the cool kids in banking call it, 00:15:16.840 --> 00:15:20.259 the HELOC. Home Equity Line of Credit. That's 00:15:20.259 --> 00:15:22.700 the one. This feels less like a loan and more 00:15:22.700 --> 00:15:25.600 like a credit card with a massive limit that's 00:15:25.600 --> 00:15:27.820 secured by my house. That is the best way to 00:15:27.820 --> 00:15:29.500 think about it. It's a revolving line of credit. 00:15:29.600 --> 00:15:32.220 It's a revolving door. The bank approves you 00:15:32.220 --> 00:15:35.440 for a maximum credit limit, say $100 ,000. But 00:15:35.440 --> 00:15:37.809 on day one, you owe zero. You haven't taken anything 00:15:37.809 --> 00:15:40.370 yet? Nothing. You simply possess a checkbook 00:15:40.370 --> 00:15:42.809 or a debit card tied to your house's equity. 00:15:43.110 --> 00:15:45.350 You choose when to pull the money out, how much 00:15:45.350 --> 00:15:47.529 to pull out, and what to use it for up to your 00:15:47.529 --> 00:15:49.629 limit. The flexibility there sounds amazing. 00:15:49.710 --> 00:15:51.889 If I'm doing a home renovation and I don't know 00:15:51.889 --> 00:15:54.730 if materials will cost $20 ,000 or $40 ,000, 00:15:54.929 --> 00:15:57.870 I can just pay the bills as they come. It's incredibly 00:15:57.870 --> 00:16:00.009 convenient for projects with uncertain costs 00:16:00.009 --> 00:16:03.610 or for having an emergency fund on standby. And 00:16:03.610 --> 00:16:06.009 you only pay interest on what you actually borrow. 00:16:06.169 --> 00:16:09.769 Exactly. If you have a $100 ,000 line, but you've 00:16:09.769 --> 00:16:13.309 only used $10 ,000 to fix the roof, you only 00:16:13.309 --> 00:16:15.970 pay interest on that $10 ,000. The other $90 00:16:15.970 --> 00:16:18.309 ,000 is just sitting there waiting, costing you 00:16:18.309 --> 00:16:20.289 nothing in interest. Okay, that sounds fantastic. 00:16:20.730 --> 00:16:24.129 So where's the trap? Because that sounds too 00:16:24.129 --> 00:16:26.389 good to be true compared to the rigid lump sum 00:16:26.389 --> 00:16:29.490 loan. The trap, or at least the major risk, is 00:16:29.490 --> 00:16:32.259 the interest rate. Unlike the boring, safe, closed 00:16:32.259 --> 00:16:34.720 -end loan with its fixed rate that never changes, 00:16:35.379 --> 00:16:38.460 HELO SEs almost always have adjustable interest 00:16:38.460 --> 00:16:41.679 rates. Variable rates. My stomach tightens just 00:16:41.679 --> 00:16:44.279 hearing that phrase. It should. It means your 00:16:44.279 --> 00:16:47.700 interest rate can go up or down over time. The 00:16:47.700 --> 00:16:49.940 rate is typically pegged to a financial index, 00:16:50.179 --> 00:16:53.259 most commonly the prime rate, plus a margin set 00:16:53.259 --> 00:16:56.049 by the bank. So the bank says... We will charge 00:16:56.049 --> 00:16:59.710 you the prime rate plus, say, 1%. Correct. So 00:16:59.710 --> 00:17:03.029 if the prime rate is 5%, your rate is 6%. But 00:17:03.029 --> 00:17:04.809 if the Federal Reserve raises interest rates 00:17:04.809 --> 00:17:07.490 to combat inflation, or the economy heats up, 00:17:07.630 --> 00:17:11.069 the prime rate could jump to 7%. And suddenly, 00:17:11.210 --> 00:17:14.730 my HELC rate jumps to 8 % without me doing anything. 00:17:14.910 --> 00:17:17.470 Your monthly interest payment just went up significantly, 00:17:17.710 --> 00:17:20.410 and you have zero control over that external 00:17:20.410 --> 00:17:22.920 factor. You are floating on the waves of the 00:17:22.920 --> 00:17:25.019 global economy. So you're betting that interest 00:17:25.019 --> 00:17:27.799 rates will stay low or at least manageable for 00:17:27.799 --> 00:17:30.140 the life of the loan. That's a huge gamble. You 00:17:30.140 --> 00:17:32.220 absolutely are. And there is another seduction 00:17:32.220 --> 00:17:34.039 here that catches a lot of people off guard. 00:17:34.240 --> 00:17:36.140 It's the payment structure during the initial 00:17:36.140 --> 00:17:38.380 phase. What do you mean? Most ELUGs have two 00:17:38.380 --> 00:17:41.640 phases. The first, often for the first 10 years, 00:17:41.819 --> 00:17:44.539 is called the draw period. During this time, 00:17:44.640 --> 00:17:47.099 you can borrow from the line. And the source 00:17:47.099 --> 00:17:49.799 notes, your minimum required payment can be interest 00:17:49.799 --> 00:17:52.539 only. Wait, explain that. I can pay the bill 00:17:52.539 --> 00:17:55.460 every month, but not actually reduce the principal 00:17:55.460 --> 00:17:58.539 debt I owe. That's exactly it. If you've borrowed 00:17:58.539 --> 00:18:02.140 $50 ,000, your minimum monthly payment is just 00:18:02.140 --> 00:18:04.640 the interest that accrued that month. You aren't 00:18:04.640 --> 00:18:07.940 paying back a single penny of the $50 ,000 itself. 00:18:08.279 --> 00:18:10.279 So you're just renting the money from the bank. 00:18:10.500 --> 00:18:12.779 You're just renting it. And because it's interest 00:18:12.779 --> 00:18:16.410 only, the monthly payment is tiny. It feels very, 00:18:16.490 --> 00:18:18.470 very affordable. It makes it easy to borrow more 00:18:18.470 --> 00:18:21.029 and more. That sounds like a ticking time bomb. 00:18:21.170 --> 00:18:23.900 It is. Because eventually the draw period ends, 00:18:24.099 --> 00:18:26.819 usually after 10 years. The line of credit freezes, 00:18:26.819 --> 00:18:29.059 you can't borrow anymore, and the loan converts 00:18:29.059 --> 00:18:31.059 to the repayment period. And what happens then? 00:18:31.180 --> 00:18:33.119 Suddenly you have to start paying back the principal 00:18:33.119 --> 00:18:35.240 and the interest, usually over the remaining 00:18:35.240 --> 00:18:38.380 15 or 20 years. Your monthly payment can double, 00:18:38.440 --> 00:18:40.940 triple, or even quadruple overnight. We call 00:18:40.940 --> 00:18:43.299 it payment shock. Payment shock. I can see why. 00:18:43.480 --> 00:18:45.720 And if you aren't financially prepared for that 00:18:45.720 --> 00:18:48.809 massive jump, it can be devastating. It's one 00:18:48.809 --> 00:18:51.150 of the biggest risks of a H -E -L -O -C. That's 00:18:51.150 --> 00:18:53.210 a nasty surprise waiting for you a decade down 00:18:53.210 --> 00:18:56.450 the road. Wow. Wow. So you have the certainty 00:18:56.450 --> 00:18:59.130 and predictability of the lump sum versus the 00:18:59.130 --> 00:19:01.529 flexibility and serious risk of the H -E -L -O 00:19:01.529 --> 00:19:04.049 -C. That's the fundamental choice. But regardless 00:19:04.049 --> 00:19:05.950 of which one you pick, we need to talk about 00:19:05.950 --> 00:19:08.869 the elephant in the room, the government, and 00:19:08.869 --> 00:19:14.210 specifically the taxman. Ah, yes. the 2018 tax 00:19:14.210 --> 00:19:17.289 reform bombshell. Bombshell feels appropriate 00:19:17.289 --> 00:19:19.769 because growing up and even just watching TV 00:19:19.769 --> 00:19:22.509 commercials five or six years ago, I always heard 00:19:22.509 --> 00:19:24.390 that the smartest thing about home equity loans 00:19:24.390 --> 00:19:26.990 was the tax deduction. It was the number one 00:19:26.990 --> 00:19:29.309 selling point. It's practically free money. The 00:19:29.309 --> 00:19:31.390 government helps pay the interest. That was the 00:19:31.390 --> 00:19:33.630 vibe. That was the conventional wisdom for decades. 00:19:34.109 --> 00:19:37.109 The sales pitch was don't use a credit card. 00:19:37.210 --> 00:19:39.930 Use your house. It's cheaper and the interest 00:19:39.930 --> 00:19:42.849 is tax deductible. Prior to December 31, 2017, 00:19:43.130 --> 00:19:44.950 in the U .S., you could deduct the interest on 00:19:44.950 --> 00:19:48.490 up to $100 ,000 of home equity debt. And it didn't 00:19:48.490 --> 00:19:50.309 matter what you spent the money on. For the most 00:19:50.309 --> 00:19:53.009 part, no. You could use it to consolidate credit 00:19:53.009 --> 00:19:56.990 card debt, buy a boat. take a world cruise, and 00:19:56.990 --> 00:19:58.869 you could write off the interest on your taxes. 00:19:59.069 --> 00:20:02.089 It was a massive government subsidy for this 00:20:02.089 --> 00:20:04.269 type of borrowing. It effectively made the loan 00:20:04.269 --> 00:20:07.029 cheaper because you got a chunk of it back at 00:20:07.029 --> 00:20:08.829 tax time. It felt like the government was sponsoring 00:20:08.829 --> 00:20:11.349 your new deck. They essentially were. But then 00:20:11.349 --> 00:20:14.529 came the Tax Cuts and Jobs Act of 2017, signed 00:20:14.529 --> 00:20:16.789 into law in December of that year. And the rules 00:20:16.789 --> 00:20:20.490 changed? Drastically. As of 2018, the broad deduction 00:20:20.490 --> 00:20:22.869 for what they called home equity indebtedness 00:20:22.869 --> 00:20:26.539 was suspended. It's gone through at least 2025 00:20:26.539 --> 00:20:29.680 and maybe for good. Gone, just like that. For 00:20:29.680 --> 00:20:32.660 many people, yes. Now, we have to be very precise 00:20:32.660 --> 00:20:35.099 here because there's a lot of confusion. The 00:20:35.099 --> 00:20:37.460 interest is no longer deductible just because 00:20:37.460 --> 00:20:39.579 it's a home equity loan. But there's an exception, 00:20:39.779 --> 00:20:42.000 right? There is a very specific narrow exception. 00:20:42.299 --> 00:20:45.200 The interest may still be deductible if the loan 00:20:45.200 --> 00:20:47.980 proceeds are used strictly to buy, build, or 00:20:47.980 --> 00:20:50.279 substantially improve the home that is securing 00:20:50.279 --> 00:20:53.049 the loan. So if I use the money for that new 00:20:53.049 --> 00:20:56.089 kitchen or to add a new bedroom, I might still 00:20:56.089 --> 00:20:58.730 be able to deduct the interest. You might, yes. 00:20:59.490 --> 00:21:03.049 But the days of use the money for a boat and 00:21:03.049 --> 00:21:06.509 write off the interest are dead. If you use the 00:21:06.509 --> 00:21:09.170 money to pay off credit card debt, no deduction. 00:21:09.430 --> 00:21:13.089 Use it for college tuition, no deduction. Medical 00:21:13.089 --> 00:21:16.130 bills, no deduction. That fundamentally changes 00:21:16.130 --> 00:21:18.769 the math on this, doesn't it? Completely. It 00:21:18.769 --> 00:21:20.710 changes the entire calculation. You have to look 00:21:20.710 --> 00:21:22.849 at the interest rate naked without the rose -colored 00:21:22.849 --> 00:21:24.970 glasses of a tax break. It removes the subsidy. 00:21:25.089 --> 00:21:27.609 It puts home equity loans on a level playing 00:21:27.609 --> 00:21:30.109 field with other types of debt, forcing you to 00:21:30.109 --> 00:21:32.609 ask, is this actually a good deal or am I just 00:21:32.609 --> 00:21:34.589 doing it because it feels easy? Exactly. Because 00:21:34.589 --> 00:21:36.210 the government isn't helping you carry the load 00:21:36.210 --> 00:21:38.450 anymore. And to determine if it's a good deal, 00:21:38.569 --> 00:21:40.569 you have to look at the total price tag. And 00:21:40.569 --> 00:21:41.970 I don't just mean the interest rate. I mean the 00:21:41.970 --> 00:21:44.670 fees. Yeah. The source material had a laundry 00:21:44.670 --> 00:21:47.750 list of costs that made my head spin. It felt 00:21:47.750 --> 00:21:50.349 like death by a thousand fees. We call it the 00:21:50.349 --> 00:21:53.049 price of admission. And it can be steep. People 00:21:53.049 --> 00:21:55.170 often forget this part when they're seduced by 00:21:55.170 --> 00:21:58.130 a low advertised interest rate. They don't calculate 00:21:58.130 --> 00:22:00.670 the total cost of borrowing. Okay. Let's run 00:22:00.670 --> 00:22:03.309 through the laundry list of pain, as I'm now 00:22:03.309 --> 00:22:05.769 calling it. First up, a fee for something we 00:22:05.769 --> 00:22:08.710 already talked about. Appraisal fees. Right. 00:22:08.789 --> 00:22:10.890 You have to pay the appraiser. Banks will pass 00:22:10.890 --> 00:22:13.029 that cost directly on to you. You're looking 00:22:13.029 --> 00:22:16.269 at usually $300 to $500, sometimes more in high 00:22:16.269 --> 00:22:19.049 -cost areas, just to find out if you even qualify 00:22:19.049 --> 00:22:21.869 for the loan. And here is the kicker I saw in 00:22:21.869 --> 00:22:25.049 the notes. You usually pay this even if the loan 00:22:25.049 --> 00:22:27.609 gets denied. That's the painful part. You are 00:22:27.609 --> 00:22:30.170 paying for the service of the valuation, not 00:22:30.170 --> 00:22:32.740 for the loan itself. So if the appraisal comes 00:22:32.740 --> 00:22:35.500 in too low and the deal falls apart, you're still 00:22:35.500 --> 00:22:38.579 at that cash. Ouch. Okay, what's next? Originator 00:22:38.579 --> 00:22:40.740 fees. That's basically the bank charging you 00:22:40.740 --> 00:22:42.460 for the privilege of processing your paperwork. 00:22:42.700 --> 00:22:45.119 The ticket processing fee of the banking world. 00:22:45.400 --> 00:22:47.779 It covers their administrative costs and their 00:22:47.779 --> 00:22:49.980 profit. It can be a percentage of the loan amount, 00:22:50.140 --> 00:22:52.839 right? Often, yes. One or two percent of the 00:22:52.839 --> 00:22:55.799 loan amount is not uncommon. On a $50 ,000 loan, 00:22:55.920 --> 00:22:59.000 that's another $500 or $1 ,000 right there. Then 00:22:59.000 --> 00:23:01.859 there are title fees and stamp duties. This sounds 00:23:01.859 --> 00:23:03.819 like government stuff. It is. These are costs 00:23:03.819 --> 00:23:05.579 for checking the property's title to make sure 00:23:05.579 --> 00:23:07.619 you actually own it and there aren't other secret 00:23:07.619 --> 00:23:10.240 liens on it. And then there are state and local 00:23:10.240 --> 00:23:13.359 taxes, or stamp duties, for recording the new 00:23:13.359 --> 00:23:16.099 lien. It's all administrative friction, but it 00:23:16.099 --> 00:23:18.819 costs real money. Now here is one that feels 00:23:18.819 --> 00:23:22.019 particularly mean -spirited. The early payoff 00:23:22.019 --> 00:23:25.640 fee, or prepayment penalty? Yes. This one always 00:23:25.640 --> 00:23:28.019 angers responsible borrowers who are trying to 00:23:28.019 --> 00:23:30.240 do the right thing. Explain the logic. It seems 00:23:30.240 --> 00:23:33.220 crazy. I borrow money, I get a big bonus at work, 00:23:33.259 --> 00:23:35.359 or I just scrimp and save, and I want to pay 00:23:35.359 --> 00:23:37.619 the loan back early to get out of debt, and the 00:23:37.619 --> 00:23:40.140 bank fines me for it. They do in some cases. 00:23:40.319 --> 00:23:42.160 You have to understand the bank's business model. 00:23:42.460 --> 00:23:44.619 They don't lend you money out of the goodness 00:23:44.619 --> 00:23:47.960 of their hearts. They lend it to earn a predictable 00:23:47.960 --> 00:23:50.339 stream of interest payments over time. They've 00:23:50.339 --> 00:23:52.319 planned on that income. They've projected that 00:23:52.319 --> 00:23:55.230 income. If you pay the loan back in six months 00:23:55.230 --> 00:23:57.690 instead of 10 years, they lose all that future 00:23:57.690 --> 00:24:01.130 profit they were counting on. The fee is there 00:24:01.130 --> 00:24:03.549 to recoup some of their lost revenue. It's like 00:24:03.549 --> 00:24:06.190 a trap. Here's the money, but don't you dare 00:24:06.190 --> 00:24:08.930 give it back too fast. It really emphasizes the 00:24:08.930 --> 00:24:12.170 need to read every single line of the fine print 00:24:12.170 --> 00:24:15.029 before you sign. You have to ask the loan officer 00:24:15.029 --> 00:24:18.150 directly, is there a prepayment penalty on this 00:24:18.150 --> 00:24:20.339 loan? And there was another fee that seemed just 00:24:20.339 --> 00:24:22.099 as frustrating, but for the opposite reason. 00:24:22.339 --> 00:24:25.700 This one is specific to the HELOC, the inactivity 00:24:25.700 --> 00:24:29.579 fee. This is a fee for doing nothing, for being 00:24:29.579 --> 00:24:32.119 responsible and not borrowing money. Pretty much. 00:24:32.180 --> 00:24:35.220 If you open a $50 ,000 line of credit just in 00:24:35.220 --> 00:24:37.579 case of an emergency, which many financial advisors 00:24:37.579 --> 00:24:39.880 tell you is a smart move, but you never actually 00:24:39.880 --> 00:24:42.240 use it, some lenders will charge you an annual 00:24:42.240 --> 00:24:45.279 fee of $50 or $100 just for keeping the line 00:24:45.279 --> 00:24:47.559 open. So you pay to borrow, and you can also 00:24:47.559 --> 00:24:51.099 pay not to borrow. In some cases, yes. The bank's 00:24:51.099 --> 00:24:53.579 argument is that they have to reserve that capital 00:24:53.579 --> 00:24:55.539 for you. They have to keep it available on their 00:24:55.539 --> 00:24:58.259 books in case you ask for it. It costs them money 00:24:58.259 --> 00:25:00.519 to keep that facility open. So they want you 00:25:00.519 --> 00:25:02.779 to use it. They want you to use it, so they penalize 00:25:02.779 --> 00:25:05.299 you if you don't. It's also counterintuitive. 00:25:06.029 --> 00:25:08.450 Now, amidst all these fees, there was one pro 00:25:08.450 --> 00:25:11.529 tip in the source material, something about surveyor 00:25:11.529 --> 00:25:14.589 costs. It seemed like a rare opportunity to save 00:25:14.589 --> 00:25:17.569 a buck. Yes, this is a rare nugget of good news. 00:25:17.690 --> 00:25:20.430 The source notes that some of the valuation costs, 00:25:20.630 --> 00:25:23.730 like paying for a property surveyor or the appraiser, 00:25:23.809 --> 00:25:26.990 can sometimes be reduced. How? By asking nicely. 00:25:27.190 --> 00:25:29.529 By pleading. By doing some of the legwork yourself. 00:25:30.039 --> 00:25:32.019 The tip is that if the borrower finds their own 00:25:32.019 --> 00:25:34.740 licensed surveyor to inspect the property, rather 00:25:34.740 --> 00:25:36.940 than relying solely on the lender's default, 00:25:37.180 --> 00:25:39.920 an often more expensive vendor, they can sometimes 00:25:39.920 --> 00:25:43.400 shave a bit off the closing costs. That is actionable. 00:25:43.460 --> 00:25:45.859 It requires making a few phone calls and getting 00:25:45.859 --> 00:25:47.559 some quotes, but if it saves you a few hundred 00:25:47.559 --> 00:25:50.299 bucks, that's absolutely worth it. Absolutely. 00:25:50.759 --> 00:25:53.920 But even if you save a little on fees, we have 00:25:53.920 --> 00:25:56.380 to circle back to the biggest cost of all, the 00:25:56.380 --> 00:25:58.339 one that doesn't show up on the fee sheet, the 00:25:58.339 --> 00:26:02.400 risk. Right. Section 6 in our outline, the bigger 00:26:02.400 --> 00:26:05.380 picture. We've danced around this, but we need 00:26:05.380 --> 00:26:07.920 to stare it in the face. The source links to 00:26:07.920 --> 00:26:10.079 an article titled, Putting Your Home on the Loan 00:26:10.079 --> 00:26:13.279 Line is a Risky Business. Subtlety is not their 00:26:13.279 --> 00:26:16.019 strong suit, but they are right. They are. We 00:26:16.019 --> 00:26:17.859 talked about the lien. We talked about the collateral. 00:26:18.200 --> 00:26:21.259 But practically speaking, what is the nightmare 00:26:21.259 --> 00:26:23.920 scenario? What happens if you lose your job and 00:26:23.920 --> 00:26:26.079 can't make the payments for a few months? The 00:26:26.079 --> 00:26:28.859 nightmare scenario is foreclosure. It's that 00:26:28.859 --> 00:26:31.990 simple. So it's not like a credit card. It's 00:26:31.990 --> 00:26:33.730 nothing like a credit card. If you stop paying 00:26:33.730 --> 00:26:35.950 your credit card, you get harassing phone calls, 00:26:36.069 --> 00:26:38.009 your credit score tanks, and maybe eventually 00:26:38.009 --> 00:26:40.630 they sue you and try to garnish your wages. But 00:26:40.630 --> 00:26:42.589 you still sleep in your bed. You still have your 00:26:42.589 --> 00:26:45.369 home. But with a home equity loan. If you stop 00:26:45.369 --> 00:26:47.589 paying your home equity loan, the lender can 00:26:47.589 --> 00:26:50.490 initiate foreclosure proceedings. They can legally 00:26:50.490 --> 00:26:53.049 seize your home and sell it at auction to get 00:26:53.049 --> 00:26:55.390 their money back. You are bedding your shelter. 00:26:55.630 --> 00:26:58.170 You are wagering the place where your kids sleep. 00:26:58.509 --> 00:27:00.670 Against your ability to pay back the loan. That 00:27:00.670 --> 00:27:03.069 is the raw truth of it. And there's another more 00:27:03.069 --> 00:27:06.269 insidious risk related to the broader economy. 00:27:07.150 --> 00:27:09.829 Negative equity. This is the underwater concept 00:27:09.829 --> 00:27:12.470 we touched on earlier. Right. Remember that CLTV 00:27:12.470 --> 00:27:14.910 ratio? Let's say you borrow right up to the max, 00:27:15.049 --> 00:27:17.529 maybe 90 % of your home's value. You have very 00:27:17.529 --> 00:27:20.569 little equity left, only 10%. Then a recession 00:27:20.569 --> 00:27:23.710 hits. The housing market in your area drops by 00:27:23.710 --> 00:27:27.009 15%. Uh -oh. Suddenly, the house is worth less 00:27:27.009 --> 00:27:28.809 than the combined total of the loans attached 00:27:28.809 --> 00:27:31.789 to it. You are underwater. You owe, say, $300 00:27:31.789 --> 00:27:35.329 ,000 on a house that is now only worth $280 ,000. 00:27:35.589 --> 00:27:38.109 Exactly. And the consequence of that is you are 00:27:38.109 --> 00:27:40.970 trapped. You literally cannot sell the house 00:27:40.970 --> 00:27:43.509 unless you bring a check for $20 ,000 to the 00:27:43.509 --> 00:27:45.630 closing table to pay off the difference to the 00:27:45.630 --> 00:27:47.890 banks. It locks you in place. You can't move 00:27:47.890 --> 00:27:50.089 for a new job. You can't downsize if you want 00:27:50.089 --> 00:27:51.710 to retire. You can't escape the debt. You're 00:27:51.710 --> 00:27:54.539 just stuck. It completely reduces your flexibility 00:27:54.539 --> 00:27:58.000 in life. It's a powerful tool. It can fund dreams 00:27:58.000 --> 00:28:01.099 and fix major problems, but it binds you to the 00:28:01.099 --> 00:28:03.740 property and the market conditions in a very 00:28:03.740 --> 00:28:06.279 tight and sometimes suffocating way. This has 00:28:06.279 --> 00:28:09.240 been, well, it's been sobering. It's a lot to 00:28:09.240 --> 00:28:10.940 think about. Let's try to pull all these threads 00:28:10.940 --> 00:28:12.720 together. We've covered a massive amount of ground 00:28:12.720 --> 00:28:15.160 today. We really have. From the basics of liens 00:28:15.160 --> 00:28:17.460 and appraisals. All the way to the risks of payment 00:28:17.460 --> 00:28:19.799 shock and foreclosure. I think the biggest takeaway 00:28:19.799 --> 00:28:22.960 for me is the choice. The fork in the road. Yes. 00:28:23.680 --> 00:28:26.039 We've distinguished the tools. Yeah. The predictable 00:28:26.039 --> 00:28:28.940 fixed rate, closed end lump sum for that one 00:28:28.940 --> 00:28:32.220 big expense. Versus the flexible but volatile 00:28:32.220 --> 00:28:36.220 adjustable rate HGLOC for ongoing or uncertain 00:28:36.220 --> 00:28:38.700 costs. And we've learned that the government 00:28:38.700 --> 00:28:40.579 isn't helping us out anymore for the most part. 00:28:40.680 --> 00:28:44.279 Since the 2018 tax reform, that sweet interest 00:28:44.279 --> 00:28:47.000 deduction subsidy is generally history for most 00:28:47.000 --> 00:28:48.960 use cases. Which means the math has to stand 00:28:48.960 --> 00:28:51.109 on its own. It does. And we've seen the price 00:28:51.109 --> 00:28:53.430 tag. From appraisal fees to originator fees, 00:28:53.650 --> 00:28:55.930 from prepayment penalties to inactivity fees, 00:28:56.170 --> 00:28:58.829 this is an expensive game to play. And the entry 00:28:58.829 --> 00:29:02.099 requirements. Good to excellent credit. a solid 00:29:02.099 --> 00:29:05.019 income and sufficient equity mean it's a game 00:29:05.019 --> 00:29:07.579 only certain people can even join. And ultimately 00:29:07.579 --> 00:29:11.339 the stakes, the non -negotiable risk of foreclosure, 00:29:11.380 --> 00:29:14.160 the economic risk of going underwater if the 00:29:14.160 --> 00:29:16.680 market turns. It's not just a piggy bank. It's 00:29:16.680 --> 00:29:19.500 a high stakes financial contract with your shelter 00:29:19.500 --> 00:29:22.400 as the bargaining chip. Well said. So here is 00:29:22.400 --> 00:29:24.299 the final thought I want to leave you, the listener, 00:29:24.319 --> 00:29:27.289 with. We've spent decades in this country thinking 00:29:27.289 --> 00:29:29.950 of the home equity loan as a standard part of 00:29:29.950 --> 00:29:32.430 the American financial toolkit. It's how our 00:29:32.430 --> 00:29:34.190 parents fixed the roof. It's how they paid for 00:29:34.190 --> 00:29:36.150 college. For a long time, it was a no -brainer. 00:29:36.289 --> 00:29:38.349 But the world has changed. The rules of the game 00:29:38.349 --> 00:29:41.329 are different. Exactly. With that tax deduction 00:29:41.329 --> 00:29:43.910 gone, with interest rates being much more volatile 00:29:43.910 --> 00:29:45.730 than they were for the last decade, and with 00:29:45.730 --> 00:29:48.470 all the fees piling up, does the home equity 00:29:48.470 --> 00:29:51.490 loan still deserve that same place on the pedestal? 00:29:51.589 --> 00:29:54.529 It's a serious question. Or has it become just 00:29:54.529 --> 00:29:57.630 another, frankly, expensive way to borrow money, 00:29:57.769 --> 00:30:00.230 one that carries the unique and terrifying risk 00:30:00.230 --> 00:30:02.630 of leaving you homeless if life throws you a 00:30:02.630 --> 00:30:05.390 curveball? It's a calculation every single homeowner 00:30:05.390 --> 00:30:08.089 has to do for themselves based on their own finances 00:30:08.089 --> 00:30:10.829 and their own tolerance for risk. But at least 00:30:10.829 --> 00:30:13.789 now, you know all the variables you need to solve 00:30:13.789 --> 00:30:16.569 that equation. Knowledge is the best equity you 00:30:16.569 --> 00:30:18.589 can have. Thanks for taking this deep dive with 00:30:18.589 --> 00:30:20.109 us. Safe borrowing, everyone.