Money Rehab with Nicole Lapin - The Ultra-Rich Use This Money Move To Get Richer, and You Can Too

Episode Date: August 4, 2023

Nicole explains how you might have a tax-advantaged line of credit right under your nose, without having any idea. She shares what that asset is and how to take advantage of it.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. All right, let's think back to the weird days during the pandemic when we were having our drinks delivered and wondering if we would ever go back to the movies. So much has changed since then. Now we're going to two movies in a single day and having lots and lots of drinks out with friends. At least I am. For many people, the financial landscape has changed as well. During the pandemic, as a result of strong government

support and limited opportunities to actually spend money, more and more people were able to squirrel more and more money away. But as the world opened back up, we went on a little bit of a culture-wide revenge spending spree, with people across the world spending big on vacations and dining out. That, coupled with supply chain issues and a tight jobs market, helped spur inflation higher and higher until suddenly those fatty savings accounts were looking pretty thin. A study by the Brookings Institute found that for many families, especially those in more precarious financial situations, those savings accounts are gone and they're going to need to stop spending as much or take on more debt. But it's not all bad news. Housing prices have stayed high. And yes, sure, that's crappy news if you're looking to buy

right now. But if you're already a homeowner, it means you have one very valuable asset. This rise in prices and the value of homes has led to more and more people looking at a special vehicle for credit that allows them to access the value stored in their homes, home equity loans and home equity lines of credit, or HELOCs. While rich people have known about these vehicles for a long time, rising home values have made this a more and more attractive offer for people across the money spectrum. A recent study found a 50% increase in both types of loans. While the majority of borrowers were using the money for home improvements, others were dipping into their home's equity for debt consolidation

or emergency cash. Maybe one of these loans could be a good fit for your needs. So let's dig in. A home equity loan is a straightforward loan using the equity in your home as collateral. It's sometimes called a second mortgage. Quick dictionary note here, this is a secured loan. So that means you've told the lender basically that they can have the asset you borrowed against if you don't pay off the loan. So obviously, this kind of loan is more risky for you. After all, if you don't pay back the loan, you could lose your house. But it's less risky for the lender, meaning that they can probably offer you lower, usually fixed interest rates in exchange. This lower rate is one of the big benefits of using a home equity loan over a personal loan or credit cards.

But because your home is collateral here, you want to be absolutely sure you can pay it off. To figure out how much of a home equity loan you qualify for, subtract the balance of your remaining mortgage from the value of your home. So for example, if you still have $250,000 left to pay on your mortgage and your house is worth $350,000, you would qualify for a $100,000 loan. The difference is simply the equity you have in your home and the amount you can borrow against. Just because you can, though, borrow that much doesn't mean you should. These loans are not for buying depreciating assets like cars. Ideally, they're used for things like home improvements that will ideally help improve the value of your

home. The other way to tap into the equity of your home is to use a HELOC, or home equity line of credit. While a home equity loan just gives you a big old chunk of cash, a HELOC is more like a credit card. There's no lump sum here. Rather, as you need it, you can come back to the line of credit and take out money. Basically, you have a 10-year draw period where you can take out money up to a certain limit and repay it, similar to a credit card. You can access this money with online transfers, a card similar to a debit card, or even checks. You don't have to pay the full balance you use during that period, usually 10 years. After the draw period closes, though, you have 20 years, usually, to pay off the remaining principal of the loan plus interest.

you have 20 years usually to pay off the remaining principal of the loan plus interest. HELOCs usually have variable rates, meaning that the interest rate can go up and down over the course of the loan. So if the Fed continues to raise interest rates, the cost of your credit will also go up. You'll only owe interest, though, on the amount of money you draw from your line of credit, not the total you can borrow. Although some lenders do require an initial minimum drawdown amount, which is kind of odd, but so it goes. In addition to their interest rate advantage, both home equity loans and lines of credit have some tax advantages as well. Although these are kind of weird, so listen closely. If you use the credit or loan to improve your home in any way, then the interest paid on the loan is tax deductible,

meaning you can subtract the amount of interest you paid from your taxable income to reduce the amount of taxes you owe. Now, this is where it gets a little tricky. Any interest on a home equity loan or line of credit can be deducted from your taxable income after 2025, regardless of how you use the money. So depending on how you plan to use these loans, they may be a better deal in the long run than they are now. That long run thinking is important when it comes to these types of loans and credit. They tend to have repayment periods similar to mortgages, think decades, not months. Obviously, like mortgages, if you want to avoid paying the most interest, you want to pay them down as quickly as possible. Most of them

have to be paid off in full if you sell your home. They also may have greater upfront costs than other types of loans. But again, depending on how you use them, the lower interest rate and possible tax benefits may pay for those upfront costs over the life of the loan. If you're listening to this episode while you're doing the dishes and you're thinking, okay, Lappin, maybe I can get a new kitchen. I'm going to break down some of the steps to actually get a home equity loan or line of credit and some tips for getting a better interest rate. Number one, check your credit score. To qualify for these types of loans, you're going to need a credit score of at least 620 or better. If your score isn't there right now, then check out my tips for some credit hygiene linked in the show

notes. Number two, figure out your home's equity. To get a rough estimate, you can look up your house on any of the real estate websites, use their estimate for your home's worth, and subtract the amount you owe on your mortgage. During the actual approval process, use their estimate for your home's worth and subtract the amount you owe on your mortgage. During the actual approval process, you may need to get your home formally approved, but you can use the online estimate to determine if you even qualify. Generally, you need to have a mortgage that is 85% of the value of your home or less. As a side note, you want to do your overall debt to income ratio as well, and that has to be 40% or less. As a side note, you want to do your overall debt to income ratio as well, and that has to be 40% or less. To calculate that, add up all your debt and divide that number by your income.

The answer to that will give you some decimal point, so multiply that by 100 to give you a percent. Or just search online for debt to income calculators if math isn't your favorite pastime. Number three, now that you've done your own calculations to figure out if you qualify, put together an application packet including proof of income, proof of assets, and proof of debt. You'll probably apply online, so this doesn't need to be a physical packet or dossier, but make sure that you know your passwords and you can forward those docs to the lender when they ask. And that's basically it. If you've done all that, you can shop around for the best lender. Definitely start with your bank or mortgage lender, but also cast a wide net. Most lenders

will give you a quote with only a soft credit check. That's the kind that doesn't hurt your credit score. So take advantage of that, even if it's a little bit of a pain in the butt, because it could save you big in the future. Once you find your match, submit the application and start the process. It could be pretty quick or take a few weeks depending on if they need to do a formal appraisal of your home. Just a quick side note, you have three days to cancel the loan once you've taken it out with no penalty. So if you have major buyer's remorse or something major in your financial picture has changed, remember you do have that cooling off period. For today's tip, you can take straight to the bank. If you're looking to build up equity in your home a little faster, remember that you

can make extra payments on your mortgage without that much pain. One of my favorite mortgage hacks is to pay half of your monthly mortgage biweekly instead of paying whatever you are monthly. It sounds like a simple scheduling shifteroo, and it is, but because of the way the math works, you're essentially making 13 full monthly payments instead of the 12 you would make otherwise. This new schedule can actually knock off years and tons of interest from your mortgage.

Just remember to clarify with the lender that these extra payments are on the principle and not on the interest of the loan. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive

video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.