Should You Take a Home Equity Loan? There Will Be a New Gold Rush

The new rush to gold will be home equity loans; mark my words. The average American homeowner is up to their eyeballs in debt, and the federal government has a solution.

Instead of teaching people fiscal responsibility, the government wants to support the secondary market for home equity loans (or secondary mortgages).

This means the federal government wants to create a market for packaged secondary loans, similar to the one for mortgage-backed securities (primary mortgages).

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More government for the win. When the government steps into a situation, there is typically a rush to wealth. People can smell the easy money and focus on extracting it from the feds.

We can look no further than student loans, PPP loans (Paycheck Protection Program) during the pandemic, and primary mortgages during the 2008 recession.

In the case of secondary mortgages, banks can offload home equity loans to the secondary market. This means banks will transfer home equity loans from their books to investors a month after creation.

Banks will take their fees and move on to the next applicant. Banks will have little reason to screen homeowners’ financial status because the bank will never own the loan.

This situation is similar to the 2008 housing crash when banks offered NINJA loans (no income, no jobs, no assets) to millions of people who could never afford their homes. Then, banks sold the loans to investors as mortgage-backed securities.

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The rush to gold. Home equity loans will be the new gold rush. But not for you, for banks and investors. The federal government wants YOU to assume more debt.

There is a silent recession; the only way to stop it is to inject more money into the economy. The Fed tried this once with stimulus checks, but it only caused high inflation.

Now, the government wants you to take a second mortgage so you can live your best life. They want you to keep traveling, spending, and fine dining.

The question is, will you fall for the bait? Will you put your family at risk by adding another $800 to $1200 payment to your debt burden?

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Home equity vs credit cards. Sure, taking home equity looks much better than racking up a ton of credit card debt. Home equity loans are typically 2-3 percent points higher than primary mortgages.

Credit cards are sitting around 25-30% of high interest rate pain—why are people using credit cards in the first place?

Americans want it all. They want a fancy house, a brand new car, and to travel to exotic locales. On top of that, they want to eat the best foods at home and away.

When you spend this much on your basic needs, you’ll quickly run out of money. This is where credit cards enter.

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When you add in student loans and childcare costs, you have a horrible mix of debt and pain. The government wants to help you out of the debt hole.

However, the Feds don’t have your best interest at heart. Consumer spending fuels the American economy, so the government needs you to spend.

Now, banks will have the incentive to promote home equity loans in their advertisements. Second mortgages have always existed, but without a market, banks would have to keep them on their books. Things will change.

Using debt to pay off debt. Should you assume a home equity loan to pay off high interest credit card debt or student loans?

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In 95% of cases, the answer is no. Credit card debt is the result of a bigger problem—overspending or under-budgeting (or both).

That means that if you paid off your credit cards and now have a nice, clean $1,000 monthly payment, you would be sitting pretty for a while.

However, you still have a spending or budgeting problem. The credit card will still be available to use in case of your monthly emergencies.

Before you know it, you have the same level of credit card debt PLUS a home equity loan to boot. Now, your primary residence is at risk of being taken by your bank. You don’t want this headache.

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Student loans may be different. On paper, the interest rate on your student loan may be much lower, but they have a high amount. 

So, the sheer amount of interest compounds quickly. You at least know your final payment date with a home equity loan. A home equity loan could work in your favor.

Using a home equity loan to invest in assets. The only reason to take a home equity loan is to purchase an income-producing asset or a home for your kids.

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Yet in still, the average consumer isn’t sophisticated enough to pull this off. It’s tough to find an investment with a higher yield than a home equity loan (let’s say 9%).

With the right mindset, you could start a business with much higher returns. You could purchase a retirement home in a foreign country or a tiny house that generates rental income.

I would stay far away if you know very little about these investments. It’s better to live below your means and pay off all debt.

Once you have a clean slate, a home equity loan may be a way to boost returns by investing in yourself, your family, and your future.

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Working with family. Ultimately, most people are in debt because they want to be independent. Every person and every family seeks to recreate the wheel.

If families worked together, they could build wealth slowly. Let’s say three siblings could live together until they paid off one house.

They all move to another house and pay it off while renting the first home. They do it a final time, and before you know it, they have three paid-off homes.

Home equity loans can help generate massive returns by speeding up the process. You can extract wealth from your home without creating a taxable event.

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Conclusion. The true power of home equity loans is that you can grab a large payment without reaping tax consequences.

Say three siblings have a paid-off rental property. The tenant is paying $2,500 per month. One sibling could extract a large sum, say $200,000, and create a $1,500 monthly payment.

Now, they have $200,000 cash to roll into another property while their tenant pays off the loan. They can also use the home equity payments as a business write-off against the home.

Before you know it, the siblings have ten homes around town. Can this scenario work? Yes! My wife and I used our military moves around the US to have four properties.

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If you lack the financial education to use leverage in your favor, I recommend avoiding home equity loans.

Once the government steps in, secondary mortgages will be the new hotness; all you will see and hear about are home equity loans from every bank.

The government wants you to keep spending. However, you will become a slave to your debt. There is a small population of people who can use home equity loans to build generational wealth. Do you fall into this category? Good Luck!

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