How to unlock equity in a home, even with rising interest rates
There are so many new/experienced investors that find themselves trapped in a “I have so much equity in my home, but my interest rate is too good to ever touch it” mindset. What if I was to tell you that you that a “low” interest rate is not as important as a low “interest cost”. Think about this, if you were to have a $400,000 loan balance at an interest rate of 2.875% you will spend $54,000 in interest (27% of total interest paid) in the first 5 years, and a total of $197,000 in interest over the life of the loan. This is one of the major issues with standard financing. You spend a large chunk of total interest in the first fraction of the mortgage. The other BIG issue is having your money locked away until you spend money to pull it out, and every time you want to pull it out you spend money. Creating a loop that is focused on fees and interest, while never actually building equity unless the market value of your home skyrockets.
There are several ways to access the equity in your home:
Cash out Refinance- Now there is nothing wrong with doing a cash out refinance, it is useful for the right people in the right scenario. The issues with 30, 20, 15-year mortgages, is that it costs you money every single time you want to get access to your money. So, every extra principal deposit you make is now locked away unless you refinance or sell. You also become subject to where rates are in the moment you decide to pull cash out. Typically, when you need the money from the refinance, you may already be too late or giving up return on your investment by needing the cash instantly.
2nd position HELOC- For the right scenarios, sure this is not a bad idea. But even when you get a second position mortgage you are still obligated on your first mortgage. You are splitting your dollars up between two items that need to be paid off/down, plus it slows down saving for your next investment.
1st position HELOC/ALL IN ONE – This is an integrated checking and savings account with your mortgage that allows for 100% of income/savings to get applied to your balance of your mortgage. The payment on this mortgage is calculated of your DAILY balance. So, as you earn your money, your payment goes down. As your payment goes down, you save more money, accelerating mortgage payoff, and significantly reducing interest expense. This is a combination of all the positives of a 1st mortgage, while having all the flexibility of a HELOC. This gives you access to your money and more importantly THE EQUITY in your home without any of the expenses associated with it being available (such as pre-pulling cash out in a 30-year mortgage)
Cash out refinances and 2nd position HELOC's become more attractive as interest rates dip, but as rates increase (like we are noticing throughout 2022) these programs become less desirable. However, when interest rates rise you tend to find yourself finding more opportunities. What if you could take advantage of the changing market while not being negatively impacted.
The ALL IN ONE LOAN™ is a great way of combating higher interest rates while still being beneficial when rates inevitably go down, because the interest rate on the loan is not as important as the amount of interest paid on a loan. For example, if someone had a $400,000 loan with the ALL IN ONE LOAN at an interest rate of 6.80% (7.049%* annual percentage rate) and saved $3,000 a month they would pay their home off in 10.1 years, without changing how they live their life. But more importantly, they would SAVE $38,000 in interest compared to a 30-year mortgage at 2.50% (2.875%** annual percentage rate but they would have access to 80% of the value of their home at any moment they would want it. Even though their interest rate is 7.049% they still save money. Their “effective rate” which is comparative to a 30-year mortgage would be at 2.36%.
Now let’s take the SAME scenario and say that we are comparing this to a 30-year loan at 5.6% (5.875%*** annual percentage rate. This same person would save $324,000 in interest. It would effectively feel as if this person had a 1.925% 30-year mortgage.
*Rate could rise during the life of the loan. The All In One Loan does not use a traditional amortization schedule. Principal is paid through deposits into the All In One Loan sweep-checking account. Interest is computed based on the nightly unpaid principal balance. Each day’s interest is totaled once each month ends.
**Payment example: If you bought a $500,000 home and put 20% down, for a loan amount of $400,000, with a 30 year term at a fixed rate of 2.50% (Annual Percentage Rate 2.875%), you would make 360 payments of $1661.00. Payment stated does not include taxes and insurance, which will result in a higher payment.
***Payment example: If you bought a $500,000 home and put 20% down, for a loan amount of $400,000, with a 30 year term at a fixed rate of 5.60% (Annual Percentage Rate 5.875%), you would make 360 payments of $2,367.00. Payment stated does not include taxes and insurance, which will result in a higher payment.
To learn more about the ALL IN ONE LOAN™ check out my other post.