Cashing in on the Home Equity Explosion #506

some looks like you've got some junk boss. You always telling people what to do. This is what we're gonna do. You know, this is what you're gonna do. Dang it, and you better like it. Uh way. We will tell you what we think you should do with your home equity after you know, just a little bit. But before we get to talk about using using your return envelope mailers, I've already done that. We've already mentioned that on the show.

I do occasionally do that. But no, I want to talk about something I did get in the mail, and this was from a loan servicer. They wanted to notify me. I guess maybe I had either applied for a mortgage with this company in the past, and they reached out via snail mail to tell me that there's been some sort of breach. Some of my information has been compromised by an unauthorized person. And what information, you might ask, Well, my name, my address, my loan number and so security

number were in these files. That's the one that matters social that's the one you really Yeah. Unfortunately didn't say anything about mother's name, but yeah, you know that could have been in there too, So to me, like, the interesting thing was, they offered me free credit monitoring, and uh, you know, you and I we've talked on the show about kind of how we feel about credit monitoring. It's it's kind of overrated. It's kind of like I was gonna let anybody know that it was your favorite thing.

Yeah right, well, no, craft beer is my favorite thing ever. But uh, yes, so credit monitoring. I'm not going to take them up on this offering. I'm not going to sign up for this. It's like, even though it's free, you're offering me, offering me monitoring, but you're the one who actually compromise my information in the first place. It's like your dog coming to you and being like, hey, youn need guard that slice of pizza because the last one got eaten by me. I'll make sure it doesn't

happen again, right right, Well. And the problem though, with credit monitoring, the thing we've talked about forever, This is classic in every breach scenario now which I think we have all experienced breach fatigue, we kind of believe and truthfully believe that all of our information is kind of already out there. Thanks Equifax back in for that, but we're not gonna let that one go never. We will never let that one go. And and so you know this,

this just doesn't matter. This credit monitoring is kind of sort of worthless. The problem isn't this free offer. The problem is that people often pay for credit monitoring when it is an inferior product. And so I just want to remind people I saw this in the mail and I kind of chuckled a little bit, ha ha, not ending up for that because credit freeze are the best, and credit freezes are free. Yeah, you guys are barking

up the wrong tree. That's that's sort of like if if I got a coupon in the mail for like Whole Foods. It's like, you guys know I don't go to Whole Foods. You know that I love Aldi in the Circular fil and I actually have a great article on credit freezes, how you do it for free, how how easy it is. By the way, federal law mandates that you get acts have access to freezing your credit for free, but there are a lot of pitfalls along the way ways that you could get taking advantage of

by the credit bureaus, of course. And we'll put a link to that article in the show notes for today's episode. Done, But Matt, let's mention the be that we're having on this episode. This one is called Let's do It Above the Threshold of Hell by Burial Brewing. There's so melodramatic with their beer names. For anybody who has heard us mentioned the name of other Burial beers on this show, all of the names are something like this. They're ridiculous.

But I am looking forward to enjoying this one, and we will share our thoughts on the specific Asheville, North Carolina Brewery at the end of the Yes. Well, but let's get onto the subject at hand. Cashing in on the home equity explosion. And I know this might be hard for you to believe. It's not hard for you to believe for my best friend, you know, you know everything, But for everyone else out there, I was not popular in school. Like they're shocked right now, their minds are blown.

I was at wasast not the popular kid, and randomly actually in sixth grade, for just about a week and a half, I was randomly popular at the beginning of sixth grade. Why it was it was kind of a week and a half. I don't know why. But before they had you figured it out. They're like, I think they were like, maybe that guy's cool, we'll include him. Were wrong, he's pretty tall. Maybe he's just amazing on the basketball court. Was that it had you like shot

up like a foot. Maybe that's it. Maybe maybe they assumed I had can this guy dunk athletic talent? But a last I did not. Then they watched you play, they're like, oh, but in the end it didn't even have the Scott It was. It was this mirrage, right. It lasted for a short period of time and then they figured me out and they were like, no, wait, he's nerd material. No longer in the cool club, and

so it just it didn't last long. And uh, just like middle school, Joel, something similar has actually kind of happened to millions of Americans when it comes to their home equity. They bought a house, they are thinking the foundation, the walls, and the acreage that they purchased for shelter that and and then for community too. Well, now that starts to look more like a piggy bank thanks to the rapid growth in home prices. I don't know if that's a really good correlation. I think I just wanted

to tell everyone I was I'm a loser. But except that in this case, we don't think that we're gonna see values come back down. We'll actually talk a little bit more about that later on in the show. It's right, yeah, but the the average homeowner actually saw their homes value jump dollars last year alone, like when one single year, And uh so, yeah, what should you do with this information? What should you do with this newfound riches with more money,

with their home being worth so much more. We're gonna get to the bottom of that in this episode. Yes we will. Yeah, home equity it normally moves that more of a glacial pace, but you don't really need us here to the point out that it's become more cheatah like, over the past couple of years, there is over twenty five trillion dollars in equity hanging out doing not much of anything except for making recent home buyers feel like they are real estate moguls. Like I'm of course brilliant

because I bought at the exact right time. I'm a genius. I know exactly what I'm doing. But there's a problem here. As you've seen your equity balloon, you might be tempted to do something with those newly found funds. You might starting to to get the itch to finally maybe buy that boat or to go on a lavish vacation or something. Or maybe you're just more of a money nerd right and you just hate to see that equity sitting there

under utilized. Either way, though, you might be facing a money decision with a number of zeros after it, and we want to help you to think about it well. We want you to make the right decision that's right. And essentially, everyone who purchased a home in the last ten to twelve years has done really well for himself. It's not just the last two years. It's like the last decade, but in particular the last you know, twelve to fifteen months have been outside. We've seen outside gains.

But really, if you've owned a home for the last dey gate, you're doing great. And and then anyone who hasn't bought a home, then Matt on the flip side but wanted to buy a home, they're just bumped. They're

sitting on the sidelines and they're probably fuming. They're a little piss that they've missed out on some of these games, which I understand because they're on the outside looking in at an abundance of what we call tappable home equity, which you mentioned the overall amount of home equity, but the tappable amount is just hit a record of nine

point nine billion dollars last year. And what do we mean when we say tappable, Well, that means the amount that you can snag while still keeping equity in your home. And that means that the average homeowner has access to something like a hundred and eighty five thousand dollars in home equity, which is astounding. That's a lot of money that you have access to. So um and you wonder our homes for most Americans are the number one asset

where they have most of their net worth stocked away. Yeah, and that's not what we want to see for folks. We want to see folks have more money in their retirement accounts than they have in a home equity. But you're right, most people, that's why, are in a situation where they've got more money in home equity than they have in their former one case in i RAS. And how much you you have access to obviously depends on your specific situation, how long you've owned your home, and

what's been happening in your specific market. For instance, if you live in Denver or Miami, two of the hottest real estate markets of the past couple of years, uh, the average home equity increase you saw was in the neighborhood of dollars in just one year. If you live in l A or San Francisco, it's closer to ten thousand dollars. So, um, yeah, where you live. If you live in let's say Huntsville, Alabama, you've probably seen decent

appreciation to but but nowhere in that ballpark. And this this abundance of equity has led to I think some of our friends and neighbors talking about selling their homes as well, you know, like cashing out, Why not sell when the market is near the top, right, Well, the thing is this strategy is going to create some problems, namely, where are you gonna live If you end up selling your house, chances are that you've locked in a pretty low mortgage rate, and if you want to buy another

property with a mortgage, you'll be doing so at today's rates, which have arisen quite a bit, and that could be a tough pill to swallow. So it's it's obviously okay to downsize, to move to a new city or you know, or if you have other good reasons to do so, but it is not necessarily a smart idea to move with the main purpose of grabbing some of that home equity. There are other just so many more important factors to consider.

For instance, what will selling your house due to relationship with your partner or to your family, you know, like what kind of opportunities are going to be available for your kids, what kind of lifestyle do you want to live, or like, if you are someone who is more religious, there are factors of faith that you probably also want to consider as well. There are. I don't know, it's

what you do. Want to consider the numbers and see how things actually end up shaking up, But there are so many other important considerations that you want to keep in mind as well. Yeah, the numbers are one thing, but then yeah, loving where you live and being attached

to a place. There's a great article in The Atlantic recently about that how homeownership can provide a deep attachment to a place that's hard to come by in other ways, and I was like, Yeah, that's exactly what I feel, because we've been in the same neighborhood for thirteen years now and we feel deeply rooted here and that means something well. And similarly, you might decide to sell and then rent in order to snag those dollars for other purposes.

So let's say you're like, listen, I want to cash out take advantage of this home equity by selling my house, and I'm just gonna go down the street. I'm gonna say, in the same neighborhood, but I'm gonna rent something instead, wait for the market to maybe correct, and then maybe swoop in and grab a deal. That's definitely in the mind what some folks have in mind and that sounds reasonable, but we all know that rents have sword in the

past year across the country too. If you have a fixed rate mortgage, that's not gonna budge except for those annual changes to your property tax rate and homeowners insurance rate hikes. But your rent is of course far less predictable. And again, if this is a lifestyle decision, then it can be a reasonable choice if you're just tired of the maintenance and you'd prefer to live in a home that requires less effort, or you're downsizing because the kids

are getting older and they're going off to college. I get it, But doing it in order to take equity dollars off the table, uh, Thinking that you're gonna save money in the long haul by becoming a renter instead of an owner, that doesn't necessarily make the most sense. Um, it's so much of it depends on your particular market as well, and how much cheaper maybe it is to

rent them to own or vice versa. But those are the kind of things you're gonna want to take into consideration before you just say I'm gonna, you know, all my home equity back and I'm gonna start becoming a renter, because that's going to be the better financial decision. Exactly. Yeah, it's It's also important to mention that the housing market overall,

that it's a pretty healthy place at the moment. Like we think that it's a good thing that rising rates are mellowing out the different bidding wars that we've heard of this pass spring, creating a less frothy environment, But that doesn't mean that there's gonna be a meaningful downward home price correction in store for us. We still just don't have enough supply of homes for all other folks who want to buy one, and that problem it is

not going to get fixed overnight. There's just no way of knowing what will happen in the future, and the housing market it might continue to cool a little bit, uh compared to what we've seen over the past year. A massive supply increase combined with a massive decrease in demand leading to significant decline and prices. This isn't something that we expect to happen. I feel like, just generally speaking, dude, this is one of the most common conversations I have

with my neighbors. It is like, it's like, when this bubble gonna burst, yeah exactly. It's like, is this actually gonna happen? I'm like, no, I don't think it is. And I start talking through just the demographics of our country, right, like the millennials are coming into home buying age or they're looking to upgrade their homes, right, And so you have this entire generation looking to buy homes, by the way, a generation that's larger than Gen X, it's the generation

that's larger than the Baby Boomers. Uh. And they all want homes and so that demand is there. They've got high paying jobs. Uh. And then you can look at the different stats that the FED provides and they're showing that just the quality that the credit quality of new mortgage borrowers, it's sky high. This this is nothing like the Great Recession back in you know oh six or seven oh eight, when you look at the credit score from back then and they were in the dumps compared

to what we're seeing today. And combined with just the overall shortage of homes we have in the country and a larger supply of people who want to buy them, and and this is something that doesn't get corrected overnight because homes take time to build, especially in an era of supply shortages and increased lumber costs. This is not something that's going to get corrected overnight, and so this

is not something that we see. You and I aren't fortune tellers, although I don't even think those people are accurate most of the time. You've got imagine Gate Bob and New Crystal Ball, and there's certainly a chance that rates escalate so quickly that it does actually start to bring home prices down, not just moderating them. But yeah, all of all the signs point to the fact that this is not some sort of bubble that we're in. We might continue to see sustained prices over the near

term future. So what should your reaction be, though, If you're the recipient of some of this new found wealth, if you've got more home equity than you know what to do with, well we're gonna talk about how to use it wisely in just a bit, but we gotta get to the downsides actually of this this extra money that that you've got on hand. And that might sound surprising, but no, there are some real downsides to having more it's home equity, and we'll get to the reasons why

that's the case, right after this break. Alright, we're back from the break and we're gonna continue our conversation about home equity. Uh. So you're listening to us right now. You own a home. You purchased it in order to have a place to live, to write a family. That's great, But now you're in this position where you've got that home equity that you didn't bank on having. Well, I hate to break it to you, but there are actually

some downsides to your home increasing in value. And you might be you maybe saying to yourself, like, sure, Matt, I just made fifty dollars just for owning this home last year. I see no downside. You're an idiot, dude. Uh And I promised like, like, we're not trying to take the wind out of your sales here. I actually might be an idiot, but we should still talk about

the potential pitfalls of owning a more valuable home. That's right, Okay, So let's dig in and talk about some of the downsides now that come along with that home price Inflation and property taxes are at the top of the list, because that's one of the main things you need to watch out for as your home is increased in value. And and from from everything I've read, Matt, actually, it seems like most counties around the country they haven't actually

raised tax rates commensurate with your current home value. And so your home might have gone up value, but your taxes might have only gone up six or seven percent, which is fortunate for you. They're they're lagging behind, but trust us, uh, they're gonna catch up quickly because the tax man cometh he or she always cometh. And so yeah, depending on where you live and how in tune your county has been to value changes, you might see a rapid increase in the amount of tax you're paying every

single year for on your home. And and here's the thing. If you feel like your local municipality has given your home too higher value, maybe maybe they haven't been lagging in You're like, wait a second, that's more than it's actually worth. It makes sense to challenge that tax bill.

The process. It's not the exact same everywhere, but there are ways to fight a bill if you believe that it's inaccurate, and and sometimes winning that case can actually lock in a lower tax rate for future years too, which can save you a ton in taxes. I I just recently did this on a couple of rental properties, Matt and I could. You could do it yourself. You can hire someone else to do it on your behalf.

But either way you you swing it. Typically there can be substantial tax savings if you feel like the assessor has has it wrong and they're overvaluing your home. But that is definitely one downside is that you might be paying a thousand dollars extra a year um in taxes because your home just went up in value. That's right. And the thing is this, I mean, not all taxes are bad, right, Like, we're not the ones out here saying that you should not pay any of your taxes.

They're necessary in order to make society functions, specifically property tax that they're used to fund schools, public schools in your city. And so we don't want you to think that we're completely against taxes. But that's definitely something to keep in mind, Joel. Something else we touched on this briefly earlier, but a legit downside of home equity that's just off the charts is that you might find this

money burning a hole in your pocket. This is when you feel like that you have to do something with it. But of course you don't. Luckily, pulling that equity out of your house isn't as easy as like, you know, like just transferring funds around using an app on your phone something like that. But there's also something called the wealth effect, which basically means that as your assets go up in value, you start to feel much wealthier. You feel like a baller who has way more cash on

hand than you can actually spend. I always feel like a ball that It's just it's a it's that mentality, you know, like if you believe it, it'll spend like one. But I always feel like one. But even though that money isn't super liquid, it's there in theory. And so you start spending you know, your your actual liquid cash, as though your home equity dollars we're currently in your savings account. It's kind of like counting your chickens before

they've hatched. Um. And so we mentioned that because it's great that your home is now worth more. But don't start spending like a maniac, because you just feel like your newfound home equity has made you like warm buffet wealth. It's like, oh man, I've got like hundreds of thousands of dollars more now I can afford take out every night of the week. Whatever. Whatever it is that you might mindlessly spend grow hub in perpetuity just because you

feel like that you've got more wealth on hand. Yeah, you know, that wealth effect is real. It's almost kind of like I liken it to just having made a Costco run. And you know, I've talked about this before. What if you load up on top, do you do you over eat or over consumed just because yes, you get that fresh bounty. And you know, we've had so many groceries on and I found that to be true in my own life at times. So I always think back to when I was a teenager and I would

always drive terribly after I filled up the car. I would swear that anytime I filled up the jeep, it just felt like it just went faster, which doesn't make sense, right, because when you've got twenty gallons of gasoline slashing around in the tank, technically the car should be much heavier. But it's just because of that lead foot. Dude, Like I knew mentally that that tank was just full of gas. I didn't need to conserve gas at all. But these days, man,

we're all driving like a Grandma, just like slowly accelerating. Yeah, well, I think the wealth effect is real. It's worth mention ng And sometimes yeah, just just feeling like you have access to more money makes you start spending in a way that you didn't before. And and let's talk about too, you know, a sizeable chunk of home equity just another

downside to having more of it. It might mean that your finances are now a little more unbalanced, right, you might now have an inordinate amount of your wealth tied up in one single asset, which is your home. And we talked about this just a little bit earlier. How that's not actually the best thing ever, even though that is the reality for so many Americans, Um, that's not something that we want to see happen for how the

money listeners. So even if your home is in a location that's likely to appreciate further and you're planning to own it for the long haul, it's still important to stay diversified. And and that means that we want to see you not just banking on your home as a wealth building asset, but investing in other other ways at the same time, investing in the stock market through tax advantaged retirement accounts. I mean, that's I mean, that's the

number one way we suggest doing that. There obviously other ways too, but just note that your scales might be getting a little out of whack if you're heavy on the home equity, light on the IRA funds or roth IRA funds for instance. Exactly. And there's a difference to what we'll say, between investing in real estate, for in specific properties that you have as rentals or as you know that where you're actually investing in it, as opposed

to a home that you are living in. Because the more properties that you have from an investment standpoint, obviously that diversifies your portfolio overall. It's also important to mention the tax consequences of grabbing your home equis. Were already talking about property taxes, but there there's another tax angle

we have to mention. Exactly. Yeah, if if you're doing a cash out refinance, there are no real negative tax consequences that you need to consider that cash is not considered income and you're able to deduct the mortgage interest of that new loan if that's something that you want to do. But if you're pulling money out in the form of a helock of a home equity line of credit or in the form of a home equity loan. Whether or not that money is tax deductible depends on

how it is that you use it. Uh. And so according to the i R S, if those funds are used to quote unquote by build or substantially improve the property that you're taking the equity out of, then you're able to deduct the interest paid on that loan or on that line of credit. Otherwise no deduction is allowed. And so keep in mind that this is on the financing of that money that you are considering taking out, not the entire amounts itself, but the interest paid on

that loan. Yeah, and those those rules changed to back during the Trump administration when the tax cuts and Job Act cut passed. And so this is one of those things where you used to be able to pull that money out willy nilly, take a vacation, buy a boat,

and you could still deduct that interest. But that's not the case anymore, only if it's used for those specific purposes at least until right And we'll see if that gets extended or if that's something that gets reversed very much that that will depend on who who our president is like, who's in Congress? Do you want to make any calls? No, I don't think I'm gonna make any political predicted predictions, no other predictions at this point in our age of insanity. But let's let's talk about the

smart uses of home equities. So we talked about the downside. You've accrued more home equity in this in this home. Your your home is worth more than you thought it would be, even just two years after buying it. Well,

how can you use it intelligently? Well, before we specifically start talking about how and why you might use those dollars for other purposes, I think we should match stress that you should probably think of your home equity dollars similar to the way you think about something like taking on debt for college, Because using a little in an intentional way can be great. It's like adding a little bit of salt to a dish, like while you're cooking, Well,

a little bit of spice. Smart use of college debt can get you a degree that then allows you to massively increase your income and provide you a joyful career that maybe you get to pursue for decades. It enhances the flavor, but too much of it. Nobody likes that except for my mom. My mom loves salt like you could put so much, like you could put a mountain of it and she would still eat it. She is oh g, just got called out. She's a rare bird. But uh, but cashing it all out can lead to

future financial hartshat. It's right, especially if we you know, do experience let's say, a pull back in home prices, one that we're not predicting, but that is possible. And so yeah, pulling pulling money out of your home is something you want to do very cautiously. You only want to tap home equity if you can do it wisely, that's right. Yeah, And that means not taking out more than you need and also not using it for dumb stuff. Right,

And so like what do we mean by dumb stuff? Well, our homes, Like we we do not need to treat our own like piggy banks. Uh. And if you use it as such, you're putting yourself in a potentially difficult situation. Let's say, Uh, let's say rates continue to rise and that actually does make home prices contract a little bit, and you've borrowed against your home, maybe to buy some fun toys and you know, to take cool vacations. You might be underwater if you have to sell that home,

putting you in a financial bind. Of course, sure like you've you've had some great experiences with that money, but using your home to fund trips and goofy purchases is just financially stupid. In short, we want you to use that money, not to consume h We want you to use that money to invest wisely, because basically, right now that equity is tied up in your home right and essentially, since you're not making payments on that equity right, you

have not borrowed it. Basically, it's saving you money. But once you take that money out and you start paying a premium for access to those funds, a premium being the interest that you're paying on the money, you need to make sure that you're going to see return that's much higher than what it is that you're currently paying on that mortgage or on that home equity loan, or on that helock. But even still, just because you're making a little bit more, that does not make that a

slam dunk decision. But just generally speaking, I think that's a good way to think about ways that you use the money that you pull out of a home. Yeah, meaningful guaranteed rates of return are hard to come by right now in this current interest rate environment, right, and so at the same time, while saving these accounts are earning next to nothing, we know that it's getting actually

more expensive to borrow against our home. So you know, our advice might have even changed a little bit from what people would have done four or five months ago when interest rates were closer to three percent. So, yeah, now that we've talked about what would generally be a smart use of home equity funds, how to think about it, next, we're gonna discuss some of the specific ways that you

can use that money that might actually make sense. There are already a few specific purposes where home equity dollars makes sense to actually pull out and start to start using them. We'll talk about those specific instances and in the best ways to actually withdraw those funds, because there are a few different methods of doing so we'll talk

about all that right after this. All right, we're back from the break and Joel, like you said here, in a second, we're gonna talk about how you actually do it, how to cash out, how to get that money. This was like a one long setup. And you know what the name of our show is how to Money, so we should probably get We will tell you how to do it, but first I do think it is important to talk about some of the specific situations where when

it makes the most sense. Uh So, let's cover a few scenarios when it's smart to use your home equity. And the first one we want to mention is renovating your home, making an improvement on the home that you're pulling equity from. This is the classic use of home equity, putting that money from the increase in value directly back

into the property. That's what we're talking about here. It is possible to overdo this, of course, Historically it's it's pretty difficult to increase the value of your property dollar for dollar as you make improvements. Though we are living in some crazy times right now, but it is regardless, it's going to be smart to pay attention to the kind of return you might see as you consider how

to improve your house. You know, and doing some of those renovations purely for your own enjoyment is is totally fine. We want you to leave your life and enjoy uh. Set a specific lifestyle that you think is going to work for you. But again, borrowing too much can put you in a bind. Uh, This isn't a terrible reason to take out some of your home equity dollars, but

just make sure that you do not go overboard. Yeah, you mentioned that this was the classic use of home equity, which when I think classic, I think Chuck Taylor All Stars, because that's the classics who choice of baby any millennial these days, I think, and I still have a couple of pairs, and really I've never actually seeded millennials too, I think so Chuck Taylor's They're just people of all ages can certainly enjoy them. Do they make also like

wide all Stars? Because I will say, I out of Paara Chucks, uh maybe a decade ago, and I can never wear them because my feet are too fat, They're too wide, And whereas some tennis shoes like they break in and they will widen with your foot, that never happened, and instead my pinkytoe is just rubbing up against that tough, hard, raw rubber on the inside of the shoe. I'm sorry, I don't know what to say to that, but you started us down this path I'll talk to the folks

at Nike who now own the truck Taylor brand. I believe, do they really? Yeah, And so we'll see what they can do. Um, I love Nikes. Make a wider a wider truck tailor for you. But yes, brought to you by Nike. But that is that is a classic use is for home equity and it can be done well, but it can also be done poorly. But but just another another reason you might be willing to take home equity dollars out of your home is to just do some traditional investing. And we did a whole episode on arbitrage.

I don't remember the number of that episode rough top of my head, but basically, there are ways to use your money to make more money. There are ways that you can find a deal and turn that into cash. And so taking money from your home, let's say it's at a super low interest rate, and then you know, investing in the market for higher returns will that could

allow you to build wealth at a faster clip. And here's the thing, though, this is our least favorite of the potentially decent ways to use your home equity because your monthly payments are going to increase while those investment dollars are basically locked away for your future. And so I guess the question is can this increase your net worth over time? Well, yes, the answer would be yes, But but it could also put you in a precarious situation.

If let's say your income drops and you've got this higher loan payment and paying off that home equity loan or line of credit, it just becomes more difficult. And yes, maybe you you've got to spread on the interest rate and you feel like you're gonna make more money in I bonds let's say, which is guaranteed or in the market over the decades, which is not guaranteed. You're you're hoping at that point they're gonna make more money. It's a little bit more of a gamble to take this

this route. Yeah, And the thing is too, is that it depends this all counts and comes down to you actually doing that investing right. And so that's where it falls apart because basically, like at the core of arbitrage or at the core of business is arbitrage, right, Like you have found some sort of niche for you to have your business. You're taking, uh, these different products, you're piecing them together and you're able to sell them at a profit at a premium. But you're doing that because

you've actually launched a business. And the problem with us as individuals is, I think we could take that first step, right, we take that money out thinking that we're gonna actually see it through, but then we don't do that. Uh and so so much of this depends on what you actually end up doing with that money. It ultimately comes

down to the follow through. Yeah, it sounds nice when your daydreaming about about that arbitrage, right, Yeah, we're just gonna pay this money out at four and a half percent,

I'm gonna get nine percent in the market. But if you withdraw the funds and then you take a long time to stick any of it in, you sit on it, maybe you get scared a little bit, and maybe you do use some of that money since you would like if I take a little bit, I'm still got the sweet arbitrage deal going on, and and uh and then yeah, you you can't predict the future and you can't know what your personal financial situation is going to look like,

even just a few months down the road. There is risk involved, and so there yeah, it is a risky scenario. It is one that can and has worked for some folks, but it's like proceed with caution sort of thing. Totally yeah, And so investing in the market like that's one thing. But taking those dollars and then specifically using them to invest in real estate instead, that can actually be a bit less risky, especially if you have a lot of experience and you're very familiar with rents and the market

that you're considering. If this is your first time, I think it's best to be at a bit more cautious and save up those dollars from your paycheck instead. And the reason this form of investing isn't quite as risky is because rental real estate allows you to reap some of those financial rewards now in the form of unpick cash flow. You're growing your your money for your future, you're growing that equity, but you're also receiving dividends along the way. And so sort of what I was saying

as far as like that follow through. If you are committing to purchasing a home, I think it's much easier to actually see those dollars do something good because you have purchased a property, right you're basically going all in there's no You're not like it gonna be on the fence about like, oh, maybe I'll invest a little bit of the money in the market and then I'll maybe

i'll dollar call savage. I see it as a it's it's sort of like a form of accountability essentially, And you know, I'll confess to I think one of the reasons we we mentioned real estate specifically, it's because it's something that's worked for us. Right, We've got a lot of expertise, We've got a lot of experience in our

local real estate market. But at its core, uh, investing in real estate it's a business, right, Like you are looking for an opportunity, and for somebody else, their expertise, their experience may be say less in real estate, and maybe it's more in creating some sort of business. And so I guess what I'm saying here is that I think it's okay to consider some funds from a home to fund another business that you are very proficient and the thing is a man with real estate. It's just

such a proven way to invest your money. That's one one of the other reasons why we like it. Like, in my mind, it's like the difference between starting a restaurant from scratch and you have to figure everything out and who knows exactly what's going to happen, as opposed to starting like joining a franchise or something right like where it's just like, Okay, I want to be a check Filo owner, or I'm gonn a starter taco Bell

or something like that. There's a proven model, which by the way, Chick fil A, not the franchise model in case you're wondering, well, that's right, Yeah, they choose you. Uh so, let's make it a taco bell and a

dairy queen or something else else like that. But in those instances, in those examples, there's a proven model, right like, they have very specific items that are going to be on the menu, they have name recognition, they have all these things that are proven, and it's easy to slot yourself into that formula, as opposed to just build something from the ground up, which is what I feel like starting your own business is more like yeah, so I agree.

I think there's a complete difference in putting that money in the market and hope of future returns which are likely to occur, whereas buying a piece of rental real estate, you kind of have. There's more solid numbers behind your ability to do that. And I gotta say, it's actually harder to pull this off right now because it's harder

to find good deals right now. So even though this might be a good use of home equity, it doesn't necessarily mean that you should pull money out and be like, all right, we're all in the real estate bandwagon, because if you can't find a deal with that money, then it's not worth pulling it out, right But I agree, I think there is just a little more of a known quantity when you're buying a rental property with those funds than when you're trying to invest in other ways.

But so let's just quickly reiterate all these reasons, uh that can make sense for for snagging some of your home's equity. We talked about renovating your home, maybe investing or buying our rental property. But but even if you're taking out your home's equity for a quote unquote good reason, some of these ones that we mentioned, you still need to do it carefully because leveraging your home to make improvements or investing to build more wealth, it's it's a

strategy that can increase your wealth generating abilities. But it's crucial to use leverage judiciously. It is possible to overdo it and so um, it can come back to bite you in the butt. If you use it flippantly and you haven't planned things out, you don't know what you're doing,

it's possible for leverage to eat you alive. That's right, dude, All right, now, let's talk about how to tap your home equity fly if it does makes sense for you to take some some out cash out refis they these were these were uh moves that were hot for a minute. But now that rates they've you know, they've taken off faster than a bottle rocket. Those are making lessons for

a lot of folks today. If you're currently sitting pretty with a rate, you know, in the twos or in the threes, you likely don't want to refinance out of that into something that's closer to five percent just to pull some cash out of that home. It's like an itchy trigger finger when you're like, I want my home equity so bad, I'm willing to sacrifice my two point seven five right to go to five pc rate. Don't do it, or actually potentially even higher, right, now don't

say any numbers. Yeah, seriously, in a few days, this is gonna potentially be out a date. But you'd be shooting yourself in the foot, you know, were you to do this. And so the best options are likely going to be that home equity line of credit, that helock, or that home equity loan, like we mentioned earlier, on which you opt for is it's mostly influenced by how quickly you'll be able to pay that loan back. That's right, Yeah, because the helock. Let's go into which one makes sense

in what's scenario? Well, yeah, cash out refis are rarely, rarely makes sense for most folks right now who own a home in order to tap that home equity, except for Matt is actually messaging with a buddy of mine who we go to the same church, and he was talking about doing a cash out refinance and I was like, whoa, whoa, whoa, whoa, whoa,

slow your role. What's your current interest rate? And he said six percent because my card it was trash went up and I was like, Okay, you're one of the rare folks where a cash out refinance actually might make the most sense for you because you could potentially lower your rate while you're pulling money out, and so I bought fifteen years ago and never refinance. Well, that could be, that could be the same to somebody else to be

in that scenario. But for him specifically, it was his credit was wrecked and he's built it up, you know, he's built it back into being decent, and so he might be able to get a rate lower than six percent, which is incredible. What what's crazy, though, is that my natural reaction, in my natural inclination, is to hear six percent and just like cringe, cringe. Yeah, like I WinCE

when I hear that. But what's nuts is that could very well be in our future and that's still it's not been great over the past decade, but it's still historically a reasonable rate. It's yeah, historically great. But you know, hopefully you listen to us last year, when I don't know how many times we said, we said so many times, please refinance if you have not already. I almost felt like I was we were lying, and uh, We're like, rates are gonna go We're gonna go up at some point.

And then finally they climbed and were like the Fed finally got to it proven true. It's happening right now. Yeah what Okay, So the cash our refine not doesn't make sense in most scenarios. The helock is great because you don't have to take all the cash at once, whereas with the home equity line or with a cash our refinance, that money gets stuck into your bank account. You're paying interest from the moment that you close on

that loan. You're only going to pay interest, however, on the funds that you take out when it comes to a helock. So you might have a line worth of a hundred thousand dollars worth of equity that you can take out, but until you actually pull the money from the line, you're not paying interest. And so that is what makes that such a great vehicle. It's great. Yeah, you don't even have to use the whole thing if

you don't want sends helock. Yeah, you might have a hundred thousand dollars and you only pull ten ran out for a specific purpose. But the rate is also going to adjust, and that can happen as frequently as every month, and so with with especially the way things are looking today. When yeah, in a rising rate environment, that could potentially mean that your rate is uh quite a bit in just a year's time, and we're pretty sure we're only going to see rates uh and continue to increase over

the course of the year. Yes, agreed, And so it could get nasty pretty quick having a helock on hand. But with a home equity loan, you take out the entire amount in one fell swoop. So, like I said, those interest charges they do begin immediately, but the interest rate is locked in, so that's kind of a plus

of that product. So much of which one you decide to go with depends on how quickly you feel like you're gonna be able to pay that loan back, because the helock is going to have a lower starting rate, and so you might say, well, I'm gonna pay this off in eighteen months, I know I can do it well then, or if you know you'll need like you mentioned, like if you only need to tap say ten thousand dollars or a couple of thousand or five thousand, there's

no need in taking out an entirely new home equity loan. So it also comes down to the amount that you are needing access to you right now, that's right, and home equity loan typically comes with some closing cost wars helocks. You can find them with zero closing costs from a lot of lenders. And by the way, when we're talking about where to get one of these products, local credit

unions are are typically the best place to go. Yep, best best rates, they offer the best products, and so I would shop with a few credit unions in my area if I were all. If you're if you're looking to get one of these products and you are looking to tap some of your home equity, check out two or three credit unions. Oftentimes those rates are posted on their website, so you don't even have to necessarily go in and meet with somebody. You can kind of at

a glance figure out. You know what these products are and which one is going to suit you best. Click you that today's rates. Okay, So what about using home equity to pay off higher interest rate debts. That's a good question because a lot of people kind of think about doing that from time and time to Like, I got a credit card debt, can I consolidated exactly? And you know, we totally we we get it all right,

Like I get this urge. But being said, there are a lot of ways that taking out home equity to pay off a credit card, let's say, can actually make things worse. Why is that, Well, you know, let's talk about secured versus unsecured debt. For a second. Part of the reason that you get a better interest rate for borrowing against your home is because you're borrowing against a valuable assets your home, uh, and this is called a

secured debt. Credit cards are the opposite. You're not putting up any collateral, and so that's why credit cards are unsecured debt, and you have a higher interest rate associated with those quote unquote loans. And so the downside of say, not paying your credit card bill for months on end, is that your debt is going to go to a collections agency and it's going to wreck your credit. But let's say you borrow against your home and you fail

to pay the credit union. The consequences here become much more dire, potentially even losing your home, because you put your home up as collateral for that loan. So that's why we're trying to stress again, Joel, you said the judicious use, and that's such a great way of saying it, because that's how we want you to approach these types of loans. That's how we want you to a coach home equity. We don't want you to go overboard, and that means while using home equity to pay off high

interest rate debt. It can work, but there's enough risk involved that you might not want to try it. Yeah, exactly, because the risks are just completely different. Losing your home versus wrecking your credit those are two completely different outcomes. One feels much more dire than the other. And I don't want to play my risk at home just to consolidate my credit card debt, whereas some people might recommend that um and for some people in certain financial circumstances,

it can work out. It's just not a slam dunk, and it's not something that we want to tell people willy nilly, uh talking to two tens of thousands of people like you, go go do it, no problem. It's just a scary proposition. It depends a lot of It depends on how you arrived with all of that credit card debt as well. Right if it was just if it's behavior and that's just how you've always been, and it's what you're going to continue to do. What's gonna

change if you continue to go down this path. Uh, it's likely that you will continue in those same behaviors, within those you know, in those same actions. Uh. And so I see that being a situation where you wouldn't want to do it, versus a situation where maybe let's say you didn't have an emergency fund set up, and maybe you never carry a balance on your credit card, but maybe you hit some rough patches over the past year. You put a lot of expenses, you charge a lot

to your card. But things are turned around, You're on the straight and narrow. You do now have some margin in your life. You have some money set aside in an emergency fund. I could see that being a situation where you might want to tap some of that home equity because that was sort of a blip. It was

a one time thing. You're never ever going to do that do that again, and you just want to eliminate like at that point it becomes a numbers game, right, and you want to eliminate the high interest rate debt. I think you need to have a plan to do two things. Yeah, change your behavior, like plan like exactly, that's the thing. You have to have a plan, but it needs to be a plan to one change your behavior, because you can't say I'm gonna take this money out

pay off the credit cards. You have to have a plan to not use those credit cards again, to change the way you treat them. And then you also have to have a plan to then pay off the debt that you've just incurred against your home and to do that in short order as well. So, yeah, you want to make sure you're doing you have a plan to do both quickly or else this could un awl and it could end up in really, really crappy circumstances for you.

And by the way, if you need help with your money, if you need to talk to somebody and you feel like you're in that situation we're tapping home equity to pay off high interest rate credit card debt because it's overwhelming, is the only solution for you, Well, I would suggest speaking to a nonprofit credit counselor at NFCC or Money Management International. Will post links to both of those in

our show notes. But those are places I would turn because sometimes they are able to work with your creditors to give you lower rates that you can't get on your own. And and by the way, here's the thing, there's almost no upside. Back to the home equity thing, Matt to dwelling on the increased value of your home. I think sometimes people keep refreshing Zillo or red Fin every day and they're like, just for that little pick me up. Yeah, let's see how much this estimate has

increased my value. What's what's the redfin estimate? Exactly? There By, the way is always more, it's always higher, the red Fins always higher. Yeah, I really have you found that? No, I don't check enough, to be honest, I've noticed that. But I know that some people love checking, and they're like, I've been I've been just sitting here eating bond monds and I just made three k uh and that feels good. That makes people feel pretty swell that they didn't have

to do anything and they just made some money. But but here's the thing, doing nothing is actually the best course of action in so many circumstances. I'm not I'm not saying sitting on your couch, but but um, if you're in great financial shape, if you're if you're living life how the money way, the way Matt and I talked about your saving and investing for your future in a meaningful way, Well then we would say tapping your home equity wisely in order to pursue a renovation or

some of these other financial goals that you've got. It could make sense because his home equity has skyrocketed. More folks are thinking the exact same thing. But but as rates have gone up, it's not necessarily a slam dunk decision. There's a lot that you need to consider, and if you're kind of doing it out of desperation, the consequences could be severe. They could be bad. And so there's just a lot that goes into thinking through whether or not you're going to cash in on some of that

home equity or not. We want people to be careful, proceed with caution, and in some situations you could further your nutual goals. In other ways, it could end up harming you. This whole conversation, it kind of reminds me like we've our kids are a little bit younger, but we we have folks who have kids who are older and they're starting to have the big talk with their kids, and it's sort of like, wait about investing. If only it was that easy. Here's what a four one heay is, sweetie, um,

But basically what I'm saying, I'll have that one. I'll let my wife handle. Like I'm thinking about the fact that there may have been some folks who weren't even aware that this was something that they should be paying attention to, or it's something that it may not have even been on the radar, but by talking about it, all of a sudden, you've thrust in front of them and you're like, hey, this is something that you gotta watch out for, and now we hope you make the

best decision possible. Right Like in the same way with with home equity, It's like, I bet there were some folks were it wasn't even on their radar at all that this was an option for them, And now they've gone to Zello and they're like, they're like, look what's available. Uh now they've got those Uh they got the dollar signs and their eyes. But it's still we think it's still important to talk about it and just be something in Vegas with this to be something that you're aware of.

We want this to be something that you're thinking through in a healthy way. That is what we do here on the show. We talk about money in a way that it's where you know where it's not ABU. We want to help you through some of these different financial seasons of your life, and hopefully we were able to do that today. And this is of course just a top of mind discussion as you're seeing these headline numbers and you're you're wondering if you're a homeowner, like, well,

what do I do with this newfound money? Well, for most people, nothing is the best best course of action. So are Matt. Let's move back. Let's get back to the beer that we had on this episode. This one is called Above the Threshold of Hell by Burial Brewing Company. That was a pretty good metal voice, just that's how it's written out on here with its super metal design. Is just kind of a ridiculous name, but for a great I p A. Yeah, what were your thoughts on

this one? It was fantastic. I don't think we've ever had an I p A from Burial that wasn't amazing. This was a double dry Hops I p A. And I will say a lot of times some of their beers can be kind of thick, difficult to drink, but I felt like this one was a little bit lighter. Um, it was lighter. I think in the Hops and the flavor it was nuanced. It wasn't just like you know, they weren't smashing the guitar on the stage. They were

just up there playing like a normal person. And for them specifically, I feel like that's a nice change of pace. You know, like like a lot of times it's like to be abrasive. They've always got it cranked to eleven. And it's really cool to see a brewery like Burial dial it back just a little bit. Sometimes you want to bear that's a little bit easier to drink, that

doesn't smash you over the head nearly as much. Maybe got some more of the hop nuance that's going on in this beer because it wasn't over the top, because it wasn't just like hopped to the gills. It was like, oh, I feel like I can taste the flavor profile of the hops a little more because it was a little more laid back, so in my mind was a touch more like fruity. I feel like you could taste more of the fruit flavors with within the hops that they tend to evoke. I dug this one, and I dig

pretty much everything Burial makes. They're awesome, all right, that's gonna do it for this episode. For folks who want the show notes will have links to some of the resources we mentioned. You can find those up on our website at how to money dot com. That's right, and don't forget if you have not signed up for our

weekly newsletter comes out every Tuesday morning. Our first one, actually our first legit newsletter, came out yesterday, So all of you listeners out there there who are already subscribed, you got to enjoy that. But if you're listening and you maybe you're sending some of that poo uh it's real, make sure you make sure you had to have the money dot com forward slash newsletter, or you can just

scroll down to the bottom of the homepage. Best newsletter in the history of money, Newsletters in the history of money, and we just started. Uh it's a tall claim, but we're gonna stand by it. That's gonna be it for today though, until next time, Joel, best Friends Out, Best Friends Out,