The housing market has been going up, and as a result, a lot of investors and
homeowners are finding themselves benefitting from substantial appreciation on
their home values. Investors often approach me with the problem of too much “lazy”
equity in their homes.
Sophisticated investors know the amount of equity they have in their properties and
closely monitor the return on equity of their investment — that is, the percentage of
return in comparison to the amount of deployable equity, or how much they would
net after a liquidation. This is different from the return on investment, which is the
amount the initial capital investment makes off a down payment.
With the rise in home prices, people are looking to optimize the equity trapped in
their home. In this situation, there are three options for redeploying the equity: sell
the property, cash-out refinance, or take out a home equity line of credit (HELOC).
Consider the strategy known as mortgage recasting or rate arbitrage on of those
options in order to pay down your current mortgage.
First, let’s talk about good debt versus bad debt. An 18% interest rate paid on
something like a credit card is bad debt. But taking a 4% HELOC or loan from your
life insurance policy can be good debt. Especially if you are putting the loan proceeds
into private note fund at 10%, an apartment private placement at 15%, a rental
property at 25% or another higher risk/return partnership or development at
30%. What you do with the liquidity from your mortgage debt is what really matters
— just don’t buy jet skis or other doodads with the money.
You assume when you buy a house that it will go up in price. Historically this has
been true, but it’s not guaranteed to go up in the future. Mortgage debt is how most
people can afford homeownership, whether or not they are responsible enough to
commit to a 30-year loan or can afford the monthly payment. The unavoidability of
mortgage debt is one of the myths I blindly followed to buy my first primary
residence in 2009. You hear of it often from bankers and lenders, most of whom are
simply acting as salesmen for big banks and get compensated when you originate a
loan. They are not always acting as a fiduciary.
A traditional mortgage is where you have a 30-year amortization schedule where you
make payments in the same amount for 30 years and all the interest is paid upfront.
In the first few years, a huge majority of your payment is going toward interest.
When the majority of homeowners move before the end of the 30-year mortgage,
brokers love it because they get compensated with origination fees when a new loan
or refinance happens, and banks love it because the amortization clock has been
extended and the customer is again put into the front-loaded majority interest
portion of an amortized loan.
Mortgage rate arbitrage turns the tables on this situation.
Take out a HELOC — credit borrowed against the equity in your home or any other
loan that is based on simple interest, not amortized interest. This is a liquid line of
credit that you can put money into and out of without penalty. Many people call
these “debt-destruction weapons,” which is illustrated when you take a spreadsheet
and compare simple interest and amortized interest against you.

For more information please click the link on this page or contact Bruce Singer with Vision Home Mortgage at 702-217-5525