You have heard before that there is “good debt” or debt
that can actually increase your wealth. So, let’s explore how “good
debt” can work for you.
Your home is one of the most tempting assets to leverage. You can
take a home equity loan, which allows you to borrow a lump sum of money for a
fixed interest rate, or a home equity line of credit, with payments based on the
balanced owed.
Equity, the difference between what you owe and what the home is
worth, allows you to leverage or effectively borrow money that you would not otherwise
put to use. There are pros and cons: one is that there won’t be as much
equity, since you are borrowing against the money you have put into owning the
home, and two, depending on what you are using the money for, you could be accumulating
debt on top of the loan payment, increasing your debt load.
On the positive side, you could use the equity to buy another home—such
as a vacation home—which could also increase in value, thereby increasing
your net worth. You must be able to make the payments or rent the second home
to offset your payments.
You could also invest the equity in the stock market and increase
your investment portfolio, keeping in mind that the loan interest must be deducted
from the gains in the market in order to give you your net rate of return. You
would then have equity growing in two investment sources. If you can’t handle
this level of risk, don’t do it.
Your Securities
Brokerage firms lend money “on margin.” The most they
will lend you is a percentage of the total value of the “marginable”
securities in your account—the ones the broker considers valuable enough
to protect the firm if you default. The broker gives you the loan, and you give
the broker the right to sell the securities in your account if you fail to repay.
You pay interest on the loan, and repay it as any other loan.
The attraction of margin loans is that the interest rate tends to
be lower. But margin loans can be risky.
Life Insurance
If you have a universal or variable universal life insurance policy
you may be able to borrow an amount equal to its “cash surrender value.”
The loan amount could decrease the face value of the policy if you die before
the loan is repaid. The interest on such a loan varies, but often, it is lower
than a bank.
Make your money work harder and smarter for you. PE
