Borrow Against Your Home And Pay Your Credit Card

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Borrow Against Your Home And Pay Your Credit Card

Say you hire a worker at an expensive price, then a poor immigrant is willing to work for you at a fraction of the cost. What would you do? You fire the expensive citizen worker and hire the immigrants. See?

The same way, if your credit card company charges higher interest rate than your bank, you should hire money from the bank instead. It's the principle of appeasing the lesser evil. The thing is why would any bank want to lend you money at low interest?

Now, we need to resort to psychology here. Say someone comes to you and says, "Lend me money I have a huge business that can have 100% yield". Say another person comes and says, "Lend me money, I got a standard real estate business that yields 20% per year". Which person would you give your money to? The one giving 100% yield?

Obviously it's not obvious. Why? Because you don't give a shit on the sort of yield he'll get.

All you care about is how much from that 100% yield will he share you?

If both say that they will share you 10%, which one will you choose? The safer investments. Usually higher yield investments are riskier. So, when both say the will share you 10%, you will choose the business yielding 20% per year. That's why Banks love lending money to low yield real estate rather than highly profitable silicon valley business start up. There is another even more important reason, which I'll explain later.

You don't care how much yield a businessman will make. You care what your share is. That and the probability that they won't pay your loan.

The same way, Banks lend money to businessmen at pretty much constant interest rate. If the businessmen make a lot of money, the Bank makes 10% interest, if the business makes less money, the bank also makes 10%. So banks don't care how much money businessmen make.

Banks only bite the bullet when businessmen go bankrupt. The same way, when a bank considers a loan to you, they don't care how brilliant you are. They're only interested whether you will pay the loan or not. If they feel secure you'll pay, they lend the money. Simple?

Now, how do we make bank feel safe that you'll pay? Collateral. You see, secured debt are debts where banks can seize something if you don't pay. You'll usually get lower interest rates this way. Collateral makes banks feel safe in lending money for you. This is the second reason why banks love real estate. Real estate loans always come with collateral that will minimize banks' problem when the debtor ditches.

Trivia: Why Credit Card Interest Rate is Higher Than Mortgage?

Answer: When you lend money on interest rate basis, all you seek is security. To make a profit, your interest rate should be higher than the interest rate your lender gives. However, that's not the only factor. You need to compensate for the probability of default. Your interest rate should be high enough so that even if say, 10% of your debtors are defaulting, you still earn a profit.

Different Point Of View: Credit Cards, unlike Mortgages, are unsecured by collateral. So banks are not motivated to lend money through unsecured loan to unsecured debt. So how do we motivate them to lend money? By agreeing to pay higher interest rate.

Morale: As with anything, after a bunch of regulation, the market will sort of take care of it. More pain for a bank usually leads to bigger share for it in another form.

As usual, I put a few simulations for this advance strategy. I also put an in-depth analysis to explain why this advance strategy is possible. You should compare the simulations of this strategy with the simulations of the basic strategy


Is it for you? Well, I won't jump to conclusions. If you're determined to pay, go ahead.

However, if you're not, this can make you loose your house. You see, that's the downside of collateral. It's a secure debt so you cannot hide behind bankruptcy laws to prevent banks from taking it.

I'll explain more about bankruptcy later.

However, if your debt is not neck deep and you obviously can pay, this is obviously the way to go. The worst is you live on welfare, right? Doing this right can help shorten your loan payment period or cheapen your payment.

Loan interests go high because banks are taking risks that some people won't pay their loan. Hence, by paying high interest loan, you are paying the loan of those who don't feel like paying loan.

Maybe you think it's unfair that some people don't pay their loan expecting you to pay for it. However, for all the bank knows, you are potentially one of those people.

Unless you can convince your bank that you're not likely to default on your loan, the bank will think that you're a potential defaulter.

You see, unless you have a credibility or collateral, the bank will automatically think that you are partially a defaulter. If the default rate in your country is 20%, for example, then the bank will look at you as if you've decided to default (on average at least) 20% of your loan already.

Here, the bank will give you an interest rate where on average, the bank still gains its usual low interest rate plus some amount to compensate for the extra risk.

By signaling to the bank that you're not one of them through collateral, you only pay interest for what you owe rather than paying for those who don't pay their loan. Hence, you get cheaper interest rate.

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