The Power of Leveraging

You have heard me tell you that there is "good" debt or debt that can actually increase your wealth. So let's explore how "good" debt can work for you and help you increase your bottom line.

Leveraging Your Assets

To a lender, the most attractive borrower is someone who has assets under the lender's control along with an excellent payment history. With these two advantages, you can often get a loan quickly and at better lending terms by leveraging the power of your assets.

Your home is one of the most common and 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, which gives you a line of credit for a variable interest rate with payments that are based on the balanced owed.

Equity is the difference between what you owe and what the home is worth. It allows you to leverage or effectively borrow money that you would not otherwise put to use, unless you sold your home. As with everything there are pros and cons: one is that there won't be as much equity since you are borrowing against the money you have paid for the home, and the second is that, depending on what you are using the money for, you could be accumulating additional debt on top of the home equity loan payment, thus further 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. Remember that you must be able to make the payments or rent the second home to offset some of 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. This is often a more daunting task. However, this is how many people build their wealth. You would then have equity growing in two investment sources, not just one. The one major factor in all of this is your level of risk and your ability to sleep at night. If you cannot handle this much risk and find yourself worrying at night – 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 you would any other loan.

The attraction of margin loans is the interest rate that tends to be slightly lower than what you would pay at a bank. Margin loans can be risky; for example, if the prices of your marginable securities drop to a point where their value does not leave enough protection, your margin would be "called" and you would have to add additional monies to the account or pledge additional securities to the account. Failure to meet the margin call means instant sale (often at a loss) of the securities you've already pledged.

Borrowing from a 401(k) retirement plan has different restrictions than borrowing from your securities portfolio. You will be required to make regular repayments with interest, so not only will you borrow from yourself but you will be repaying interest to yourself.

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 cash surrender value increases over time as you make payments to the account. Borrowing from the cash surrender value is a loan, and the outstanding loan amount could decrease the face value of the policy if you die before the loan is repaid. The interest charged on such a loan varies from company to company. Often, it is lower than a bank.

As you can see there are many ways to make your money work harder and smarter for you. We've only covered a few here. The main consideration is risk. Often you may know that leveraging your assets are a good financial move but the stress of extending yourself beyond your comfort level can make this move a difficult, if not an impossible, one to make for some people. Another element to consider is the accumulation of additional debt on debt you already have. If you are having difficulty paying your bills, leveraging your assets may not be the right answer.

Job security and health are also factors to take into consideration. If either one of these are in jeopardy, don't leverage your assets – nothing could make you sicker! Remember to seek the advice of a financial professional before you make a move. Your advisor will be able to look at your situation with an open mind and assess the best way for you to go. Getting the appropriate advice will be money well spent!

Cindy Diccianni is a Registered Nurse, a Certified Senior Advisor (CSA), a Certified Long Term Consultant (CLTC), a Registered Investment Advisor and a Registered Representative with Leigh Baldwin & Company member NASD and SIPC. She is affiliated with Ortner, O'Brien & Ortner Advisory Group, Inc., Malvern PA. Her passion is assisting clients in creating financial freedom. You may contact her at Cindy@taxlegalfinancial.com.

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