HELOCs vs. Infinite Banking

Infinite Banking can be difficult for people to understand which is why we frequently use analogies to explain the process. We've noticed that after educating clients, we see many respond with comments like, "Oh, so this is kind of like a HELOC?" This is an astute observation, so we'd like to take the time to show you the similarities and differences.

Subscribe

HELOCs

A HELOC, or home equity line of credit, is a revolving line of credit secured by the equity in your home. Borrowers apply for HELOCs from a bank, and the loan size is generally a function of your home's market value and your outstanding mortgage. Banks typically require an LTV (loan-to-value) of 80-90%. As an example, if your home is worth $400,000, and you have $200,000 left on your mortgage, an 80% LTV requirement would allow you to borrow $320,000 or an additional $120,000.

Additionally, after building up equity and applying for a loan, HELOCs have a draw period which allows you to access the line of credit (i.e., for 5-10 years), followed by a repayment period, which requires you to repay the loan plus interest (i.e., over the next 10-20 years). HELOC repayments, like typical mortgages, are treated as amortized loans, in which a portion (and potentially large portion) of payments are going towards interest. HELOC rates are variable, generally priced by the current prime rate plus a spread. They currently sit at about 10% on average. Failure to repay your HELOC could result in a foreclosure.

HELOCs can be used for basically anything, although many use them for additional real estate purchases, home improvement, debt consolidation, or emergency expenses. As opposed to an unsecured loan like a credit card, the main appeal to a HELOC is that real estate prices generally trend higher over time with inflation, so you can leverage your equity to buy things, allowing your capital to continue growing (if home prices increase). However, as we're seeing now, home prices can fall. As a result, lenders may reduce your available credit limit to maintain your LTV. If home prices fall enough, this could also result in negative equity.

Infinite Banking

We define Infinite Banking as the process of safely growing and leveraging capital using a properly structured, dividend-paying whole life insurance policy from a mutual company. Similar to a HELOC, we are also buying an asset, which is a permanent death benefit. As opposed to "renting" (think term insurance), the question isn't about whether the death benefit (our asset) will be paid or fully acquired, but when. Just like a HELOC (20% down payment plus additional equity), there is also a "capitalization" period, in which we build up "equity" to borrow against. Our current equity value is the cash surrender value ("cash value" for short) of the contract guaranteed by the insurance company.

When it comes to policy loans, access to our capital is guaranteed. We don't have to receive approval from the lender to access our capital because the lender is the guarantor of our collateral. What we mean is that the value of the asset we're buying (death benefit) is contractually guaranteed, which means our equity (cash value collateral) grows each year and cannot decline. As a result, the insurance company doesn't have to worry about negative equity situations, so loan rates are much more favorable (i.e., around 5% right now). This also allows the insurance company to safely lend you more against your collateral than a bank might. For instance, it's not uncommon for insurance companies to let you borrow against 95%+ of your cash value asset.

Additionally, since the insurance company owes the borrower (death benefit) more than the borrower owes the insurance company (cash value), the repayment schedule is fully flexible. Any amount not paid will accrue interest at the end of each year, but there is no "foreclosure" on the asset being acquired. The insurance company would just deduct any outstanding policy loans plus interest from the death benefit when it's paid out. The last thing to note about policy loans is that these are not amortized, meaning all repayments go towards reducing the principal balance, which can save borrowers on interest.

Lastly, similar to a HELOCs, policy loans can be used for anything at all. As an example, households find use in debt consolidation, home remodeling, and financing vehicle purchases. Entrepreneurs leverage their capital to start or buy businesses or invest in securities. Small business owners find this particularly helpful for equipment financing, business expansion, or emergency funding. However, Infinite Banking allows users to compound capital while safely borrowing against capital to buy the things they want or need.

Characteristics	HELOCs	Infinite Banking
Credit check & application	Required	Not required
Guaranteed access to capital	No	Yes
Guaranteed collateral growth	No	Yes
"LTV"	~80-90%	~95%+
Current rates	~10%	~5%
Debt repayment	Amortized	Non-amortized
Repayment schedule	Fixed & required	Flexible & not required
Used for	Anything	Anything
Offers death benefit protection	No	Yes

Conclusion

Conceptually, the HELOC vs. Infinite Banking comparison gives people an opportunity to better understand what Infinite Banking truly is. While we can see there are many similarities, such as borrowing against collateral, we find that Infinite Banking is a far superior process of growing and leveraging capital. We believe that people need a place to live and protection against the loss of life. However, when it comes to the best way to save, finance, and invest capital, we believe Infinite Banking offers unmatched safety, guarantees, and efficiency.

Subscribe