With real estate prices shooting up over the last few years, some people have taken advantage of this situation by tapping into the increased value. One housing trend that some investors have tested is the idea of using a HELOC to invest in real estate or another asset. Dave Ramsey has advised his listeners against using a HELOC, which stands for a home equity line of credit, and as the name suggests, allows you to borrow money from your home’s equity.
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Ramsey, the popular personal finance expert, refers to this as a “stupid” housing trend. In this article, we will examine the risks associated with a HELOC. What are the six major risks of HELOCs?
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1. You Could Lose Your Home
The biggest issue with a HELOC is that you’re using your home as collateral. If, for some reason, you can’t pay back your HELOC, you could risk losing your home to foreclosure. While most people think that this wouldn’t happen to them, the reality is that you can’t predict how the market will react.
If you lose the money or things don’t work out, you’ll struggle to repay this loan, which could lead to serious financial issues. You want to think twice before risking the largest investment you’ve made in your life. Many people who take out a HELOC need to be made aware of the worst-case scenario.
2. You’re Taking On Unnecessary Stress
During an episode of The Ramsey Show in October, he informed a caller that they should sell their house and move. He told them that they were trading one type of stress for another. When you make complex financial moves, you’re taking on additional stress that could cause trouble in the future. While the idea of borrowing money from your home’s equity to pay down debt or make an investment sounds simple on paper, plenty could go wrong in application.
Here’s another scenario to consider: what if the money you borrow from your home’s equity to invest is allocated towards an asset that doesn’t increase in value? What if the investment loses value? There are no guarantees when investing your money; you could place this money into another investment that doesn’t pay off as you expected. If you can’t repay the borrowed money, you will create a new set of problems and stress.
3. The Rates Could Increase
When you take on a HELOC, you have to accept that the rates could increase on you since they’re variables. You may borrow the money at a lower interest rate only to discover that the rates have increased. You’ll then spend more money on interest; the entire stressful process could’ve been a colossal waste of time.
4. You’re Still in Debt
Dave Ramsey is a proponent of a debt-free life, meaning he doesn’t believe in carrying a mortgage. In the episode above, Ramsey stated that the goal is to be 100% debt-free. He wants listeners to focus on avoiding debt instead of determining when debt is acceptable.
Ramsey harshly informed a caller on the episode that they shouldn’t use a HELOC to pay down debt because they would falsely feel like they took action when they moved debt around. Ramsey reminded listeners that personal finance is 80% behavioral and that those who got into debt should focus on creating a budget and planning to pay off debt.
5. You Could Owe More Than You Thought
A HELOC will give you access to funds, and you can easily pull out more money than you expected. A major concern is that you could owe more money than you thought you would pull out, which could lead to financial issues. You could struggle to find the money in your budget when you owe more than expected. You could then get desperate to find the funds, and you may even hurt your credit if you don’t come up with the funds.
6. You Rely on Your HELOC Instead of Building Emergency Fund
Ramsey shares his frustrations with the advice that people could use a HELOC as an emergency fund. While some readers have used a HELOC to bail themselves out of an unexpected scenario, Ramsey reminds them that an emergency fund would’ve been a better option.
With your HELOC, you could turn an emergency into a financial disaster because now you have to stress about paying back a loan with a variable interest rate. Ramsey wants people to focus on building a healthy emergency fund instead of relying on other methods to cover these unexpected situations.
Closing Thoughts
Ramsey urges readers against taking out a HELOC at all costs and shares details as to why you shouldn’t fall for this housing trend. If you’ve been debating using your home’s equity to get access to cash, you may want to think twice because there are potential consequences to this financing method.
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This article originally appeared on GOBankingRates.com: Dave Ramsey Advises Against This ‘Stupid’ Housing Trend — The Risks of HELOCs
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