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 — home equity line of credit — to invest in real estate or another asset.
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Dave Ramsey has advised his listeners against using a HELOC, which, as the name suggests, allows you to borrow money from your home’s equity. Ramsey, the popular personal finance expert, refers to this as a “stupid” housing trend. In this article, we will examine the six major risks associated with a HELOC.
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.
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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.
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.
