Dave Ramsey: Why a Home Equity Line of Credit Is a Bad Idea
Written by
Katie Wudel
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Dave Ramsey has been known for his straightforward approach to money management. He often advises against borrowing money and promotes living within one’s means. One of his frequent pieces of advice is to avoid taking out a Home Equity Line of Credit (HELOC). Here’s why he says a Home Equity Line of Credit is a bad idea.
What is a HELOC?
Before diving into the reasons, it’s crucial to understand what a HELOC is. A Home Equity Line of Credit is a revolving credit line secured by your home. In other words, you’re borrowing against the equity you’ve built in your house. This might sound tempting because these loans often come with lower interest rates than credit cards. However, Dave Ramsey points out several potential pitfalls.
Potential for Overspending
A key concern with a HELOC is the temptation to spend. Because it’s like a credit card – a pool of available money – it’s easy to justify making big purchases. The problem? Most people use it for things that depreciate–vacations, cars, or other luxury items. Instead of building wealth, you’re effectively taking steps backward by dipping into your home’s value.
Your Home Is at Stake
A significant difference between a HELOC and other types of credit is that your house secures the loan. This means that if you can’t make the payments, you could potentially lose your home. This is a huge risk, especially for something that’s not only a place to live but also, for many, their most significant asset.
Variable Interest Rates
Many HELOCs come with variable interest rates. While it might start low, there’s always the chance it could rise, increasing your payments unpredictably. This can be a dangerous game to play, especially if you’re stretching your budget to make the payments in the first place.
The ‘It’s My Money’ Trap
It’s easy to fall into the mindset of thinking, “It’s my money, why shouldn’t I use it?” But Ramsey reminds us that while it’s technically true, using a HELOC is not accessing your money free and clear. It’s borrowing it. Every dollar you take out today is a dollar plus interest you’ll need to pay back in the future.
There Are Other Options
If you need money for home improvements or other necessary expenses, there are typically other options available that don’t involve putting your house on the line. Saving up cash or even refinancing your home (without pulling cash out) might be better solutions.
The Takeaway
While a HELOC may seem like a good idea on the surface, the risks often outweigh the benefits. Ramsey advises against it because it promotes poor spending habits, puts your home at risk, and can come with unpredictable costs.
As with any financial decision, it’s essential to weigh the pros and cons carefully and consider all the potential outcomes. Remember, building wealth is a marathon, not a sprint. Avoiding shortcuts like HELOCs can lead to more secure and stable financial growth in the long run.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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