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The ‘unlock your home’s equity for cash’ HELOC ads do seem exploitive and designed to prey on the financially ignorant who will use HELOC money for a family Disneyworld trip. But that’s not how sensible people use them.
The ‘unlock your home’s equity for cash’ HELOC ads do seem exploitive and designed to prey on the financially ignorant who will use HELOC money for a family Disneyworld trip. But that’s not how sensible people use them.
True, and I think a lot of people may think they are angry at the product, when they are really angry at the marketing.
The ‘unlock your home’s equity for cash’ HELOC ads do seem exploitive and designed to prey on the financially ignorant who will use HELOC money for a family Disneyworld trip. But that’s not how sensible people use them.
I suppose that a person might compare HELOC loans with beverages containing alcohol. Both can certainly be dangerous if used improperly or abused, but both have their benefits when used prudently and responsibly.
No, I'm not trying to derail this thread or get into a discussion about alcohol. That's a topic for another day. Just making an analogy.
Turning unsecured credit into secured credit is a dangerous gamble. Take that gamble only if you are a disciplined person that will pay it off in short order. With unsecured credit they can't come and repossess the dinners you ate at the Ritz, but secure that debt with your car title, or your home, now they've got something they can repo! Just pay your bills timely, and you will qualify for unsecured credit cards.
If the credit card is strictly used for home improvement or emergency repairs, then it's fine, as long as it's understood that failure to repay is the same as failure to repay your mortgage, i.e. foreclosure and loss of ALL your equity. It's a gamble, and some will lose that bet.
Last edited by TheShadow; 03-10-2022 at 10:26 AM..
Turning unsecured credit into secured credit is a dangerous gamble. Take that gamble only if you are a disciplined person that will pay it off in short order. With unsecured credit they can't come and repossess the dinners you ate at the Ritz, but secure that debt with your car title, or your home, now they've got something they can repo! Just pay your bills timely, and you will qualify for unsecured credit cards.
If the credit card is strictly used for home improvement or emergency repairs, then it's fine, as long as it's understood that failure to repay is the same as failure to repay your mortgage, i.e. foreclosure and loss of ALL your equity. It's a gamble, and some will lose that bet.
This is a great summary. HELOC loans are not inherently bad, but they are risky. A credit card that can easily and incrementally add to the loan balance increases risk.
People who do not fully understand how this works, and therefore fail to mitigate this risk, are therefore more likely to have problems.
That doesn’t mean that HELOC is bad, just risky.
My ultimate opinion is that it would be best if they weren’t as easy to get as a credit card. Make the requirements for qualifying an actual visit to a bank where the risks must be explained, and to draw on the funds you need to sign a document reminding you of the risks.
For a little bit of inconvenience, more people are educated on the process and risks.
Turning unsecured credit into secured credit is a dangerous gamble. Take that gamble only if you are a disciplined person that will pay it off in short order. With unsecured credit they can't come and repossess the dinners you ate at the Ritz, but secure that debt with your car title, or your home, now they've got something they can repo! Just pay your bills timely, and you will qualify for unsecured credit cards.
If the credit card is strictly used for home improvement or emergency repairs, then it's fine, as long as it's understood that failure to repay is the same as failure to repay your mortgage, i.e. foreclosure and loss of ALL your equity. It's a gamble, and some will lose that bet.
My husband lost his job in the home improvement field back in 2007-2008 when the banks started turning off everyone's HELOC's. Before that, they couldn't get jobs done fast enough. Over the next few months the talk was all about second mortgages foreclosing. Look back at all those foreclosures. It was common to get the money out of their homes to buy a second home with another mortgage, pay off college debt, credit cards, go to Europe, etc. It was all great until it wasn't.
We aren't tying any other debt to our house. Who knows what could happen. Times are a bit turbulent right now.
There seem to be two main categories of reasons why people use a HELOC. The first category is to pay off consumer loans or debts (credit cards, car loans, etc) and to purchase additional consumer items (new cars, trucks, boats, or vacation spending). Personally, I think it's generally a bad idea to use a HELOC for these type purposes because it usually results in even more debt and greater financial problems a year or so later.
The second main category of why people use a HELOC is to help with a short-term liquidity problem (such as a bridge loan in buying and selling properties) or to enable an investment that requires a substantial amount of immediate cash without having to cash in other financial assets such as stocks, bonds, 401k's, real estate, etc. These type uses are generally good uses of HELOC loans.
In other (simple) words, borrowing money in order to SPEND more money is bad, but borrowing money in order to invest wisely is good.
There seem to be two main categories of reasons why people use a HELOC. The first category is to pay off consumer loans or debts (credit cards, car loans, etc) and to purchase additional consumer items (new cars, trucks, boats, or vacation spending). Personally, I think it's generally a bad idea to use a HELOC for these type purposes because it usually results in even more debt and greater financial problems a year or so later.
The second main category of why people use a HELOC is to help with a short-term liquidity problem (such as a bridge loan in buying and selling properties) or to enable an investment that requires a substantial amount of immediate cash without having to cash in other financial assets such as stocks, bonds, 401k's, real estate, etc. These type uses are generally good uses of HELOC loans.
In other (simple) words, borrowing money in order to SPEND more money is bad, but borrowing money in order to invest wisely is good.
Provided that the "wise" investment turns out well, and that's a big assumption. I would only do it knowing that my cash flow would cover the additional expense of the new monthly payment until it's paid off, even if the "wise investment" failed to perform. Always consider the worst case scenario, and how one will minimize the chances for that happening, and how one will cope with that should it come to pass.
Why is a HELOC a terrible idea? The interest rate is way, way lower than on a credit card.
People who may get in trouble with a 19.99% credit card may be able to handle payments when they are 3.99%. In fact, many people do borrow against their home's equity to pay off high interest loans. It's a normal financial product.
Edit: Just checked Aven's website. They advertise rates of 3.49%-10.99% I'd refuse anything over 3.49% and in fact our own HELOC with our local bank is currently 3.25%.
We keep a HELOC open for emergencies or opportunities. For $75 we can lock any amount at the current interest rate. It makes more sense than taking out an unsecured high interest loan for a car or major home improvement or major medical expense (or a surprise big tax liability). It used to make more sense because you could deduct the interest from your income at tax time but that went away a while ago.
There seem to be two main categories of reasons why people use a HELOC. The first category is to pay off consumer loans or debts (credit cards, car loans, etc) and to purchase additional consumer items (new cars, trucks, boats, or vacation spending). Personally, I think it's generally a bad idea to use a HELOC for these type purposes because it usually results in even more debt and greater financial problems a year or so later.
The second main category of why people use a HELOC is to help with a short-term liquidity problem (such as a bridge loan in buying and selling properties) or to enable an investment that requires a substantial amount of immediate cash without having to cash in other financial assets such as stocks, bonds, 401k's, real estate, etc. These type uses are generally good uses of HELOC loans.
In other (simple) words, borrowing money in order to SPEND more money is bad, but borrowing money in order to invest wisely is good.
I think there is a 3rd category for HELOCs. Home remodeling.
Tapping equity to remodel kitchens and bathrooms and to make home additions is a reasonable use of a HELOC. You are tapping home equity to re-invest in the home and add value, so the money goes right back into the home. Your loan is bigger but your home's value should be bigger as well.
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