In the real estate sector, there are several housing trends, but Dave Ramsey warns against one particular housing trend.
Over the past few years, the price of homes has significantly increased. Due to this increase, some homeowners have found ways to use their home’s increased value to borrow money. One popular way to do this is through something called a HELOC. HELOC stands for “home equity line of credit.” It allows homeowners to take out a loan using their home’s equity as collateral. Some investors have tried this method to buy more real estate or invest in other things.
However, personal finance expert Dave Ramsey strongly warns against this. He believes that using a HELOC is a risky move. He specifically referred to it as a “stupid” housing trend. In this article, we will discuss the six biggest risks that come with using a HELOC.
Six Reasons Dave Ramsey Warns Against HELOC
The following are six reasons Dave Ramsey believes you should not follow the HELOC housing trend:
1. You Could Lose Your Home
A HELOC (Home Equity Line of Credit) will allow you to borrow money using your home as collateral. This means if you can’t pay the loan back, the bank could take your house. In a lot of cases, many people believe they would be able to pay, and their houses would not be taken from them. However, the truth is that financial situations can change unexpectedly.
If you spend the money and can’t repay it, you could face serious money troubles. Since your home is likely the biggest thing you have ever bought, one of your most expensive assets, you should think carefully before putting it at risk. Many people take out a HELOC without considering the worst case scenario. They do not think of the possibility of things going bad and how it could get worse if they can’t pay it back.
ALSO READ: 5 Housing Markets Poised for Significant Value Growth Before the End of 2025
2. You Are Adding Unnecessary Stress
In an episode of The Ramsey Show, the personal finance expert gave a caller advice. He said they should sell their home and move because they were just swapping one kind of stress for another. When you make complicated financial decisions, you might end up with new problems. These problems can make life even harder.
For example, imagine you borrow money from your home’s value to invest in something, but the investment does not grow in value, or, worse, you lose the money. You will be burdened with more stress. There is no guarantee that any investment will work out. If things do not go as planned and you can’t pay back what you borrowed, you will have even more stress and financial trouble than before.
3. Your Interest Rate Might Increase
When you take out a HELOC, the interest rate you have to pay is not fixed. It can change over time. You may have borrowed the money with a lower interest rate, only to discover that it has increased when you want to pay back. This means you would have to pay more interest than you originally expected. If this happens, you might feel like you shouldn’t have borrowed the money, because in the end it wasn’t worth it.
4. Your Debt Will Increase
One reason why Dave Ramsey warns against this housing trend is because he believes in a debt-free life. He does not even support having a mortgage. In the episode mentioned earlier, he explained something concerning this. He said the goal should be to get rid of debt completely. Instead of trying to figure out when debt is okay, he wants people to focus on avoiding it completely.
In the same episode, Ramsey strongly advised a caller not to use a HELOC to pay off debt. He explained that doing this does not actually get rid of the debt. It just moves it around. This can trick people into thinking they have made progress when they have not. Ramsey also reminded listeners that managing money is mostly about behavior, not just numbers. People who are in debt should focus on making a solid budget. They should also follow a plan to pay off what they owe.
ALSO READ: Lowe’s and Home Depot Face Challenges Due to the Slumping Housing Market
5. You Might End Up Owing More Than You Expected
Although a HELOC allows you to borrow money when you need it, it is easy to take out more than you planned. The big problem is that you might owe more than you thought you took out. This can lead to financial issues. If your debt gets too high, you might struggle to find the money to pay it back. This could leave you stressed and scrambling for cash. It can even hurt your credit score if you can’t make payments on time.
6. Using a HELOC Instead of Saving for Emergencies Can Be Risky
Dave Ramsey disagrees with the idea of using a HELOC as an emergency fund. Some people use a HELOC to cover unexpected costs. However, Ramsey argues that having a savings fund would be a smarter choice.
If you rely on a HELOC during an emergency, you could turn a bad situation into an even bigger financial problem. This is because a HELOC is a loan with a variable interest rate. It means your payments could go up over time. Ramsey encourages people to build a solid emergency fund so that they would not have to depend on borrowing money when unexpected expenses come up.
Remember, Dave Ramsey warns against this housing trend. So, if you are thinking about borrowing money using your home’s value, you should be very careful. While it might seem like a quick way to get cash, it can lead to serious financial problems in the long run.