What's the deal with HELOCs?

Question

HELOCS sound good in theory but after listening to Dave Ramsey's podcast, I've heard them shutter at people using HELOCS to finance. I am in a real estate class currently and the professor posed HELOCS as a positive so I'd like some outside feedback and see some differing views about this subject.

Thank you!

Chris Seveney · Answer

@Hannah Tucker

If it’s on your primary residence it’s very risky to use equity from your home for an investment property. If you do it it’s typically meant to be used for short term financing

Long term you are borrowing for down payment so your true equity in the property is zero and puts you at a a lot of risk.

Ray Hage · Answer

HELOCs are a tool. Like any tool, it can be used properly or abused. If you use a HELOC on your house for a well-thought out and analyzed investment that makes you 10-20% on your money, you're fine. If you use it to invest in some random things and it doesn't work out, now you are stuck paying it back from your current income (whether it is a W-2, investment income, 1099, etc) and that is just terrible. In summary, be diligent when financing your future investment and you don't need to worry.

Ramsey is a bit too conservative financially speaking. Sure, you'll never go broke but you won't make much of anything either.

Terrell Garren · Answer

Ramsey's viewpoint is entertaining and useful for people in financial trouble.  I've never heard him mention 'good debt' as it doesn't fit his schtick. I've used HELOCs for many years to build, buy, and remodel SFHs.  Your professor is right as long as you don't overextend and have a fallback plan.

Sean Martin · Answer

I would take anything Dave Ramsey says about real estate with a grain of salt, personally. When it comes to pinching pennies and building budgets he is really good but that’s about it.

What's the deal with HELOCs?

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