Borrowing to spend… or invest?

I recently saw a TV commercial for my local bank where they advertised the incredibly low rates for HELOCs. And then they shot down that by showing how you could use that equity to fund a renovation.

This is classic sales stuff banks use. They know people are much more willing to spend money on themselves if they can get a hold of it. And it’s one of the reasons anti-debt people eschew HELOCs. The concept of a HELOC is to borrow money against your house, and use it to knock out high interest debt with something much lower. But many people can’t help themselves. If they get a hold of $20,000, $30,000 or $50,000, they want to spend it. And then they are even deeper than before.

This problem really escalates when something happens that requires them to sell their house. They could put themselves underwater by taking out more debt than they can sell the house for. And that ultimately leads to panic.

So backing up to the beginning, can you see why there is so much criticism out there for opening a HELOC? But if you start from the beginning with intentions of using that money to build wealth, such as investing in income property that you are going to renovate and resell at a profit, then you now have a powerful tool. I am using my HELOC to fund my position with Vanguard Natural Resources. It is yielding approximately 9% while the HELOC is costing 4%. I get to pocket the difference until I pay it off. Then I can coast into retirement with an extra stream of passive income.

That is why debt is credited as one of the most powerful tools used to build wealth. You just have to properly handle the risks and plot your escape plan.

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