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 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.