Does Dave Recommend Home Equity Lines?

Dear Dave,

Can you please explain how a home equity loan works? Do you ever recommend them?

Patti

Dear Patti,

It's simple. A home equity loan is a second mortgage. You're borrowing money against your house. Some people in the banking business call it a HEL, but considering what these things can put you through, I think they left off one "L."

I don't like home equity loans, and I never recommend them. Most of the time the terms are crummy, with higher, variable interest rates, and they usually have annual calls or a balloon payment tacked onto them. I would never recommend putting your home at risk to pay off credit card debt that piled up while you were out buying that fancy restaurant steak you couldn't afford. Talk about financing a depreciating asset!

Right now, lots of people who thought they were being smart or financially sophisticated by taking out home equity loans because the interest rate was lower than the one on their credit cards are really stuck. Their houses have gone down in value and created a real mess. Plus, the banks have been handing these things out like candy, and they're feeling the pinch, too.

Stay away from home equity loans, Patti!

-Dave

*For more financial help please visit daveramsey.com.

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