This Stupid Housing Trend Could Leave You Houseless

Welcome back to another episode of Real Estate, The Ramsey Way. I'm Dave Ramsey, and today we're talking about a stupid housing trend that's getting out of control. The famous HELOC. If you're not familiar, you're going to want to keep it that way. But just so we're all on the same page, HELOC stands for a home equity line of credit, which is a type of loan that allows you to borrow cash against your home. In other words, it's just moving debt from one pile to another with a lot of risk involved. And last year, the number of overall HELOCs increased nationwide, along with the balance of the loans. And that's a reversal of a 10-year trend that was going in the right direction. So keep listening to understand why a HELOC is not the answer to your cash flow problems. Tina's in Fort Lauderdale. Hi, Tina. How are you? Hi, guys. I appreciate your show. Thanks. Hi. My question is around using a HELOC to put 20% down on a new home. Nope. And then selling the current home right after closing on the new home. Oh. That home. I got confused. Okay. Yeah. So you're going to close on another property before yours closes? I would like to, so... That's pretty dangerous. I just... Yeah. Okay. So let's say you didn't close. You got two house payments. Correct. And you know what you become after that? We call them a motivated seller who sells their house cheap because they get stuck. Three times that happened to me. Whoa. Wow. You didn't learn after the first one? No, no, no. Three times I have gone to closing, or within a week of closing, the deal has fallen through. Oh. When I'm trying to sell a property. Oh, yeah. Yeah. I see. Okay. And... Yeah. We're going to close on the second one after the first one closes. Mm-hmm. Then we use cash. I just did that. I am in my second real estate property now. And when I sold the first home to get into this new home that I live in now, it was really stressful for me to not have anywhere to live, like in the interim. I happened to just close... You know what's more stressful? Two house payments. Yeah. Two mortgages. Okay. Yeah. How long of a gap are you talking here? I mean, I would immediately, like when I would close, I would put the original home up for sale. I guess my idea of doing it that way is because this closing on this new... The sale that I did just now, it was really stressful for me to move. I need to find a home. Where am I going to live? And I would have preferred to be able to secure a home for me first. So write a contract on the property you're purchasing contingent on the sale of yours and set the closings up on the same day. But if your current house doesn't close, you don't close on the new one because you're going to end up with two house payments in a market that has slowed down with higher interest rates. And you're going to be calling me two years from now going, I've done the dumbest thing. I got two house payments. It's killing me. Can you help me, Dave? Okay. And aside from that, so what if I could take out a HELOC enough to pay for a home cash because I have quite a bit of, well, enough equity in my current home. Listen, here's what, Tina, you be you, okay? You go be you. That's what you need to do. Don't take out a HELOC ever, ever. Period. Ever. Sell your stinking house and move and quit talking to me about stress. You're trading one kind of stress for another because you don't perceive the risk that after 30 years of doing what I do, I've seen people step in it up to their knees. And I'm begging you not to do that. Jake is with us in St. Louis. Jake, welcome to the Ramsey Show. Hey, Dave. Hey, Ken. How are you doing? Better than we deserve, brother. How can we help? I had a quick question. So I've been teaching, leading FPU, and I just actually just finished financial coach master training. Cool. I've been telling people for years about HELOCs and stuff that they've been, that are just a credit card attached to your house. Exactly. But I had a quick question. My wife and I were walking in our neighborhood and one of our neighbors told us, hey, I was looking to move, but housing market's crazy. And my banker told me I had $70,000 of equity. So he, I don't know if he did a cash out refinance or whatever, but was doing, instead of buying a new home, he was upgrading his home. And I guess my question is, what is the difference between doing that, as long as you're doing it to actually upgrade your home, and just buying a new home and financing all of that stuff already in the home? Well, the biggest thing is, is these are repairs or updates you should have been doing all along. And so they don't come at you at $70,000 in one bill. And if you can do them $70,000 in one bill, you can do them in phases and you can cash flow them. And then you don't need to add the debt. Obviously you know from coach master training that even with a mortgage, we're going to teach you to get out of the mortgage. So we don't want you every time you want a nicer home to move up in home or to renovate your home. Either one. We want you to pay cash for doing either one of those things, because ultimately we want to end up being 100% debt free. So I would reframe the approach and say, instead of let's figuring out a time that debt is okay, let's figure, always figure out a way to avoid it. And just not even ask the question is my point. So I mean, your neighbor didn't ask you for coaching, or me. And so, but had they asked me for $70,000, I'm going to guess and say he probably could have cash flowed that in 24 months, or maybe 36 months and done it in three projects. Because it's probably not just one thing. And if it is a $70,000 single improvement, that's highly unusual. Highly unusual. Now, you could do a $200,000 addition to a property and that would not be unusual. In that case, I'd just move, personally. In almost every case, and you hear me say that all the time. But even when you move, you're moving into a better property, you're going further into debt. Now you got to turn around and reverse the process again and start getting out of debt again. And so I'm always trying to figure out a way to stop the borrowing. Not figuring out a way that it's okay. Well, under what conditions is the borrowing okay? Instead of going that way, it's always figure out a way to stop the borrowing. Because see, what I did, Jake, as you know, is when I went broke, I vowed I'd never borrow money again. And so this is not an option for me. If I want to upgrade my house, I want to move up in house, I want to fix something in my house, there's only one method I can use. Because I'm never going in debt again. There's only one method I can use. I have to pay cash. We're nowadays, we got more zeros on some of our projects. We're building a conference center on top of the hill here, right above this building. That's about $40 million. We're about halfway through it, a little more than halfway through it. I'm at about 26 million in right now. And we got about a year left. So that tells me I got about 2 million bucks a month to cash flow this puppy out the door. And we're watching it cash on cash, cash on cash, cash on cash. And I'm from Antioch, Tennessee. I don't know where you came from, guys, but that's a lot of money to me. That still freaks me out. You start talking about $2 million for something, you start talking about $2 million a month for something, that just blows my little country mind, I'll tell you. But that's what God has said we're able to do. We have the money. He's showing us to do it. We're doing it. And we're going to help a lot of people with that conference center. And that's a tool in what we're doing with it. It's not something I'm buying for personal consumption. So you know, so again, if I want a conference center, I got to rent one, I got to use something around here and stack chairs too high. We have to have cubicles that are two stories or something in here until we can afford to do a different building, a better building, because we just don't borrow money. We just took it, you know, Anthony O'Neill used to say it well when he was here as a Ramsey personality, he said, you have to take debt off the table. If you've got a big expense coming up, but don't quite have enough savings to cover it, a HELOC may sound like a good idea, but it's actually one of the biggest financial traps you can fall into. To learn more about what exactly a HELOC does and what you should do instead, check out the link in the show notes or go to ramsaysolutions.com slash HELOC. Michael is in Alaska. Hey, Michael, welcome to the Ramsey Show. Thank you. It's a pleasure to be talking to you. You too. What's up? Hey, so I just got a quick question. I got a little bit of consumer debt and I own a home, so I got a little bit of equity. What are your thoughts on possibly taking out a HELOC or equity loan to pay off that consumer debt, bring down the APR and stuff like that, and then just throw that equity loan into my debt snowball? I wouldn't. Okay. You want to know why? Why? Because you're going to feel like you did something and you didn't do anything. All you did was move it. Now listen, all you did was move it. Interest rate's not your problem. Lack of a budget, lack of focus, lack of attacking this is your problem. You need to get fired up and pissed off about being in debt and get after your debt. Invest it smallest to largest, pay minimum payments on everything but the little one, and get after it. The problem when people move debt around, they use words like pay it off. You didn't pay it off. You moved it, and 2% savings on the interest rate is not your issue. Your issue is getting focused, getting on a budget, living on beans and rice, selling so much stuff the kids think they're next. Get fired up and wired up, baby. That's what does it. That's what moves the needle. Ken, there's so much of what you teach about jobs and what we teach here that is about action. It's motive, which leads to motivation. Yes. Personal finance is 80% behavior. It's only 20% head knowledge. There's so much about a job, choosing a career, stepping into something that is about, you know, don't try to trick it. Don't try to trick your way past the hard work. There's no shortcut to any place that's worth going, Beverly Sills used to say. She's absolutely right. Why are you going after it? You've got to remind yourself on the journey, why am I doing this? I get that it takes time. If you walked out on the street today with a camera and a microphone, and you asked people, are you willing to do whatever it takes to get where you want to go, whether it be career or in your money, most people look at you and instantly say, absolutely. But if I followed up and I said, well, but I think they mean that, but then here's the follow-up question. If I said, are you willing to wait as long as it takes? That's exactly what happens. They literally can respond that way, and here's why. There's something about the human condition where we want everything now. That's what this journey is all about. It's what Dave talks about all the time. It is the budget helps you control the behavior issue to where you go, hey, this is a long slog. This is going to take time. And so you have to, whether it's in your career and doing work that you deeply want to do because you know you were put on this planet to do it, or it's paying off debt and saving money so that you can live like no one else. All of this is the same exact conversation. You want to live like no one else, you want to work like no one else. It's going to take time, and you better have the big picture in mind and know that this is a climb, but it is going to be worth it when I get there. There's no shortcut. There is not a shortcut. A generation ago, there was one of the world's best golfers. It was a guy named Gary Player. And the story has been told about him over and over and over again through the years that he was warming up at a tournament on the driving range, and he's pulling back that driver and sailing that ball out there 300, 360, 350 yards, whatever, just popping that drive straight as a string. And this guy walks up behind him and goes, I would give anything to hit a golf ball like that. And I think he caught him at the wrong moment because he turned around and said, no, you wouldn't. Yeah, it's a fantastic story. No, you wouldn't. You would not stand out here in the heat and hit 2,000 golf balls, hit golf balls so long that you get blisters, hit golf balls so long that the blisters bust, hit golf balls so long that you can't hold the golf club anymore from the busted blisters, you tape up your hands and you hit another 1,000 balls. You wouldn't do that. Yeah, that's right. You wouldn't do anything to hit a golf ball like that, to which the poor guy just said, I'm sorry I asked, you know, but just, you know, but that's the thing, you know, I would do it. No, you wouldn't. You got to be willing to do it. And so that's the thing, and I'm not picking on Michael here, that's not the issue, but the issue is there's a thing about action and paying the price, live like no one else so that later you can live like no one else, that supersedes a little bit of interest saved by moving it to a HELOC. So true. 88% of the people that move their debt over for debt consolidation go further into debt, don't get out of debt. Yeah. Nine out of 10 times. Yeah. It's interesting. They don't change their habits that put them in there in the first place. That's right. They feel like they did something, and that's dangerous to feel like you did something when you did nothing. So the home equity loan is back. Yes, home equity line of credit. The HELOC, the home equity line of credit. And Lifehacker says, I used one when I got in trouble, so you should, everyone should have one, in this stupid butt article. I remembered that we'd taken out a home equity line of credit when we bought the house and it saved our butts. Oh really? His whole house is leveraged on this money. Yeah. So, you know, do you know what a home equity line of credit is? Explain it for him, Dave. It's debt. It's a second mortgage. And you know what they base the interest rate on? Your credit? Nope. Whatever they feel like when they wake up that morning. Because it's variable. It's completely variable and it is not indexed to any outside thing. So Mr. Banker says, today, I think I'm going to charge Joe and Susie stupid money. So you mean to tell me, in 2021, when I saw everybody in my neighborhood redo their yard, redo their kitchen, redo everything, and I'm going, where is this money coming from? It's because they took advantage of their home equity. They leveraged. That's the word I like, Dave. They leveraged. I'm sophisticated because my equity otherwise was not working for me and now I have new bushes. At what cost? Yeah. That's what the, you know, and that's what the banking ads sound like, don't they? I mean, if you listen to SoFi, oh, just make me SoFi puke. I'm just going to SoFi throw up right here. Oh my God. Man, Dave, I told you this before the break, it's a good thing because I did so much stupid stuff before I got a hold of the principles here. If I had known about a HELOC, thank God I didn't know about this because I would have just added it to the list of dumb stuff right next to co-signing a loan. I would have put HELOC. Yeah. Well, here's the thing. There's a lot of idiot financial planners and people like Lifehacker who will tell you to get a home equity loan in case there's an emergency. Now let's follow this line of, in air quotes, logic, okay? So you lose your job or you have another financial calamity of some kind. So the home equity line is there to help you. You can go draw on it and you have money. So at the moment that I've lost my job or had a financial calamity is precisely the moment that I want to go deeper into debt. This is the line of thought. That's a head scratcher. Yeah. So I, you know, I've had financial planners talk about this for years and I've had to just rip their, rip them to shreds because it's just so freaking stupid. Not all of them do this, but I mean, some of them will say, open a home equity line of credit. Don't use it and use the fact that you can go tap into it if you need to as your emergency fund. And I always tell them, so what do I want to do? When there's an emergency, what I want to do is add to the anxiety and the stress by going deeper into debt. Right. You're turning in it. That's dumber than a rock. Oh my God. It turns the emergency into a crisis. Into a crisis. Because now you got whatever it is that you're having to deal with and you have to pay off the debt and it's at a variable rate of interest. So her, her point was is that they had a, uh, they had a, uh, damage, storm damage and they were able to use their home equity loan to fix it. Because apparently you don't know how to work with your insurance company because if you have storm damage and your roof's leaking, your insurance company will show up and start writing checks in about 36 minutes. Yeah. If you actually know how to talk to them. Instead, they didn't show up for you. You know why? Because you didn't need them because you went into debt. Yeah. There's a lot underneath the surface here on this article. And let me tell you what else happens every time you do this crap right here. Okay. House gets torn up. We use debt to fix the house and we're going to pay off the debt when the emergent, when the insurance check comes. You know what you always do a hundred percent of the time people, well, 98% of the time people will do more repairs to the house because while we're at it, we're going to go ahead and renovate. Then the insurance check will cover. And when the insurance check comes, it's not enough to cover because we, while we were at it, we did some other stuff. Yeah. And that's what I'm- Human freaking nature. That's what I love in this article. He says, the HELOC allowed us to get started immediately with the repairs. As if insurance won't show up when a roof gets blown off your house. Yeah. I mean, really, if you have an insurance company on homeowners that will not show up and give you help immediately when there's storm damage, you have other issues that a HELOC won't fix. You know, I wonder what would happen if you just saved up for emergencies. Ooh, wait. You had money. If you just saved up. Oh, there's an idea. I wish I had thought of that. And you had the amount- We should, we should do a radio show about that. That's awesome idea. And in your three to six months, you had the amount of your homeowner's insurance deductible. And you didn't have any payments. And so while you're at work, you're making money without any payments and you have an emergency fund. And then when you have a crisis, you have this thing called money. That's a great idea, Jade. And you just go, what is it? That sucks. All right, write a check. Yeah. That's all you do, Dave. Emergency fund turns a crisis into an inconvenience. And a home equity loan turns a crisis into an opportunity to be crisis squared. Triple up, triple up, exponentially worse. So you're not sophisticated if you used a home equity loan to cover your problems in life. You're broke. And there's nothing sophisticated about being broke. It's just dumb. Okay? Just dumb. Now, I've been dumb and I've been broke. So stop being dumb. Stop being broke. We're going to walk you through this. And you don't use, I'm utilizing the equity in my home that otherwise would not be working for me. You're an idiot. Okay? When you say stuff like that, you're just an idiot. Because you're truncating your most powerful wealth building tool. You're slowing your wealth building down because you didn't have any money to cover emergencies. So everyone should have an emergency fund after they're out of debt except their home. Baby step three of three to six months of expenses. We've been saying that for 30, we've been saying that longer than home equity loans have been in existence. They were not even in existence when we started this radio show 30 years ago. They didn't make them. And now we have a HELOC because HELOC sounds so, it sounds like I'm a financial person of a HELOC. You get a HELOC, you get locked into debt. Yeah. That's about it. You know what? I think somebody ought to complain. Why didn't they call it a SHELOC? Dave, don't go there. Don't go there. I think I just got canceled somewhere in the universe. Any way you look at it, a HELOC is still debt, meaning you end up paying for the expensive thing you were trying to shortcut paying for, plus thousands of dollars extra in interest and a ton of bogus fees. And if you default or misstep in any way, the bank could take your home. The truth is HELOCs keep people broke by making them think they've solved a problem when all they did is just move the problem or the debt around. Just don't do it. It's not the way to build wealth, and it's definitely not the way to financial peace. All right, guys, thanks for listening today, and make sure to share this episode with someone who needs it. And don't miss the next one, where we dig into home ownership trends that could cost you thousands of dollars.