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Financial guru Dave Ramsey is adamant about avoiding debt, so it’s no surprise to hear that he’s not a fan of home equity loans. He’s long recommended paying off your home in full and avoiding borrowing against it.
However, not every retiree can stick to Ramsey’s advice. Emergencies happen, and not everyone has a large enough savings fund to cover them. Plus, many homeowners are sitting on hundreds of thousands of dollars that could help them get by. While a significant home equity position doesn’t mean you should stop saving for retirement, it can be a useful tool — as long as you’re careful.
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Dave Ramsey’s home equity advice
Ramsey hates debt, and recommends homeowners try to pay off their mortgages as soon as they can. He is also against using reverse mortgages to fund your lifestyle during retirement. These financial products let you borrow against your home and receive a lump sum of cash, a line of credit or fixed monthly payments.
Ramsey argues that while retirees may use the money from reverse mortgages to cover living expenses in retirement, they’re getting back into debt after working hard to pay it off.
When tapping home equity can make sense
Like most personal finance decisions, there’s no one right answer for everyone. Tapping into home equity can make sense, especially if you need help keeping up with your bills or to help consolidate and pay off high-interest debt, like credit card debt.
The most common type of reverse mortgage loan are Home Equity Conversion Mortgages (HECMs), which are only homeowners age 62 or older. But reverse mortgages aren’t your only options. A home equity line of credit (HELOC) lets you draw money over time from a maximum amount, and it doesn’t require you to be 62.
What to know before tapping home equity
Although tapping into your home equity can be a useful way to access relatively lower-cost borrowing compared to unsecured debt, you shouldn’t rush to this option, especially if it just enables discretionary spending. Carefully consider why you’re considering tapping your home equity (funding a vacation, for instance, isn’t a good reason).
It’s also very important to understand the risks. When you tap your home equity, you’re using your home as collateral, which means that you’re risking foreclosure and losing your home. You also need to consider the fees, and still pay property taxes and home insurance.
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