09.21.26 HELOCked Into A Debt Trap / New Vehicles Under $40,000

The Clark Howard Podcast

Clark Howard warns listeners against the resurgence of predatory bank tactics involving Home Equity Lines of a Credit (HELOCs) to fund lifes

Key takeaways

• Banks are aggressively pushing HELOCs to turn home equity into high-interest, floating-rate debt.
• For home improvements, a fixed-rate home equity loan is safer than a revolving HELOC if the project lasts longer than 36 months.

Main topics

• HELOC and debt traps
• Affordable auto brands

Notable quotes

You take this equity, this hard-earned equity that you have built up, and you reverse it into debt.

Conclusion

The episode provides actionable financial advice for protecting home e

Transcript preview

Speaker 2 (0:04) It's my pleasure to welcome you here to the Clark Howard Show. You know, our mission is to serve you with advice and information that empowers you to make better financial decisions in your life. Today I'm going to begin with a concerning trend, turning a good financial position with home equity into a problem. And also, I got a lot to say today about the second biggest expense we have, and that's our car payments. Right now I want to talk about something that is a plague upon us. And it's like we turn the clock back 20 years. Because 20 years ago, the banks were pushing home equity lines everywhere you turned. TV ads, billboards, statements, mailers in them, saying, tap your home equity, take a vacation, buy a boat, buy a car, pay off your credit cards, whatever. The whole thing was the banks. We're trying to get you to eat up the equity in your home so you would be on the hook to them for that home equity you've given up to them by taking out the HELOC. So here we are 20 years later, everywhere you turn, online, you name it, the banks are trying the same con again, getting you. to take a good thing and turn it into a bad thing. Pushing you to take that equity. If you were lucky enough to buy a home during a time before the big price run up that started during COVID and home prices, and you're sitting there pretty, you got a low mortgage interest rate. You don't owe a huge amount of money. Your home has escalated in value. And the banks are trying to play on your mind and emotions that this is your piggy bank, your money. Grab it. Take it. Use it for whatever. That's dangerous. Because you take this equity, this hard-earned equity that you have built up, and you reverse it into debt. At today's interest rates, which are much higher. And then you got to pay it back, right? And then suddenly you got a much higher payment. And when you go to sell your home, you don't get the proceeds you would have gotten before because now you added all this extra debt onto it. And everywhere you turn, I'm telling you, everywhere the banks are trying to con you into taking out these HELOCs. And you know why they love them so much? Because it's a floating rate. And they set up the payments that you're never paying off the principal. That you're only paying them revolving interest, paying them the interest payments on it. And every time interest rates go up, they, within a month, have raised what you have to pay on it. It's a curse. You had a blessing. You got all this equity. And they turn around and say, take that vacation. Go. Spend the money. Don't worry about it. Don't worry about it. We're going to lend you that money. And then if you can't pay it, we're going to take your home from you. What a deal. Yuck. I'm definitely going to be honored as person of the year at the American Bankers Association annual convention. You know that's going to happen. Speaker 1 (4:16) Yeah. Speaker 2 (4:17) All Speaker 1 (4:17) right. We'll go to questions. Patricia in Georgia. Here you go, Clark. What is the least expensive way to tap into our home's equity? Speaker 2 (4:27) Oh, my goodness. Yeah. You really teed Speaker 1 (4:30) that up. I did. Sorry. Okay, Patricia. Because there are instances when it could be a good thing to do. Okay. Speaker 2 (4:38) Let me hear. Speaker 1 (4:39) Okay. I am about to sell my home. Speaker 2 (4:42) Had Speaker 1 (4:43) taken out an equity line, but never used it. And used a small amount of it to repair and do things to fix up the home before it went on the market. Speaker 2 (4:53) Okay. So what's my rule always been about tapping home equity? Speaker 1 (4:57) Tell me. Speaker 2 (4:58) What you just said. Well, it's Speaker 1 (4:59) for improvements to your home. It's always been Speaker 2 (5:00) for improvements to your home. reno-ing the kitchen or you have to put on a new roof or you're updating the bathrooms or whatever it is where you are putting money into the home that improves the home. Speaker 1 (5:16) But Speaker 2 (5:17) what goes on so often is people are borrowing that money against the home for various lifestyle things. Speaker 1 (5:26) Right. Pay off credit cards or, you know, car loan. And ding, ding, ding. We're about to talk about car loans later. Speaker 2 (5:32) And by the way, on the thing with the credit cards, a lot of financial planners are encouraging their customers, their clients, to take out a home equity line of credit at maybe 8 % and pay off 25 % credit card debt. Okay. So if you just look at the dollars and cents of that, that makes sense, right? Even though you're impacting the equity you have in the home. And you go from debt against your name to debt against your home. The problem is so often when somebody does that, the