Here's Why Suze Orman Says 'Your Home Is Not an ATM'

Now may not be a great time to borrow against your home.

Popular personal finance guru Suze Orman has strong words for homeowners looking to tap their home equity. In her latest podcast, she warns followers that using their home as collateral against a loan is a risky move. She says she's concerned by the increasing numbers of people taking out home equity loans and warns, "Your home is not an ATM."

Tapping home equity

Home equity is the difference between what your home is worth and the amount you owe on it. According to Orman, many homeowners have a lot more equity in their homes than they did before the pandemic. Given that many people are struggling to cover increased living costs, it's understandable that some of them want to borrow against that equity.

Home equity loans or lines of credit both allow homeowners to tap their home equity. Here's how they compare:

• Home equity loan: Also known as a second mortgage, a home equity loan is a secured loan that uses your home as collateral. If you have equity in your home, you can borrow a lump sum against it and then pay the money back over a set period of time. Check out our list of top home equity lenders.
• Home equity line of credit (HELOC): A HELOC is a revolving line of credit that also uses your home as collateral. Typically, you'll be able to borrow and repay up to an agreed amount for a set period of time. Once that time's up, you'll have a certain number of years to repay the outstanding balance.

Both types of loan use your home as collateral and the interest can be tax deductible if you use the funds for home improvements. The main difference is that a home equity loan gives you a lump sum of money at a fixed interest rate. HELOCs are usually adjustable-rate loans that let you borrow money when you need it for a certain amount of time.

The dangers of borrowing against your home

Suze Orman warns that borrowing against your home is risky because you are putting your home up as collateral. As she explains, "If for some reason you can't keep up with the repayment of the loan or line, you are at risk of losing your home."

Orman continues, "That makes it insane, in my opinion, to use a HEL or a HELOC for 'wants' such as a fancy new car, or a big vacation." The best-selling author says that tapping home equity to pay kids' college bills could also be unwise. She wants families to find affordable colleges for their children and for parents to build security for their retirement.

The other issue with HELOCs is that they generally offer adjustable-rate loans. Given that interest rates have been rising at a rapid pace for much of this year, adjustable-rate loans come with a lot of uncertainty. That can make it difficult to budget and mean borrowers face an increased risk of falling behind on payments. In this regard, a fixed-rate home equity loan or a fixed-rate HELOC could be a better bet.

Be aware that home prices may fall further in 2023. If you take too much equity out of your home, there's a risk you could wind up owing more than your property is worth. Also, know that tapping home equity can also be pricey. You may have to pay origination fees, appraisals, and other closing costs, just as you did when you took out your original mortgage.

Is Orman right?

As with a lot of financial advice, a lot depends on your financial situation. The risk of losing your home is clearly a big concern. This is all the more pressing in the current economic climate. We don't know what will happen to housing prices, interest rates, or the job market in 2023. The key is to understand the risks and think carefully about why you need that money and how you're going to pay it back.

Given that interest rates may continue to rise in the near future, it makes sense to opt for fixed-rate loans. In this regard, It's worth comparing rates on personal loans versus home equity loans. Personal loans may be harder to qualify for and charge higher rates, but it's important to weigh the risks. Missing payments on a personal loan could damage your credit but there's no danger you'll lose the roof over your head.

Borrowing to fund a vacation isn't a great move at the best of times, and even less so during times of economic uncertainty. But if you're borrowing to cover essential house repairs or medical expenses, tapping your home equity may still make sense. What matters is that you understand the risks and make an informed decision for your financial situation.