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Updated Mar 28, 2024
7-min read
Expert Approved
Expert Approved
This article has been reviewed by a
Certified Financial Planner™ for accuracy.
Written byTaylor Milam-Samuel
Written byTaylor Milam-Samuel
Expertise:Student loans, credit cards, debt, budgeting
Taylor Milam-Samuel is a personal finance writer and credentialed educator who is passionate about helping people take control of their finances and create a life they love. When she's not researching financial terms and conditions, she can be found in the classroom teaching.
Learn more about Taylor Milam-Samuel
Reviewed byErin Kinkade, CFP®
Reviewed byErin Kinkade, CFP®
Expertise:Insurance planning, education planning, retirement planning, investment planning, military benefits, behavioral finance
Erin Kinkade, CFP®, ChFC®, works as a financial planner at AAFMAA Wealth Management & Trust. Erin prepares comprehensive financial plans for military veterans and their families.
Learn more about Erin Kinkade, CFP®
Suze Orman is a famous financial expert and motivational speaker. She consistently ranks as a top money personality but wasn’t always as successful. At age 30, Orman earned $400 monthly as a waitress. Today, tens of thousands turn to Orman for her strong, no-nonsense financial advice.
As for all financial topics, Orman has opinions about home equity loans and home equity lines of credit (HELOCs). Home equity loans and HELOCs are different types of loans that allow borrowers to access the equity they’ve built in their homes. Whether a HELOC or home equity loan is the right decision depends on your goals, finances, and ability to repay the debt.
In this guide:
- When does Suze Orman think home equity loans and HELOCs make sense?
- When does Suze Orman think home equity loans don’t make sense?
- Suze Orman’s take on the risks of HELOCs and home equity loans
- Does Suze Orman think home equity loans or HELOCs are better?
When does Suze Orman think home equity loans and HELOCs make sense?
According to Suze Orman, home equity loans and HELOCs should be a last resort in most cases. But in specific scenarios, she thinks these loans make sense.
If your cash reserves are low
On an episode of her podcast, “Women & Money,” Orman suggested a listener should use a HELOC instead of a credit card due to lower interest rates. But there’s one reason for the advice: Orman wanted the listener to maintain a small emergency fund.
According to Orman, having a cash savings buffer is more important than avoiding debt. The scenario might be specific, but the advice can be helpful. If your cash reserves are low, it might be wise to use a HELOC or home equity loan instead.
If you have a true emergency
According to Suze Orman, a HELOC might be a useful backup option in an emergency. However, this strategy only works if you don’t use the credit for other expenses, such as home improvements or college funds.
In an episode of her podcast, Orman advised a listener to keep their HELOC open as an emergency fund. She explained that knowing financial challenges is difficult, so having the HELOC as a backup fund can be wise. But borrowers must use it responsibly.
If the economy is strong
In a strong economy, Orman accepts that some people prefer to use a HELOC or home equity loan to fund investments, such as stocks or properties, to earn more money.
When the economy is strong, Orman said this is a “fine idea.” But if the market changes, it could negatively affect borrowers, especially if you have loans with variable interest rates.
When does Suze Orman think home equity loans and lines of credit don’t make sense?
In certain scenarios, Orman cautions against using a home equity loan or line of credit. Here are the times she says to avoid them.
If you’re buying items you don’t need
Orman opposes using lines of credit or loans to purchase “wants.” New cars and lavish vacations fall in this category. According to Orman, borrowers should avoid using the loan or line of credit for these purposes.
The reason is simple: The collateral for the loan is your home. So if you fall behind on payments, foreclosure can be devastating. To Orman, it’s not worth the potential risk if you use the money for wants instead of needs.
If you can only afford low-interest payments
HELOCs and home equity loans have two interest rate structures: variable and fixed. Fixed interest rates don’t change over the life of the loan. Variable rates fluctuate with the market.
A variable rate often means the rate increases when the economy struggles—and loan payments increase too. For example, if you have a $50,000 loan with 9% interest and a 15-year term, your monthly payment is $507.13.
But if the rate increases to 13%, your costs increase to $632.62. If you can’t afford potential payment increases, Orman advises against the loans.
If you use it as a college fund for your kids
For certain families, this might be controversial advice. Still, Orman doesn’t think using a HELOC or home equity loan for college expenses is financially wise. She advises against this because she believes parents should focus on their own financial health and retirement savings before taking on additional debt for their kids.
Instead, Orman advises parents to encourage their children to attend an affordable in-state college. While the kids are at college, Orman says that parents should continue to build retirement savings and ensure they’re not a financial burden on their children later in life.
Suze Orman’s take on the risks of HELOCs and home equity loans
Orman says borrowers should be “very, very careful” when considering a HELOC or home equity loan. She cites two main concerns: the risk of default and unaffordable payments.
Risk 1: You could lose your home
When you get a HELOC or home equity loan, your home is collateral. If you fall behind on payments, you could lose your home—Orman’s most significant concern about this type of debt.
Because it’s an extra bill to pay each month in addition to your mortgage, a HELOC or home equity loan might make default more likely. According to recent Federal Reserve Bank of New York data, 0.37% of mortgage loans are overdue. In comparison, 1.07% of HELOC payments are delinquent.
Risk 2: Payments can balloon
Lenders structure the interest rates for HELOCs and home equity loans in two ways: fixed or variable. With a variable rate, the interest rate for the loan can change with the market.
Variable rates can be challenging for borrowers because rates often increase when the economy is on a downward trend. Several aspects of your financial health might deteriorate simultaneously: You could lose your job, and your loan payments increase.
Does Suze Orman think home equity loans or HELOCs are better?
If you’re considering a HELOC or home equity loan, Orman has suggestions to make it as advantageous as possible. Her No. 1 tip is to get a fixed-interest rate loan.
HELOC vs. home equity loan
Orman doesn’t comment on which is better. Still, she often recommends fixed interest rates, which are more common with home equity loans.
- Home equity line of credit: A HELOC’s function is similar to a credit card. You’re approved for a maximum amount and then can use the line of credit and pay it back down throughout the loan term. The main difference between a HELOC and a credit card is that a HELOC is a secured loan, and your home is the collateral.
- Home equity loan: A home equity loan is similar to other secured loans. Your home is collateral, and you get the loan as a lump sum. Regardless of how much of the loan you spend, you must pay back the entire amount.
Fixed vs. variable interest rate
Home equity loans offer fixed interest rates, while HELOC rates are often variable. Loans with fixed rates have the same interest rate throughout, while variable interest rates can fluctuate with the market.
According to Orman, borrowers are “gambling” on whether payments will increase when they choose variable rates. Orman usually prefers financial products with fixed interest rates to ensure you can always afford the payments.
How to find the best fit
HELOCs and home equity loans allow you to borrow against your home’s value. Still, they are different financial products with different interest rates, repayment terms, types of interest, and ways to access the funds.
If you’re considering one but are still unsure which is best for you, check out our resource on a home equity loan versus a HELOC.
