Homeowners love HELOC loans – Home Equity Line Of Credit - because you only pay interest on what you borrow. For example – say you originally bought your property for $125,000. Over the years it has gone up in value - it’s now worth $200,000. Instead of refinancing your property for the $200,000 it is now worth, you take a HELOC loan. You get approved for $75,000. Along with the $125,000 on the first mortgage, you also have $75,000 line of credit.

The great thing about a HELOC is that you only pay interest as you use the money. If you use $10,000 of the $75,000 that you are approved for, you only pay interest and payments on the $10,000 you are using. The bad thing is that people often have a hard time controlling a credit line like that. They use the money to pay off credit cards or buy things and then run the credit cards up again and get back into debt. If you used your line of credit to pay credit cards off, now you owe credit cards and your credit line is used up.

Many would-be investors use HELOC’s to buy rentals. I suggest that you never use your primary residence as collateral to buy investment properties. If things go wrong, you don’t want to lose your place of residence.

It is very easy to get into financial trouble with a loan like this. They are easy to get, payments can be low, and it is tempting to buy stuff with the money. You think, "I’ll just buy this one thing and then I’ll pay it off." Next thing you know, you’re buying a second thing and the first one isn’t paid off. It doesn’t take long to get out of control.

As the debt builds, you decide to refinance your house to pay off the HELOC. The banks are offering an attractive, low monthly, interest-only loan. Property values drop and now you owe more than your house it worth and - boom – you are in financial trouble.