The strangest thing to me about Money's advice is that they suggest taking a home equity loan to start a rainy day fund.
Even if you get your home equity loan at a very low interest rate (5%, say), your rainy day fund (assuming it's invested in a money market fund) is not likely to earn that much in interest right now (money markets are returning about 3%).  So you'd just be losing money. Plus, your money is probably appreciating faster while it's invested in your home than it would be if you were to transfer it to almost any other stock or bond investment. A much more sensible approach would simply be to start putting the money that you would otherwise be using to repay your home equity loan directly into your rainy day fund.

Do you suspect that Greenspan is encouraging people to borrow simply to stimulate the economy and make himself (and Bush) look good prior to the 2006 elections?  With the economy struggling, fiscal stimulus through personal debt can be just as effective as deficit spending and tax cuts. The consequences of all this borrowing won't be evident until far into the future, when Bush, Greenspan, and the current Congress are all long gone.

<span>Money magazine is getting a bad rap.  Note what they said:</span&gt 

“Do: Open a home-equity line of credit and use it for the right reasons: to tap as a rainy-day fund, to finance college for your kids or yourself, or to pay down credit-card debt. Don't: Raid your home's equity to fund vacations, plasma TVs and that Beemer you can't afford.” 

I can see using a home-equity loan to purchase an asset that is expected to appreciate (similar to what a poster said above).  You know, rare coins and cards - oh, wait, that's been done..  It's just me, but I can see using equity to improve your home (addition, new roof, etc.), put someone through college (someone close, I am not offering to put any of YOU guys through...) or maybe (BIG MAYBE) purchase an investment property.  I mean, when the market crashes, those people are gonna need someplace to live...

As a rainy-day fund - can't you consider setting up a Home Equity line of credit as your rainy-day fund, so if something disasterous does happen, you can respond accordingly.  Emergency room bills or some uninsured motorist slamming your fuel-efficient coupe into oblivion would count, but an emergency beer-run to Martha's Vineyard would not.

As I said, it's just me, but I wanted to add $.02 to the conversation

I think Prof. Warren, et al, as I have said before are focusing on the wrong things.  Borrowing on your home equity (and interest-only loan mortgages, talked about previously) are good for some people and bad for others.  Period.  The issue is not that borrowing on your line of equity is bad, but that you must be educated about it.  THey similarly decry interest-only loans, but these loans are the reason I had a place to live while in law school.  THese are not examples of attacks on the middle class.  People who mess up and borrow too much have only themselves to blame.  You need to know what you can afford and stick to it.  All of these are issues of consumer education.  I believe that consumer education is very important and should be taken very seriously.  However, Prof. Warren chooses not to follow this advice and villifies sound financial programs.  If you want to talk about the dangers of these, please couch the argument in terms of informing the consumer not in terms of "the man is coming for you - don't buy a house."

Ostap . . . there are times when it makes sense to borrow against home equity.  It's just that Money basically says it's the smartest thing you can do.  It seems more like a last resort to me.

1. Rainy day fund . . . a better approach seems simply to start saving for a rainy day. Remember, there's usually a cost to open an equity line of credit (closing costs), so why pay them if you don't have to? If you don't have a rainy day fund already and don't have enough money to start saving, then you are probably dangerously overstretched already and borrowing against your home is probably risky. If you are not overstretched, you probably don't need the equity line of credit to deal with emergencies, and saving will likely produce greater returns for you over the long term.

2. College education . . . fortunately, I haven't had to worry about this in a long while, so I'm not totally up-to-date on the options, but in the old days student loans seemed like a better approach. I know those programs have been hacked at, so maybe home equity makes more sense nowadays. Someone else will have to speak to this one . . .

3.  Credit card debt. In some instances, I'd agree with you--but Elizabeth's original post makes some good arguments why it isn't always as good an approach as it seems. The big problem with home equity is that people end up extending the length of payment at the same time they reduce interest payments, so their overall finance charges aren't always lower. And there's always a big temptation to treat yourself once you have access to that money . . .

I think the bigger issue is that consumers are being encouraged by the popular financial press (for which I have little respect, I admit) and the lending industry to take on more and more debt--and consumers are being told this debt is good for them. The downsides of taking on all this debt are not being widely publicized--particularly the danger of carrying it into retirement. 

Warren's attempts to counter the rosy scenarios get criticized by those who think she's a "busy body," but I've heard her talk in various forums and actually have been impressed by how much she advocates people taking responsibility for themselves and their financial situation. She's not advocating a big brother approach at all). Rather, I think she's trying to present a more skeptical voice in a financial world where people with various agendas spend a lot of time promoting schemes that are profitable to the promotera but not necessarily so healthy for the people they are advising. With financial advice in particular, caveat emptor.  

From my own personal experience, I can say that the key to financial security is:

1. Putting together a realistic budget that keeps your spending as low as possible and as far below your take-home pay as you can manage.

2. Paying off debt as rapidly as possible, and using credit cards only if you can pay off the balance 100% every single month. 

3. Beginning to save as aggressively as possible as soon as you are out of debt.

4. Avoiding getting fooled into buying expensive homes and cars, particularly if it means borrowing. 

5. Living on one income, even if you have two. 

All the other advice you'll get is probably crap, unless you have lots of money to play with. Then leveraging your investments and stuff like that maybe makes sense. But your average person is better off doing the basics above.  At least that's my opinion--and no I'm not a financial advisor, so please talk to a professional before doing anything I say.   

I think that people need to evaluate the probabilities.  While there is no doubt that an HELOC can be useful in certain circumstances, it seems likely that people who were incapable of managing their credit card debt are going to continue to screw up after they borrow against their home. Every one of them? No.  And not everyone loses money trading commodity futures, but it would nonetheless be sound advice that most people avoid it, and I would suggest the same is true for historic debt abusers and home equity loans.

(Though a non-home rainy day fund is better, having a HELOC before you run into deep financial waters is better than trying to get one afterwards.)

That is an excellent point. After three years of disability-induced unemployment, we recently decided that it was time to make use of some of the equity in  our house, only to discover that — surprise, surprise — now that we needed the money, no one wanted to lend it to us (well, no one with whom we felt comfortable doing business, at any rate). Our (increased) debt to (decreased) income ratio was a show-stopper.

Fortunately, we have managed to achieve an equivalent result by doing a cashout refinancing of our home, consolidating our original first and second into a new mortgage (at a lower fixed rate than our previous adjustable rate, even), and hacking away at our credit card debts. The overall effect is to reset the thirty-year shot clock on our mortgage in exchange for improving our financial outlook considerably. It's even possible that we will be able to manage to pay $100 extra a month on the new mortgage, which would return us to our original timetable.

Still, it would have been nice to have the option of opening a HELOC; if we had already opened one back when we didn't need to, we might be in better shape today.

I agree with this.  The people at Money are correct.  Home equity loans are often a good financial tool as this comment states.  Hoe can the argument be made that paying 18-22% interest is better than 5-7%?  Further, if you default on your credit card debt, etc, you may lose your house anyway

Okay let's take your advice one at a time:

 1.  If you have no cash, so that in a financial emergency you could not bail yourself out, it makes sense to open a home equity line of credit and not use it unless or until you have a financially rainy day.

-This is good advice for having some credit handy. Wouldn't a couple credit cards be better than a home equity line of credit? As Warren points out, credit card companies don't take your home.

2.  If you have no cash for college, a home equity loan is a cheap source of funds to pay for it.

-federal loans are cheaper and they don't take your house.

3.  If you have a pile of credit card debt at 20%, and you can’t pay it off, and you can get a home equity loan, after tax, at 3-4%, you would be nuts not to use the home equity to pay off the credit cards.  Then, of course, you should chop up those credit cards and throw them in the trash.

-As Warren says, if you can pay off that debt in 2 years then the savings aren't that much. If you can't, you will not get a 3-4% rate. And you can chop up those cards but you'll be left paying more interest. And, oh yeah, they can take your house. 

Ms Warren, for many home owners, equity lines of credit are tax deductable. If one has their fiscal house in order, it is imprudent not to borrow from the source of funds with the lowest real cost.

Furthermore, the advice to open an HEOC for rainy day contingencies is wise, assuming the cash for such a fund is unavailable  - and the costs of maintaining the equity line aren't excessive. The rub, of course, is resisting the temptation to use those 'free checks' the lender will inevitably send on a monthly basis.

Borrowing against a home is just that - borrowing - but it is borrowing secured by an asset, which generally means less costs than an equivalent unsecured loan. If one needs to borrow,  for whatever reason, this is often a good lower-cost place to start. 

This is, of course, assuming one has their fiscal house in order.  

Thank you!  All home equity loans and lines of credit are, I believe, tax deductible.  A big benefit.  And one that makes this form of borrowing even less expensive than credit cards or other loans.  Obviously, this is only significant if you're making enough to be taxed enough to make this significant.
But clearly, clearly one should only borrow if one has the means to repay the loan.  This applies to HELOCs, credit cards, mortgages and on and on.  This is self-evident, or should be. To the degree that Money or Greenspan or lenders are encouraging people who can't afford it to borrow, they are donig folks a big disservice.
One of the strangest aspects of today's lending scene is that "predatory" lenders seem intent on lending to folks who are likely to default on their loans.  How this benefits the predators, I can't imagine.  Lenders only make money when borrows KEEP paying.  If they default--even if they lose their house--the lenders lose out.  This is why I believe--against all wisdom--that the people who are the least able to pay should get the lowest interest rates (or among the lowest), because that will enable them to KEEP PAYING.
Ms. Warren seems to conflate a home equity loan--which gets used up and can't be reused--with a home equity line--which is revolving and can be reused.  The latter is much more useful. 

Surely there are plenty of people who are in financial danger because they've made poor choices.  But I believe that the challenge for many many more people is simply not earning enough to keep their heads above water.  Loss of a good job, unexpected medical expenses not covered by insurance, death of a wage earner without adequate insurance, lack of affordable housing, etc. all contribute to people's dire straits, and the last thing these folks need is good advice.  They need real help.