The Hidden Risk of a HELOC

After more than 34 years in financial planning, I've seen people make one expensive mistake over and over. They treat home equity like it's cash. In this segment, I sit down with mortgage expert Tyler Crowley to talk about HELOCs, cash-out refinancing, mortgage debt, and why using your house like an ATM can quietly create a much bigger problem.

HELOCs, let's talk about home equity lines of credit. Is that really... The rules have changed on those in huge ways over the last 10 years. And so now, what was deductible, how you use them, all of those things changed. Is a HELOC really a great financial tool? Or is it more of a credit card with your home as collateral?

Yeah, so it really, once again, comes down to, I think, what you're going to do with that money. Because a lot of times, the problem with the HELOC is you get a HELOC and then you get this payment and you're like, "Oh, that's a great payment." But it's like interest only. And so it's like you're not...

And for the first 10 years, it could be interest only.

Yeah.

And what if you're buying a $150,000 boat?

Exactly.

Right? That probably isn't going to appreciate.

Yep.

You can't write off the interest. Probably aren't itemizing anyway. And so all of a sudden, it could become a little bit of a ball and chain. That it sits there and it looks good and allows people to do things that might not be so disciplined as we talked about just a couple minutes ago. But on the other hand, I would say that they are a great tool because used in the right way, whether it's upfitting a home or with a business need. In some ways, I think a HELOC is a great way to get credit. Certainly, it's a lot cheaper...

Yeah. Yeah, well, it's... I tell people housing debt, if you're going to have debt, is the best debt. And so I think if you're sitting on a 2.5% mortgage...

Dave Ramsey might argue with you on that, but I agree with you.

Well, yes, yeah. That's what I said, if you're going to have debt, you should go into housing. I think even Dave Ramsey would agree with that. You... credit card or a house.

You're right. I agree with you. If you're going to have debt...

Housing is... it's always going to be the cheapest.

For sure.

Whether it's a mortgage, whether it's a second, whether it's a HELOC. And so I think the HELOC matters what your current mortgage is because if you're sitting on a 3% mortgage, refinancing to 6.5% with more money potentially might not make sense. So a HELOC might be more sense for you. If you're someone who's at 6% mortgage, it might be better for you just to do a cash out if you have the equity and lock in that rate because the HELOC is floating.

Right.

And we don't know what's going to happen with mortgage rates. And if we do see a spike... because if you look at the last 3 years, every year we have seen... 2022 was the Ukraine war. And then in '24 we had the liberation day tariffs, spiked rates, and then '26 we have Iran. And so it's like we've had three shocks to the system that have caused rates to jump. And we don't know what's going to happen with Iran. And so we don't know what's going to happen with rates. And so you're getting this floating rate instrument that you don't know where it's going to be a year from now.

At least with an adjustable rate mortgage, with an ARM, you have some time...

Exactly.

...about what am I going to do? And it's limited. Most ARMs you're looking at 1% at most a year.

Yeah. With a HELOC that thing can move quick.

Yes.

You don't really have time to worry about what you're going to do. You just get hit with this change.

Yeah. And all of a sudden your payment is moving on you. And if it's moving in the wrong direction, you're going to feel it.

Yeah.

Right? And then selling that $150,000 boat, probably you aren't going to get enough to pay off the HELOC.

Exactly.

Yeah. And now you're...

Well, and then, you...

...bad situation.

...then all of a sudden, if let's say we do see a slight downturn in houses, all of a sudden that you've taken out equity on your home that all of a sudden doesn't make sense with the bank, and now all of a sudden they might call in parts of it. And so it's... That's the other fear versus having that sort of locked in with a... doing a cash out. And so that's why people... cuz I've had people ask me, more so when rates were looking like they're going to be under six, they were thinking about doing a cash out refi. Or going the HELOC route. And I said it really just depends on what your current mortgage is, cuz if you're sitting on a 2.5% mortgage or 3% mortgage, yeah, HELOC, even if you do see a little bit of a rate rise, probably will be better for you versus having to refile that money into twice the rate.

I agree. Let's go back to that point that you made on people with equity in their home. Great way for them to create some savings, if you will. Creates discipline is probably the better way to say it. So let's say that you find someone and they've got that 300, 400, 500, 800,000 of equity in the home. Do we call that a sense of wealth? Or to your point a few minutes ago, is it just money trapped in those walls? Because they can't access it. It doesn't make money for them. They can't spend it unless they refi and do a cash out. But it's really trapped money until they sell.

Yeah. Well, I think that's kind of... once again, it depends on sort of what you're going to do with it. And so I think for a lot of people, keeping it trapped probably is a good thing for long-term situations. And so, it's always nice that you have that money there and that it does take you a little bit of time to access it.

That's what I always tell a lot of people when they come to me and they say... trying to figure out how much they're going to put down is I always say, it's never a horrible idea to put maybe a little less down because if you do need that money, it's emergency, it's going to take you some time to access it. It's going to take you 2 weeks minimum for the most part in order to do a cash-out refi. And so, would you rather have that money that you can access immediately or do you want to have it somewhere where it's harder to access? It just depends on the person.

And so, I think it's always good to have some money in your house for that exact reason. But yeah, to your point, if you got 800, mostly your house is paid off or whatever it is, and you... that feels great. It's a great thing to do, but you don't have any... a lot of assets or anything else. And so, what's the benefit of having that $800,000 if you can't use it to live a little better and enjoy some aspects of life. And so, that you can't go on a trip because you don't have the money for it, but your house is paid off. And so, it's like I think a lot of people would rather go on a trip. Now, you shouldn't abuse that, but I definitely think that tying up all your money into any single asset is probably not ideal. And you would know more about that than me.

Well, it's interesting because I think what you're saying is it's consistent with a lot of what we talk about, but you take a Dave Ramsey for example, and he says, "No matter what, pay off that house."

Yeah.

So, what if you have all that equity sitting in the walls? Pay it all. Yet, he will tell people if you just invest in his favorite four mutual funds, 12% returns so easy. So, why is it that you'd want to hurry up and pay off the home and literally lock all of that equity into the house when you could have a reasonable payment and put that money to work dollar cost averaging into the market where you can get this easy 12% that Ramsey talks about. Feel like some days he talks out of both sides of his mouth. So, go get 12% but hurry up and pay off the mortgage, and then the two tend to oppose one another.

Everyone, you heard it from Tyler. Town Bank Mortgage. This guy's an expert. He knows what he's doing. If you've got questions, reach out to him at wilmington-mortgage.com. Talk to us at omnistarfinancial.com if you have questions about your finances. We're here to help. Love to give you a second opinion. We'll see you next time on We're Talking Money.