The Personal Finance Podcast - How the Wealthy Use HELOCs to Build Wealth and Protect Their Cash (Should You Have One?)

Episode Date: August 18, 2025

 In this episode of The Personal Finance Podcast, we break down everything you need to know about HELOCs (Home Equity Lines of Credit)—what they really are, how they differ from traditional mortgages, and why the popular "velocity banking" strategy to pay off your mortgage faster delivers minimal benefits with maximum complexity. We explore the math behind using a HELOC to chunk down mortgage payments versus simply making extra principal payments, revealing that the supposed benefits are often overstated and come with significant variable-rate risks that could jeopardize your home. Get the HELOC Ultimate GUIDE Here! Watch this episode on Youtube. How Andrew Can Help You: Listen to The Business Show here. Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel! , Ask Andrew a question on Instagram or TikTok Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Car buying Calculator here Visit www.functionhealth.com/PERSONALFINANCE or use gift code PERSONALFINANCE100 at sign-up to own your health. Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Go to https://joindeleteme.com/PFP20/ for 20% off! Shop outdoor furniture, grills, lawn games, and WAY more for WAY less. Head to wayfair.com Get 50% Off Monarch Money, the all-in-one financial tool at www.monarchmoney.com/PFP Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/   Links Mentioned in This Episode: 10 Home Renovations That Are Worth The MONEY! - Money Q&A Connect With Andrew on Social Media: Instagram TikTok Twitter Master Money Website Master Money Youtube Channel  Free Guides: The Stairway to Wealth: The Order of Operations for your Money How to Negotiate Your Salary The 75 Day Money Challenge Get out Of Debt Fast Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

Amazon presents Laura versus Fruit Flies. Swarming your fruit and terrorizing your kitchen, these little freaks multiply at a rate that would make a rabbit say, yo. Chill. But Laura shopped on Amazon and saved on cleaning spray, countertop wipes, and fly traps. Hey, fruit flies, your baby boom ends here. Save the Everyday with Amazon. This episode is brought to you by Tellus Online Security.

Oh, tax season is the worst. You mean hack season? Sorry, what? Yeah, cybercriminals love tax forms. But I've got Tellus Online Security. It helps protect against identity theft and financial fraud so I can stress less during tax season or any season. Plan started just $12 a month.

Learn more at tellus.com slash online security. No one can prevent all cybercrime or identity theft. Conditions apply. On this episode of the Personal Finance Podcast, how the wealthy use Helox to build wealth and protect their cash. What's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be talking about Helox.

Now, if you guys have any questions, make sure you join the Master Money newsletter by going to mastermoney.com slash newsletter. Don't forget to follow us on Spotify, Apple Podcasts, YouTube, or whatever podcast player, you love listening to this podcast on it. If you want to have about the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player. Now, today we're going to be talking about something that I think most Americans should have open if they own a home.

And we're going to talk about the flexibility and the reasons that you should have a heat lock open. And there are a number of different things that we're going to. going to get into today. And what I'm going to be talking through is, A, what is a heloc? B, should you use a heloc instead of using a mortgage? Like, should you pay off your mortgage with a helot? Is it better to utilize that helock? C, we're going to talk about a bunch of different ways you can actually use a helock to improve your financial situation. I'm also going to be talking through the ways not to use your helot because, again, this is a debt instrument. This is we want to be very cautious when we take out debt. And so I'm going to tell you the things that you should

not be doing. And then lastly, we're going to talk about how to pay off your helock faster if you are in debt with your helic. Maybe you made a mistake and you are not happy with it. And so you want to pay off that helock really quickly. I'm going to show you how to pay that off faster. So this is going to be an action-packed episode. This is literally the ultimate guide to helocks. And we're going to dive deeper and deeper as this show goes on. So without further ado, let's get into it. So there are some wild he lock statistics out there. Approximately 28% of homeowners in a recent study say they are likely to take out at home equity line of credit in the next 12 months. Now, this is up from 21%, which is what it was a year ago. Now, the U.S. has over $35 trillion in home equity currently right now. The rising housing

prices has caused a ton of home equity to be unlocked for a lot of homeowners, which is why there are so many more people opening up HILOCs because they have that equity available within their home. equity accounts for 43% of net worth for the median U.S. household currently and between 50 to 70% for middle income Americans. And Heelock Originations rose by 8% in 2024. And as of early 2025, the average Heelock rate is around 8.25%. Now, this is something we're going to be talking about a little more. But the average Heelock rate at the time of recording this is 8.25%, which what do we classify that as? We classify that as high interest debt here at the personal finance podcast. And so borrowers on average

use less than half of their available HELOC limit, which is good. And only about 34% of homeowners have 100% equity. And Americans increased tapable equity by over $5.7 trillion. Now, the demand has searched for HELOC. And in Q1 of 2025 alone, Americans withdrew nearly $25 billion in HELOC funds. So this is a thing. This is a thing that a lot of people are doing. this is a thing that a lot of people are utilizing these funds for different financial situations. I'm going to talk about a bunch of different financial situations on when you could use them, when you probably shouldn't but could consider it, and the reasons why you should not use them. Now, if you don't know what a he lock is, it stands for a home equity line of credit.

And all this is, is this is a revolving credit line that lets you borrow money using your home as collateral. So let me give an example of this, okay? So let's say, for example, that you went out and you bought your house in 2020 during COVID, and you bought your house for $250,000. Maybe the rates were lower. And so you went out and grabbed your house for $250,000, okay? And so home prices were a little lower at that point in time. Most people didn't know what was going to happen.

They were still pretty high, but they were lower than they were right now. And so you bought your house for $250,000. And then over the course of the next five years, since home prices have started to surge, the price of your house has doubled. And so now your house is worth $500,000. Well, in that case, you have $250,000 worth of equity available that is sitting there. And so for a lot of Americans, that's where a lot of their net worth starts to grow is within their

home. It's at 43% of Americans' net worth are in their homes, in that equity within their home. And so the thing that you can do is you can go to a local bank and you can say, hey, I want to open up a home equity line of credit to be able to tap into that equity if I need it. And so the way that this works is usually they'll let you borrow about $80 to $9. 90% of the equity within your home. So in that example, you can borrow up to $225,000, depending on what bank you're working with, and they're going to allow you to open that up.

And then if you need to use that money, you can start to draw on that money. Now, Helox can be a very dangerous debt instrument if you use them wrong. They can be an amazing debt instrument if you use them correctly. Now, it is secured by your house. So your house is collateral. So, for example, if you start to default on a helock, they can take your house from you. So you have to make sure that you are very, very careful. and it's revolving credit.

So what revolving credit means is that you borrow what you need and then you start to pay it back and then you can reuse it again. And so you borrow, pay it back, reuse it again over and over and over again. Now the draw period is typically the first five to 10 years and during that time frame, you can borrow from the line and it's often interest-only payments. Okay. And so typically when you're trying to borrow with your HELOC, you can go and you can borrow money within the first five to 10 years, whatever the parameters, the bank sets.

And then outside of that, then you're in your payoff period. And usually that payoff period is 10 to 20 years. For a lot of people, I've seen the standard helock rate between that 10 to 15 year range. I don't see a ton of 20 year helox, but they're definitely out there. And it is something that you definitely want to consider. Now, one thing to note with helox is the rate. So say, for example, I just said, hey, the average helock rate right now is 8.5%. But typically the rate on helox, if you can find a fixed rate, it's amazing.

But they are typically variable. What do I mean by a variable rate? That means the rate is going to fluctuate throughout the lifespan of your HELOC. And so, for example, if you open an 8.5% interest rate, He lock right now, most likely that could go all the way up to 13%. Somewhere in that range, it's usually like five percentage points that it could move typically when you have this variable rate. There's not very many fixed rate helix.

If you have one maybe like at a local credit union or something like that, jump all over that thing because usually they are moving and they are variable. And so that is a danger for a lot of people. We never, ever, ever want to have variable interest rates if we can avoid it, especially when it comes to mortgages, when it comes to things that are going to be long-term debt instruments. And so because this is variable, it makes it a little bit more dangerous. And you need to know what that range is. You need to know how frequently they can increase that rate.

And you need to understand your HELOC in totality first. So that is a very, very important thing to understand. So again, you might be approved for a certain percentage that 80 to 90 to 90, percent of whatever equity you have available. And so that is something that you can use for this. Now next, I want to go through something called Velocity Banking, where there's a lot of people out there right now claiming that you should pay off your mortgage with a HELOC. And then because a HELOC has simple interest, you're going to be able to pay off your mortgage faster by doing something called Velocity Banking. I'm going to go through that with you now. I already ran the

numbers through this a number of different times. We actually even had an episode way back on this where we interviewed someone talking through this. And I'm going to tell you, is it worth it or is it just a waste of time and way more difficult? We're going to dive into that next. All right. So let's look at the difference between how interest works with a mortgage and he lock because I want to talk through this velocity banking idea. And if you haven't heard about it, it is a very interesting idea. But we're going to see if it's actually worth it.

We're going to debunk the myth if it is worth it or not. So with a mortgage, interest is calculated using an amortization schedule. Now, this means that your lender is going to set up a fixed, payment that covers both the interest and the principal. Now, the way that this works typically is in the early days of the loan, most of your payment goes towards interest. Banks will front load your interest on mortgages. The reason for that is because the average person only stays in their home for seven years. They want to get their money. And so they front load the interest on a mortgage so that you're paying the majority of it in the first couple of years. And only a small portion of your loan

actually goes to the loan balance. So you may have just purchased a home, for example, and you are not familiar with mortgages. And so all of a sudden you see your payments going towards that mortgage. You're like, holy cow, I'm spending $2,000 on interest and I'm only getting $200 towards my mortgage principle. This is another reason why if you are not going to live in a home for a long period of time, it is not very good investment because most of your paydown is going towards the interest up front.

And so that is something I want you to consider as we think about this. Now, with the heat lock, the interest is calculated differently. It is based on simple interest. which is charged only on the actual amount that you borrow for the number of days that you carry that balance. So, if you borrow $10,000 for 10 days and then you pay off the total amount completely, then you only pay interest for those 10 days. Every single day it begins to reset. So this makes Helox appealing for some people because they have this flexibility, especially if you have extra cash flow and you can pay down that balance really quickly. So there's this core concept that a lot of

people are starting to talk about. And I'm noticing it more and more and more where they're talking about what's called velocity banking. Now, if you've never heard of velocity banking, this is where someone opens up a he lock and draws a large chunk of it. So let's say, for example, they draw $30,000 and they use that chunk to make a one-time principal-only payment towards their mortgage. And by doing that, what they are doing is they are lowering the principal balance of the mortgage dramatically, which reduces the total interest that would have accrued over time. Then what they do, is instead of making extra payments towards their mortgage, they are making those extra payments towards their HELOC

to make sure that they can pay down that HELOC aggressively. Now, what some people actually recommend doing is they will say, hey, well, actually, just send your paycheck to the HELOC, draw from the HELOC when you want to pay your bills, and that way you can pay down even more. You can actually budget inside of the HELOC for that month. The theory is by doing this, they reduce interest charges and accelerate the payoff, meaning you're paying off the HELOC faster.

You're only drawing with what you need. And so because this interest is reset daily, it is something we got to think through. But does this actually work? Because this concept kind of makes sense when you're talking it through, but does it actually work? So I ran an example. So let's say, for example, you have a $300,000 mortgage at a 6% interest rate on a 30-year fixed term.

So very standard, $300,000 mortgage, 6% interest rate over the course of 30 years. And so your monthly mortgage payment, this is not taxes, insurance, those types of things added in, but your monthly mortgage payment would be about. about $1,798. Now, let's say your take-home income is $6,000 for your household, okay? And so you get two paychecks a month, $3,000, and you spend around $4,800 per month. And so this leaves you with 20% of positive cash flow. And so you have $1,200 left per month to put towards your debt. Let's see what would happen if you either made extra payments towards your mortgage or if you use the HELOC to chunk down the mortgage. Let's see the difference

between the two. So if you decide to keep it simple and you send the extra $1,200 to your mortgage lender and apply it directly to the principal, your mortgage is paid off in just over 16 years instead of 30. So if you took the extra 20% or you paid the extra $1,200 per month, you could pay off your mortgage in 16 years. At a 6% interest rate, probably not something I would ever do, but that's something you could do if you wanted to. And then you save around $128,000 in interest. Now, over the course of that 16 years. If you took that money and put it into the market, most likely the market would grow faster than what happens here. Now, this is powerful and it requires no he lock, but you're going to save $128,000 in interest, which is nothing to sneeze at. Okay. So now let's say that you open a

he lock with an 8% interest rate. The average right now is 8.5%, but let's just say you open one with 8%, and you pull $30,000 from it. And immediately, you send that $30,000 to your mortgage as a lump sum principal payment. Right away, that $30,000 goes to that lump sum principal payment, and it drops your mortgage balance down from $300,000 to $270,000. And then you start using your extra $1,200 of cash to start paying down that HELOC balance. It'll take you about 25 months to get that HELOC balance paid down. And then once it's paid off, you pull another $30,000 and you chunk it all the way down. At the end of this process, by doing all this extra work with the HELOC, you're going to shave a few extra months off of your mortgage payoff. And you're going to save about a $7,000.

$7,000 in interest total at the end of all of this. So you'd actually probably pay your HELOC off in about 15 years, 15 years in some change, and you're going to save about $7,000 in interest in total for doing all of that worth. So is the HELOC method worth it? Sure, mathematically, it could be worth it. You could save an additional $7,000. And if you think it's worth it to save $7,000 for all the extra work, going to the bank, opening the HELOC, pulling $30,000, thinking about making sure you make those automatic payments

towards that $30,000, paying off that every 25 months, then going to be a lot. going back, pulling another $30,000 and doing it over and over and over again, then that could work. The difference is small for some folks, but for some people who love this stuff, if you really enjoy just hacking everything and making sure you can save every extra dollar, which some of you do, a lot of your listeners do, then this may be something that's worth it for you. But managing this requires discipline. It requires attention to detail. It requires spreadsheets.

And so making sure you have that is really important. Also, you've got to manage two debts instead of one. me, I like to simplify things as much as I possibly can. And so thinking through this, it is really important to understand this. Now, you have to do the math based on your interest rate on the HELOC too, because if you have this variable rate and all of a sudden it jumps to 12% or something really, really high, all of a sudden that doesn't make a whole lot of sense now, does it? And so we got to make sure that we are looking at this in totality before we make a move like that.

So velocity banking, I've seen people call it the shred method. I've seen them call it a bunch of different things, but can it help you pay it off faster? It sure can. It just isn't going to make a huge impact for a lot of people because making those extra mortgage payments can also have a pretty good impact if you're trying to pay down your house. Now, when should you try to pay down your house? For most circumstances, I'm not going to try to do it really quickly unless you want to. Like we've had our friend Andy Hill on this show.

He talked about paying off his mortgage. We had our friend Brennan Schlagbomb on this show, the budget dog. He talked about paying off his mortgage. They did it for very different reasons. weren't financial, they wanted to be debt-free. And I love the idea of being debt-free. And so if you want to be debt-free and pay off your mortgage, that is great. But I think your dollars are usually better served in the market working for you so that you can achieve financial freedom, which is for me a higher priority, then would be paying off my mortgage. And so that's the differentiator between

those two decisions is thinking through what works best for you. Personal finance is personal. And so personally, what are your goals with your finances? And if they are something that relates to this, then that is great. And if they are something like paying off your mortgage first, that is absolutely fantastic. But if they're not and you're trying to achieve financial freedom as fast as possibly can, I would try to get to your freedom number first and then look at your mortgage after that. Now let's jump into what you should not do with your HELOC before we talk about some of the things that you could do with your HELOC. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing.

And it just hits you. Life is expanding. And when your life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in place actually matches the life that we're building. And that's where PolicyGenius comes in. PolicyGenius is an insurance company. They're an online marketplace that helps you compare life insurance quotes from some of the top insurers in America, all in one place for free. And their licensed team works for you, not the insurance companies. So they help you find the right coverage for your situation without all the guesswork. And they walk you through. And they walk you through, through everything. Answer your questions, handle the paperwork, and help you get the coverage that

actually fits your life today and where it's going. So protect your family with a policy that grows with your life. With PolicyGenius, you can see if you can find 20-year life insurance policies starting at just $276 a year for $1 million of coverage. Head to PolicyGenius.com to compare life insurance quotes from top companies and see how much you can save. That's policygenius.com. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs help you stand out and hire faster. Your post jumps up to the top of the page,

making sure it reaches the right candidates. And it makes a huge difference. Sponsor jobs on Indeed get 45% more applications than non-sponsored ones. And there's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash personal finance. Just go to Indeed.com slash personal finance right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash personal finance. Terms and conditions apply. Hiring, Indeed is all you need. Local news is in decline across Canada, and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void,

and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. CBC News. Okay, when I sell my business, I want the best tax and investment advice.

I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my out of office has a forever setting. An IG Private Wealth advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IG Private Wealth, All right, and let's talk about some of the things that you should never use your heloc for.

I've seen way too many people out there who have used a helic for something that they should not have. And this is something we've got to think through and make sure that we understand exactly what we're doing when we start to take out helocks. Now, there are a number of different things that may sound like they're fantastic to use a helock for, but they are absolutely not. And so let's dive in to a couple of those. One is to use it for lifestyle upgrades and unnecessary spending. So if you're using your HELOC for vacations, if you're using it for designer goods, if you're using it for entertainment and or just reckless purchases like that, that is the number one thing you do not need to be doing. Now, sure, a HELOC is probably better than going into credit card debt, but it is not something that you should be utilizing for personal consumption reasons that do not help you build wealth. A HELOC is still debt, and it is a revolving debt that could get you into a lot of trouble.

And so if you have ever had debt problems in the past, a helock's probably not for you. And so because of this, never ever use it for lifestyle upgrades or unnecessary spending. Number two is never use it to buy a car. I've seen people out there utilizing a helock to buy a car, unless you find a helock with way better rates than car loans have, then never ever use it to buy a car. Now, that's not going to happen. You're not going to really find a helic with better rates than car loans. And so typically, what you want to do is go out there and just get a loan specifically

for your vehicle if you cannot pay, if you cannot pay in cash or whatever else. And so cars are depreciating assets. And if you finance your car with a helock, that is not the best thing to do, because you're using a variable or a secured loan tied to your house to buy something that loses value every single day. And so that's going to be a blanket statement I'm going to make. If something goes down in value, I wouldn't use a helock for it because it is going to take something that is an asset that typically goes up in value. Houses go up and down. They don't go up forever. But they typically go up in value. And so because of this, we want to make sure that we keep those assets that are going up in value. We keep that value locked in. And if you try to take some of that value and put it

towards something that goes down in value, you are really just reducing the overall asset and the value of that asset. So we got to make sure that we are doing it in the right way. Number three is to refinance a fixed rate mortgage with a he lock. There could not be anything in this world that is worse for you than refinancing that fixed rate mortgage. You already know what the mortgage rate is. And He locks, again, like we talked about, have variable rates, meaning the interest rate is going to change. And so because of this, never ever refinance something like a fixed rate mortgage for a Heelock. It is very important to make sure that you think about that. The next thing you never want to do is treat it like a piggy bank.

A helock is not your piggy bank to go out there and use it and borrow for whatever you want to go do that day. Instead, a helock is there for very specific reasons. And when you open a Heelock, you need to map out what those specific reasons are. It may just be one reason, maybe it's two reasons, but you need to not. know why you're opening one before you open one. You should also never use a HELOC to fund speculative or high risk investments. Now, you may be saying to yourself, but Andrew, what if I took out a HELOC and bought Bitcoin in 2012? You would have zero idea in 2012 that Bitcoin was going to do that. And so trying to utilize a HELOC and take those funds for speculative investments could just

mean that you're going to lose all that money that you just borrowed and now you got to go back and pay it back. Using a HELOC without a clear payment plan, if you pull a HELOC, you and you have no idea how much you make, how much you save, how much you invest. If you do not know your core numbers, what your net worth is, then you should not be pulling a helock and you should not even be thinking about it because you have no idea how much you can repay towards that helock. And so it's very important to have a repayment plan before opening that helock. And then this is one that a lot of people do.

What a lot of entrepreneurs out there will do is they will take a helock and it's giving me a headache just thinking about it. And they will use those funds and put them in an unproven or a failing business. Now, I get it. There have been some amazing business stories out there, people who maxed out the value of their home. They pulled this cash from a HELOC to put it in an unproven business. But I'm going to tell you right now, there are way more stories that have never been told on a podcast that have never been told on social media of people who have pulled a HELOC and then it's caused them to go bankrupt and or they just lose their house because they used all of their he lock funds to try to fund a failing business. I know it's emotional. I know it's tough to

get through that. But if your business is failing and it has not been proven ever before, then using a he lock does not work. Let me give you an example of this. There's two separate examples of this. Let's say you have a business that is a startup and you just got that startup going and you're thinking about using a helock to fund that startup. Well, instead what I would do is I would save enough cash to make sure that you could pay for the startup, get the ball rolling and go from there. Now, the second scenario is you have a proven business. It was printing cash for years and years and years. You hit a rough patch. Let's say, for example, the tariffs really impacted your business. And so you went and realized, oh, shoot, my business is down 40% because of the

short-term tariff problem. I just need to find a way to get through the next couple of months and I can get over this hump and move on to the next step. Well, that would be a reason to consider are using a helock because you have a long-term back given strategy. I still probably wouldn't do it, but it is a reason, and it gives you a valuable reason to go use a heloac because you have a history. Maybe you've been in business for 20 or 30 years. You just need to get through a little rough patch. And so there are better ways to do that. I would probably use the LLC's name, try to borrow money that way. You're still going to have to do some personal guarantees, things like that. But there are probably better ways to do that than putting your house up. And again, if you're

going to utilize it for business, I would only use about 25% or less of the equity. if you're going to do that and make sure that the payments will not kill you if this all goes wrong. If it all goes wrong, the number and the calculation that you have to understand is will these payments kill me? Could I still make the payments every single month, even if I lose it all? And if you could, then okay. But if you can't, then it's very important to make sure that you are managing that debt properly. And so I would not do it. I would not take the risk. It is not worth it. And so overall, just making sure you protect yourself is going to be very, very important. So those are some of the things that I would never do with a helock.

Listen, by the way, if you want a guide to helox, we're going to link one up down below a free PDF guide so you can have as much of this information as possible and learn how to maximize helox in the right way. Now let's get into some of the things and reasons why we would use a helock and reasons why you might want to use a helock, but it's pretty risky. And so we're going to talk through a couple of these things. And then after, I'm going to talk about how to pay off a helock faster

if you have a helock that you want to pay off. faster. So number one, and this is the main reason that I use my HELOC and I have it open is you can use it as a backup emergency fund. So a HELOC can serve as a secondary emergency fund allowing you to keep more cash invested while still having access to liquidity. So always, always, always, we want you to have a six-month emergency fund, okay? Always, we want you to have that six-month emergency fund. But one thing you can do with the HELOC is this just gives you access to liquid cash whenever you need it. So if you have a six-month the emergency fund in place, sometimes what I like to do is I like to invest everything beyond six months of my emergency fund into a taxable brokerage account. And so that money is growing over

time. And then I have a backup. The he lock, if I absolutely need it and the market absolutely went to zero for some reason and the earth started to fall, then I have this helock in place that allows me to at least be able to utilize it. Now, funds are going to be less liquid in times where you really need them. So like, for example, in a recession, banks may reduce or even freeze helix just when you need it. So this is not a strategy that's end-all be-all, which is why we still have to have the six months of cash in place. Because a lot of times during recessions, banks get scared, they start to tighten up lending and helox usually get frozen, especially in really bad recessions. And so that's something I want you to consider. But also,

if your income stops and you cannot repay what you draw, the debt could compound fast. And so these are two considerations to have if you have to draw from the helock. But it helps you maximize investment returns while still staying protected. Now, again, I don't want me saying this. And then you get the idea, no, I'm not even going to have a six-month emergency fund. My HELOC is going to be my emergency fund. I'm going to invest all my dollars. That, my friends, is not what I am saying whatsoever. And it is not the way to go. You must have that six-month emergency fund in cash, in place, somewhere safe like a high-yield savings account. That is where we need to have it, okay?

Because an emergency is going to happen and you're going to have to draw from the HELOC. and I don't want you to pay an 8% interest rate because you had an emergency. Instead, you need to have the cash on hand so that you can take care of that. And then the HELOC is the backup. Now, there is nothing wrong with having flexibility and options. And so the reason for having this open is so that you can have flexibility and options. You don't have to draw from it. You don't have to use it. Now, if the bank has parameters that you have to use a certain amount or whatever else, go find a different bank that doesn't have those parameters. And so that's the number one reason why I see usefulness for a HELOC because flexibility and options and liquidity and personal finance

allows you to become a better wealth builder. And the better you are at building wealth, the faster you can achieve financial freedom for you and your family. So having those options is absolutely fantastic. Now, where should you open a HELOC if you're considering even doing this? I like to go to the local credit union because typically their rates are better than some of these other places, but you can go where your mortgage already is. Sometimes that's easier for some folks. but I go to the local credit union and talk to them. The second reason to consider using a HELOC is to fund value add home renovations to increase equity.

Now, there are a lot of different things and conversations to have here. I do not believe that most home renovations are going to get you back what you typically think they would. We run the numbers a bunch of different ways and your real estate agent is going to tell you, oh, if you had a kitchen here, it's going to increase your home value. You're going to get all your money back. Oh, if you had a bathroom here, it's going to increase your home value. You're going to get all your money back.

Typically, that's not the case. Typically, it'll get you a chunk of it back, a decent amount of it back. But your rate of return is never going to be over 100%. And so a lot of people think that, but the cost of renovations right now are so high that typically you are not going to get it back. So I want you to know that first because I've run the numbers a bunch of different ways. And some of us here at Master Money have run them different ways. And we know that long term, you're most likely just maybe going to get your money back and maybe a little less. We've actually had an episode of the top home renovations with the highest ROI. And the number one was a 100% ROI. And it was like getting a new front door, which is one of those things that obviously can make somewhat of a difference. But really, just getting your money back is kind of what you want with these renovations.

And so that is something to think through. Now, if you go out and you buy a house and you're like, I want to make renovations to this house for lifestyle reasons, I don't have a huge problem with utilizing your HELOC or using some of that home equity to do that. if you can get a big chunk of it back. So let me give you an example of this. Let's say, for example, that you live in Florida and you want to get a pool. Well, pools are really, really expensive now. There's a couple of different things to think through.

First, I would like for you to save up a good chunk of that in cash. But if you want to get to the point in time where like summer's coming back around and you know it's going to give your kids those long fun summers where they can utilize that pool and they can have fun in the pool, I don't have a problem with you utilizing a he lock to do something like that if it makes sense. Why? Because if you go to the lenders of the builders of pools, their interest rates are going to be 13, 14%. Instead, it is better to use Gilocks, which have lower rates typically, then builders do so that you can go out there and they can just tap into some of your home equity. It's going to add value to your home. And then from there, you can look at it.

Now, it's not going to get the 100% value back. You're not. You're going to be paying out of pocket for that pool. You're going to be paying out of that pocket for the new kitchen. You're going to be paying out of pocket for the new bathroom. There's going to be some portion of the money that you take out that you are paying out of pocket. You may be saying to yourself, no, no, no, no, I'm going to get it all back. Let me tell you right now, you're not going to get it all back, especially if you are going to live in the house for a longer period of time. This is just not going to happen. And so I want you to understand, go run the numbers if you haven't already to make sure that you

understand how this works. Now, again, if you over-renovate, here's the big risks with this. If you over-renovate or because you have access to this capital now, you decide, oh, I'm going to get the $150,000 pool. Well, now we have a different problem because now we are taking on debt. that we did not need to take on. And so making sure that you still fit within your parameters, have some cash on hand for it down.

I am completely okay with that if you want to do that if you're making enough money. Now, if this takes away from your retirement goals or this takes away from your investing, I'm not okay with it. So you got to make sure that you have a balance there when it comes to your future self. A third reason to use a HELOC is you can have flexible access to cash

for being bridge financing between buying and selling a home. So what can happen to a lot of people is that they will buy a house or they will sell their house. And when they sell their house, they might have a gap before they can move into the next house. And so maybe, for example, you want to buy a home. And when you buy a house, you find a dream house, okay? And you want to go buy it. But you need to sell your other house first to be able to have enough funds for the down. Well, instead of selling your other house, as long as you understand what the market is going to do there,

you could use it as bridge financing. So use a small portion of the home equity for the down payment. for the new house and then you leave, move out of your house, and then you can sell your house empty so that buyers can walk in there. It's going to be a lot easier for them to maneuver through your old house, and you can sell that house much quicker. Well, in that scenario, you could use this as bridge financing between those two options, and it can actually help you reduce moving costs and stress by preventing a double move.

It can also help you avoid taking a rushed offer on your existing home, because now you have time on your existing home to take an offers, make sure the offers make sense. And so utilizing a HELOC can kind of give you some of that extra time frame that you would not otherwise have the luxury of having. And you can use it as temporary cash flow during that transition. So as long as your home has a lot of equity in it and you're only taking a small portion of that equity, there's nothing wrong with this in my opinion.

But let's look at the risks, okay? If your old home doesn't sell quickly, you can be stuck making two house payments plus the HELOC, which is three payments towards mortgage rates. very sticky situation. And so you got to make sure you understand the home, the housing market, and you understand the certainty that your house is going to sell a different level. That's why I'm saying it's got to be a small portion of your equity because you still need room in case the housing market pulls back. And so you got to give yourself enough room for that to make sense. Also, it requires careful timing and a solid exit plan. So that is another one that I just want you

to think through. Number four is you can utilize a HELOC to avoid a cash out refinance when rates are high. So when rates are really, really high and you want to do a cash out refinance to get some of your cash out, you can use a HELOC instead so that you do not disrupt your existing mortgage rate. So for example, my mortgage rate right now, because I built my house in 2020, my mortgage rate is 2.7%. I will never pay that thing off for as long as I possible can. I'm making those minimum payments. I wish they would let me make lower minimum payments. I'll do a 50-year mortgage for 2.7% because the rate is so incredibly low. And so sometimes when people need cash, what they'll do is they'll refinance their mortgage and pull some of the equity out. Real estate investors do this all the time. If you know the

Byr method where you buy rent, rehab, refinance, repeat, that is a method where a lot of real estate investors will refinance and have to refinance into a higher rate. But let's say, for example, you bought your house in 2020, but you need some of that cash pulled out so that you can do whatever else you need to do with that cash. Well, instead of doing a cash out refinance when rates are high, you can then decide to just utilize a HELOC. And this is going to help you avoid having to refinance a low interest rate loan. Now, Helock rates are variable and could definitely climb over time. And so that is a big risk for sure.

And this works best for short-term borrowing, not long-term debt. And so if you're looking for short-term borrowing, so you can do something specific, maybe you're flipping a house and you've been a seasoned house flipper. You've flipped 100 houses, for example, and you need to just pull out some equity in a real estate investment in order to make sure that you can flip that house. Once you flip it, you're going to pay the HELOC back and then keep your profit, then you run those

numbers and look at this and you say, oh, this makes a lot of sense. Then that is a great way to do it. But if it's something for long-term financing, I would not probably consider that. So number five is for advanced investors, they sometimes use a HELOC to take advantage of time-sensitive opportunities where the expected return outweighs the borrowing cost of their he-lock. So this might include things like down payments on rental properties or buying into real estate syndications or maybe short-term private lending deals where they can go and use.

use a he lock and that's cash they can pull in order to make sure that they can get financing done. So I have a friend who does this. They do hard money for real estate investments. And so they'll take their helock and they will pull out, say, $100,000 and give it to a real estate investor. Now that real estate investor utilizes that loan and that loan is backed by the rental property and or the house they are about to flip. And so they take that $100,000 and they use it to flip the house. And when they flip the house, they pay them back over the course of six months and they will pay them a 12 to 13% interest rate. Their HELOC has an 8% interest rate. And so they keep that 5% delta typically. And it is something that works out for everyone. And so usually they make very good

money doing this, but it is something that can have risk if the real estate investor doesn't pay you back. So again, when you do something risky like this, you've got to make sure that you can still pay the HELOC back afterwards if something didn't go right. And so usually when they make those payments back to you slowly over time, they'll start to make payments to you and then they'll make a lump sum balloon payment at the end. If that's the case, when they're making those payments, you just got to make sure those payments are higher than what the Heelock payments are to ensure that you are a okay there. Now, the key is to have a clear cash flow or exit plan if you're going to do this. And it is something that is for advanced investors. This is not

for beginner investors whatsoever. It usually works best with real estate because there is some sort of security backing it. And you have something that can help you through that process. Number six, this is one that we talk about sometimes, is you can consolidate high interest So I don't have a problem with this at all. It's using a HELOC to pay off credit card balances or personal loans that can significantly reduce your interest burden. So let's say you're paying 20 plus interest on a credit card. And replacing that with a 7 to 9% interest rate on a HELOC is going to help you reduce the amount of interest that you're paying drastically. And with discipline, if you have a payoff plan, you can then make sure that you get this paid off, the high interest debt,

and lower that interest rate down so that you have a much lower interest rate and can pay it off faster. because a 20 percentage rate can absolutely kill you if you've ever been in the thick of it of seeing how impactful that debt can be. Now, what are the risks to this? The risks are, this only works if you stop using credit cards. If you're someone who is still continuously taken on debt using credit cards, do not do this. But if you are someone who can stop using credit cards and won't build that debt back up, you just are willing to pay this off every single month. This is going to be a great option. Also, if you use a HELOC to clear debt, but don't fix underlying habits, this is also another big risk because then you're just going to start to

use the HELOC as a revolving debt. And I don't want you to do that at all. Got to make sure that you were doing this properly. Number seven is you can fund a business with proven revenue. So if you have a business concept with proven revenue that is recession proof, there's a bunch of parameters around this, good management. You got good stuff in place. You have a long history. A HELOC can provide you flexible and relatively low cost to help fund growth. And so because of that, with businesses that generate income that have a history of generating income. You can have to business make your HELOC payments for you. And you can utilize, you know, a big lump sum of capital to maybe expand locations and or expand some of the business lines that you

need to do. And so this is something that is much faster and cheaper than going out and getting traditional financing. You're going to have to get the financing from somewhere anyways. This is kind of the logic for business owners. And if you're going to go out there and you don't have access to SBA funds, then you can go out there and get some cheaper access than you would with business loans. Business loans typically have a very high interest rate. And so looking at this, this might be a faster way to do that if you want to go. Now, never use a HELOC to start an unproven business. Again, only use it for expansion when revenue already exists and it is very profitable. So if you have 30, 40, 40, 50 percent profit margins, then you can look into something like a HELOC. Bake the

he lock into your numbers. You must calculate the cost first, but you can look at that and use it for business expansion. Now, I personally am someone who has, as of late with all the businesses that we run. I'm not a huge fan of taking on a bunch of debt for your business. Now, sometimes you're going to need a bunch of debt in order to be able to expand, but I'm not a huge fan of always doing that. And so just making sure you're cautious when you do that is really, really important. Number eight, this is something that I probably would say most of you should not do. Most of you should not do this at all. But I'm going to bring it up because I want it to be talked about so people know my opinion about this. So this one is an advanced strategy, but it's called

interest rate arbitrage. And what some people will do is they will borrow from a HELOC, let's say it's a 7 or 8% interest rate, and they will put it into an investment that could yield more like a 10 to 12% interest rate. Now, this can work for real estate notes like we just talked about, where you can try to guarantee that as a 12% interest rate. If it's a small enough number, I think it can make sense for things that are backed by something else. What do I mean by that? So let's say you give a note for 12% on a rental property to someone who wants to renovate the property. Maybe they need a new roof, maybe they need some other things. They send you the numbers.

The property is cash flow, okay? If they default on your note and they have no other notes there, let's say they have it free and clear. They have no other notes, but they want to borrow the money in order to do some of these renovations. And you give them the money and they renovate it. But if they default on your loan, you get the house. Well, that's a situation where, okay, I'll do that all day long. But if there's not anything backing it, like if you're doing this in the stock market,

you have no idea if the stock market is going to return tax. 10%, 12% or 2% this year. And so because of that, you could have a negative return this year. And so because that I would not do this with stocks, this is only something that you want to do when it comes to things that are secured by another asset. Number nine is a HELOC can give you cash to accelerate deductible expenses. You need to lower your taxable incomes. You can optimize your tax timing in high income years. Now, let's talk about this. You can either front end charitable giving. You can pay property taxes early or renovate your home before your end if you think you can optimize your taxes in that way. Then repay the HELOC after receiving the bonus or the tax

refund. Now, this is advanced, and only your CPA should be recommending this. You should not be doing this willy-nilly without talking to a CPA. But there are advanced tax strategies that you can utilize your HELOC with if you need lump sum quickly to reduce your taxable income in really high income years. And so there are wealthy people who do this where they will borrow and they will utilize that money. So in their high-income years, they can reduce their tax liability. Now, this requires a working and qualified CPA and tax rules can change and misusing funds can nullify deduction. So making sure you know what you're doing is really important. But secondarily, if you over-extend or guess, this strategy depends on precise timing. And so you got to make sure

that you were doing this right if you're going to go that route. So most of you probably shouldn't do that, but it is something that is an option that some people think through. Also, is you can create liquidity in early retirement by utilizing something like the barbell strategy. So when early retirees, especially those with Coast Fire or Barista Fire, often face cash flow gaps before the age of 59.5. A heat lock can serve as a bridge to avoid selling investments during volatile market conditions. Again, very advanced strategy, not something I would really consider for a lot of people. But instead of selling stocks during a downturn, you can borrow short term to cover expenses and repay when the market recovers. I would only do this in low interest rate environments.

And I probably wouldn't do this in most scenarios. most of you should not do this, but this approach can reduce the sequence of returns risk that happens within your portfolio if you do it right. But again, we're not market timers here. We're not people who are trying to predict the future. And so this can be a very difficult thing in a very sticky situation if you do it wrong. And so I want to make sure that you are looking at this. I just want to talk through some of the options that you have available to you. So those are 10 things that you could consider of utilizing your HELOC for. I do believe, personally, that everyone that has equity within their home should at least just have a

He lock open. Even if they don't use it and even if they don't feel like they'll ever use it, just having one open for an additional backup of urgency of one, nothing wrong with that. And having a financial protection plan in place that has layers and layers of capital that you can access is what really wealthy people do. And so having these layers and layers of capital that you can access when the world is falling, it's just a great decision. You probably will never use it. But if you ever do need to use it, it is great to have open. Now, if you open a Heelock and you've used it for some of the reasons that we said don't use a helock. How do you pay off that helic faster?

We're going to talk about it next. All right. So if you've reopened a helic and you realized it wasn't the right financial move, you're not alone and you're not stuck. What I want to do is I want to talk through how you can pay off this helock faster. This is going to be a really, really important concept that we need to talk through. Step one, stop using the helock immediately. So the first important step is to stop digging the hole deeper.

cut up the checks, remove the HELOC from your online transfers or bill pay options, and mentally shift from access to equity to this is a loan that I am going to pay off as fast as I possibly can. Because if you have a HELOC and you utilized it for consumer spending, this is a pants-on-fire emergency. You have high-interest debt that has no asset backing it, and you need to get this paid off as fast as you possibly can. And so that is something you definitely need to do. Step 2 is treat it like a fixed loan and not a revolving line. What do I mean by that? A HELC is technically revolving credit, but that flexibility is partially what gets people in trouble most of the time. And so what you need to do is do not treat this like a credit card. Make sure you treat it

like a structured loan with a clear payoff plan. So today, I want you to create a fixed monthly payoff amount based on your current balance and realistic timeline. So for example, if you owe 18 grand and want to be done in 18 months, that's $1,000 plus interest every single month. So figure out what that exact number is and start paying that off. Make those extra payments. Now, I want you to make these payments automatically. Make sure you have automation set up for your HELOC so that you can make these payments automatically, just like you would with a car or a personal loan. You got to make sure that you are doing that in a way that makes sense. Now, step three, as I want you to apply lump sums where you can, if you get a bonus, put that bonus towards your HELOC. If you get a tax return,

put that tax return towards your HELOC. But making sure that you apply lump sums when you can, can really get this knock down again. With that simple interest, this is going to reset every single day. And so knocking down that balance is going to reduce the amount that you pay an interest every single time you put a big lump sum in there. If you draw this thing out for the entire term, it is going to take you a long time and you're going to be paying a lot of interest over that time frame. So making sure you knock that off. Also, use biweekly payments. So if you use biweekly payments with your HELOC, you're going to make 13 payments per year instead of 12. And I really like the idea of that because then it's a way to hack your way to an extra payment and you can make a

payment every single time you get paid. And you also can lower your balance more consistently through the month, which ties directly to the next final step, which is your average daily balance. And so what I want you to do is I want you to use that average daily balance to your advantage. Here's what most people don't realize when it comes to their HELOC. And you can get a strategic edge by understanding this fully. This is a very powerful concept. He locks charge interest based on your average daily balance for the month. And so the moment you understand this, then you can look at this and say it's not on the balance that you have at the end of the month. We talk with us at the top of the show.

It is your average daily balance. So if you carry a $10,000 balance for the first 15 days of the month and then you make a $5,000 payment, for the remaining 15 days, your balance is $5,000. And so your average daily balance for the month is only $7,500 and not $10,000. Okay? It's really, really important to note that. And so you're only charged interest on the $7,500. You're not charged interest on the full $10,000.

and this is a very important concept. So if you make those payments early in the month, that is going to be number one, is always make your payments early in the month on the HELOC. And if you're trying to balance between two paychecks and you're like, I'm going to make one big payment every month, do it early. Number two, make multiple payments if you can.

Shoot, if your bank allows you to make daily payments, you're going to be better off making those daily payments than you would automatically, obviously, so you don't have to log in there every day. But even small ones throughout the month can help. Just throw in some extra cash here and there. And if possible, if you can live on half of your paycheck, direct deposit one of your paychecks into the HELOC directly and it'll start to pay that down even

faster if you can live on 50% of your incomes. It depends on where your budgeting is and all that different stuff, but it is really, really important. So again, final thoughts. Stop borrowing, treat the debt like a loan. Funnel every spare dollar towards it if you were in high interest debt and use the mechanics of a HELOC, especially the daily balance, to your advantage. It's very different than a mortgage. And so making sure you change the way that you're making those payments is super, super important. So this is the ultimate guide of the Heloc. This is a longer episode,

but on these ultimate guides, they typically end up being longer episodes. So if you guys have any questions, again, make sure you join the Master Money newsletter. Go ahead and download the free PDF down below. If you have not already, it is our guide, our ultimate guide to Helox in ways that you can use them.

We talk through a little bit more. And again, Master Money Academy Beta is launching very soon. All the people on the email list are getting access to the beta group currently. and then once the beta group launches, we will do a big launch to everyone. So really, really excited about that and really want you guys to get ready for that because it's going to be a big, big deal, some of the stuff that we're going to be doing there.

I'm really, really excited for Master Money Academy. That's where I'm going to be spending most of my time is with you guys in Master Money Academy. So again, thank you guys so much for being here. We will see you on the next episode. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the Fun with Play-O-Joe, the online casino with all the latest slot and live casino games.

What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws. Hey, I just won. Woo-hoo! Feel the fun! Play-O-Joe! Honey, forget about the lasagna. Let's celebrate! 19 plus Ontario only. Please play responsibly. Concerned about your gambling or that of someone close to you, call 1866-531-2-2600 or visitconXonxontera.ca.