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Tapping into the equity in your home can be a great way to pay off debt, cover the cost of repairs and renovations or even pay for a vacation or medical bills.
One of the most common ways homeowners can access their ownership stake is through a home equity line of credit (HELOC). It makes available to you, at a variable interest rate, a sum based on the dollar value of your home equity.
So, what can you use a HELOC for, specifically? And, perhaps more importantly, is a HELOC a good idea for your specific expense scenario? Let’s answer those key questions here.
10 common uses of a home equity line of credit (HELOC)
Secured against the value of your home, a HELOC is a line of credit you can borrow from as needed over a certain period of time and repay in installments, much like a credit card. Here are some of the most common uses for it to consider.
1. Home improvements
One of the most popular reasons for opening a HELOC relates to home renovations. That’s partly due to the tax advantages: the interest you pay can be deducted on your tax return, if the funds are used to substantially improve or repair the home. Also, because a HELOC allows for accessing large amounts of money over time as needed, it can be especially useful for the costly, long-term projects that remodels and repairs so often turn out to be.
Home improvements can increase the overall value of your home, making this specific HELOC use case a wise investment. Improvements like replacing your garage doors or remodeling your kitchen provide a valuable return on investment. A garage door replacement recoups over 100 percent of its cost, according to Remodeling’s Cost vs Value 2023 survey, while a minor kitchen remodeling returns 86 percent.
If prevailing home equity loan rates are lower than student loan rates, a HELOC can be a good way to pay the cost of college tuition.
Be sure your lender allows HELOCs to be used for this purpose. You’ll also want to investigate all possible student loan options before taking this route, as defaulting on a HELOC could mean losing your house. A student loan, on the other hand, is not secured by your home.
It’s always a good idea to have an emergency fund that includes three to six months of living expenses. A HELOC can provide an option for accessing cash quickly. When using a HELOC for this purpose, however, it’s a good idea to have a repayment plan or you could easily slip into deeper debt. Also bear in mind that the draw period of a HELOC (when you can access funds) lasts about a decade at most. After that, you’ll need another source of ready money.
4. Paying off or consolidating debt
However, if you’re exploring how to use a HELOC here, be careful. “Using a HELOC to consolidate debt is only a reasonable option if the individual has dealt with their spending issues; otherwise, digging a bigger hole of debt is a likely outcome,” says Steve Sexton, CEO of Sexton Advisory Group, a San Diego, Calif.-based firm of financial advisors.
You can also use a HELOC to pay off existing student loans. It is important to do your research before proceeding and understand the tradeoffs. Federal student loans, for instance, offer forbearance, deferment and income-driven repayment options should you face unexpected financial troubles. Once you use a HELOC to pay off federal student loans, you will no longer have access to these programs.
5. Real estate down payment
It’s not unusual for homeowners to access the equity in their homes to buy additional real estate, perhaps as a rental investment or vacation getaway. You could even use it for a down payment on a new primary residence, a strategy known as piggybacking. However, bear in mind that when you sell your current home (the one used as collateral for the HELOC), you usually will have to repay the remaining HELOC balance immediately.
6. Special events
Whether it’s a child’s wedding or a bucket-list vacation, if you don’t have the money set aside to pay for these expenses in cash, a HELOC can offer a more competitive interest rate than a credit card or personal loan. Using a HELOC for such costs can also give you a longer repayment timeline, often as long as 20 years. That said, be advised that you might be buying a short-term experience in exchange for a debt that has to be managed long-term, so weigh this use case carefully.
7. Building credit
Opening a HELOC can be a way to build your credit profile, in much the same way you might use a credit card for such a goal. Again, the key is responsible use. “You can do this by only drawing funds that you feel secure in repaying relatively quickly, making timely payments and not digging in too deep,” says Ryan Cicchelli, founder of Generations Insurance & Financial Services, a Cadillac, Mich.-based financial planning firm.
8. Aging-in-place needs
As you get older, your home may need to be modified to make it more accommodating to your physical needs. A HELOC can be used to make necessary modifications such as creating a first-floor bathroom or bedroom, widening doorways, or adding handrails to stairs. Again, the interest on the borrowed sums could be tax-deductible, if you itemize on your tax return.
9. Business expenses
A HELOC can provide seed money to take your side hustle to the next level or provide a stream of cash to fund expenses for an existing business. A HELOC’s interest rates may be lower than those of a comparable business loan. And because a HELOC is a secured loan — meaning your home is used to back it — it may be easier to get approved for one.
Remember, the fact that your home is collateral for a HELOC also has its downsides. If your business fails or you experience unexpected financial challenges that make it difficult to remain current on loan payments, the lender can foreclose on your home.
Whether you want to take time off to care for a loved one, step away from work for a while, or travel and explore other interests for a few months, a HELOC can be used to help cover some of your living expenses.
When should you not use a home equity line of credit?
Advantageous as it can be, there are quite a few instances in which a HELOC might not be your best path forward.
Generally, you shouldn’t get a HELOC if:
- Your home is your only real asset: While this line of credit might offer you a short-term fix, remember it’s backed by your home. That means that if you don’t repay what you borrow, your lender can seize your house. And if debt is already a problem, the open line of credit might tempt you to withdraw more than you really need.
- Other financing comes with lower fees and lifetime costs: Few loans come for free. HELOCs in particular come with plenty of costs, from upfront expenses like a home appraisal and a title search to ongoing ones like a variable (read: likely rising) interest rate. Make sure you weigh your other financing options so you don’t end up overpaying to borrow what you need.
- You’re only thinking about the draw period: Yes, that phase of the HELOC can seem appealing, giving you access to money as you need (or want) it. But all good things come to an end, so don’t forget to consider the repayment phase that comes after and the way that will affect your cash flow moving forward. Usually, you’ll be repaying the HELOC for somewhere around 20 years. This is why financial experts generally caution against using HELOCs for purely discretionary expenses, like vacations or weddings, that are joyous but have no investment value.
- Your income fluctuates: In this case, it could be tempting to pull as much as possible from the HELOC. But that could land you in a situation in which you struggle to pay back what you’ve borrowed during the repayment period. Remember, the monthly repayments can vary, due to the fluctuating interest rate, which can be a strain if your income varies too.
Is a HELOC a good idea for me?
When making a significant financial decision like opening a HELOC, do your research to understand all the fees and loan terms as well as the impact of loan repayment requirements on your monthly budget. Here are some factors to consider when deciding whether a HELOC may be right for you:
- Variable interest rate: Unlike other types of loans that allow you to lock in a specific interest rate, most HELOCs include a variable rate, meaning your monthly repayment amount could increase suddenly and unexpectedly. Make sure your household budget can handle this potential fluctuation. “Ask yourself whether you feel comfortable having an adjustable rate that can rise if interest rates rise, potentially increasing your monthly payments in the future,” said Matt Hackett, operations manager for mortgage lender Equity Now.
- Funding needs: HELOCs offer the flexibility of borrowing what you need, only when you need it, making them a good choice for those who lack a defined sumor those who require ongoing access to funding.
- Responsible borrowing: Opening a HELOC provides access to a line of credit that you can draw from again and again for as long as 10 to 15 years. Managing the use of this type of fund requires discipline and a plan for repayment or you can easily get in over your head. “For fiscally responsible people, these can be amazing tools. For folks with less financial discipline or security, they can be devastatingly bad,” Cicchelli explains.
When should you use a home equity line of credit (HELOC) vs a home equity loan?
A home equity loan lets you borrow against your home’s equity just like a HELOC. Unlike a HELOC, though, it gives you a lump sum of money that you repay with a fixed interest rate — similar to your primary mortgage.
If you know exactly how much money you need — say you have one large medical bill to pay or you have a budget for a single, well-planned remodeling job — a home equity loan can likely fulfill your needs without the risk of a variable interest rate. If you need money on an ongoing basis or you’re not sure how much you’ll want to borrow, however, a HELOC may better suit you.
The bottom line
What is a HELOC used for? Clearly, lots of things. There are many cases in which a HELOC can provide a smart way to leverage the equity in your home to achieve other financial goals or pay for large expenses. Before opening a HELOC, however, it’s always a good idea to shop around and crunch the numbers, ensuring that this line of credit is truly the most cost-effective option. In addition, you should be diligent about responsibly managing the HELOC and develop a clear repayment plan that you can stick to.
Additional reporting by Kacie Goff