Tapping into the equity in your home can be a great way to pay off debt, cover the cost of home renovations or even pay for a vacation or medical bills.
One of the most common ways homeowners can access equity is through a home equity line of credit or HELOC. Secured against the value of your home, a HELOC is a line of credit you can borrow from as needed and repay in installments over a certain period of time— much like a credit card. Here are some of the best uses for a HELOC and how to decide if one is right for you.
10 common uses of a home equity line of credit (HELOC)
A HELOC can be a useful and cost-effective way to pay for some of life’s major expenses. Here are some of the most common to consider.
1. Home improvements
One of the most popular reasons for opening a HELOC is home renovations. Because a HELOC allows for accessing large amounts of money over time as needed, it can be especially useful for costly projects such as upgrades, renovations or preparing your house to be sold.
Home improvements can increase the overall value of your home, making this type of use of a HELOC a wise investment. Improvements like replacing a garage door or remodeling your kitchen provide a valuable return on investment. A garage door replacement offers an average 94 percent ROI, according to the home improvement site Angi, while the average return on your investment in a minor kitchen remodeling is about 72 percent.
If mortgage 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. If you do not have this type of cash set aside and an emergency arises, a HELOC can provide an option for accessing cash. 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.
4. Paying off or consolidating debt
HELOCs generally offer a lower interest rate than unsecured debt making them a good choice for paying off credit cards or consolidating multiple types of high-interest unsecured debts.
However, you will want to be careful when doing this. “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.
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 programs in an emergency.
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. Similar to using a HELOC for education expenses, however, you’ll want to investigate all your borrowing options and make sure accessing your home’s equity is the most cost-effective way to achieve your goals.
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. Using a HELOC for such costs can also give you a longer repayment timeline, often as long as 20 years.
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,” sais Ryan Cicchelli, founder of Generations Insurance & Financial Services
8. Retirement needs
As you approach retirement, your home may need to be modified to make it more accommodating to your physical needs. A HELOC can be used to make necessary preparations such as creating a first floor bathroom or bedroom or adding handrails to stairs.
HELOCs can also be used as a stream of cash to cover some of your living expenses during retirement.
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. When using a HELOC you may get lower interest rates than with a business loan. And because a HELOC is a secured loan–meaning your home is used as collateral–it may be easier to get approved.
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 or step away from work and explore other interests for a few months, a HELOC can be used to help cover some of your living expenses.
Is a home equity line of credit 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 borrowing goal or 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,” said Ryan Cicchelli, founder of Generations Insurance & Financial Services.
The bottom line
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 a HELOC is truly the most cost-effective option. In addition, you should have a repayment plan and be able to manage a HELOC responsibly.