A home equity line of credit (HELOC) is an opportunity to borrow against the value of a home for many reasons. A homeowner who has equity in his or her home may be able to secure a low-interest loan to cover various costs. Equity is the value of the home minus any outstanding balance on the home’s loan. Equity can be valuable because it tends to be easier to obtain than a traditional unsecured loan. It also has a lower interest rate, typically, than personal loans.
What Is a HELOC?
As a line of credit, a HELOC allows consumers to borrow against the funds more than one time, in most cases. For example, if the homeowner has $50,000 in equity available to them, they can borrow from that to make a single purchase or multiple smaller purchases. They can pay back the funds over time with monthly payments. They can also borrow again from the funds as long as they have available credit. Some HELOCs do not allow for multiple or continuous draws. Some also have limited timeframes for which these draws can be used.
A HELOC is available through many mortgage lenders. Some companies specialize in them. It is always important for the property owner to compare his or her options to determine which loan offer is best for them. This may be based on availability but also interest rates and terms.
How to Use a HELOC
Once approved and set up, a HELOC can be a very flexible tool for use. There are many reasons why a consumer may wish to use these loans as compared to other types of loans. Here are a few examples of how and when they may work well.
#1: Invest in Home Improvements
One of the most common ways property owners use a HELOC is to make home improvements. Some of these projects can be large and expensive. Having a line of credit available to use to make the home more comfortable or to upgrade its value can be very beneficial because it provides a large sum of money. There are a few key benefits to using this type of loan for a home improvement project.
One of them is it directly puts the value of the house back into the home. That is, it allows for the borrowed funds to go back into adding more value to the home. This may raise the home’s value over time. That can help to boost its value for resale down the road.
Home improvement projects of any type can be a good way to use a HELOC. This includes major projects such as a new kitchen or home addition. It may also be beneficial to use these loans for other tasks such as outdoor upgrades or modernizing the electricity. Some use these methods as a way to make their home more energy efficient with new appliances or even solar panels. Since these loans are so flexible, users can upgrade and modernize in any way they desire.
It can also be beneficial to use a home improvement project like this because it may allow the user to deduct the interest from the loan on their taxes. It is worth talking to a tax professional about this benefit before choosing it.
#2: Consolidating Other Debts
If a person has numerous credit cards or other personal loans that are hard to make payments on each month, consolidation may help to make it more affordable while also helping to reduce overall costs. For example, if a person has a few credit cards, personal loans, or other debts owed to multiple people, they may be paying a substantial amount in minimum payments each month. However, the minimum payments may not decrease the actual amount owed very much.
The high interest rates on personal loans and credit cards can make it hard to ever seem like a person is getting their debt paid off. By using a HELOC, it is possible to pay off all of those existing debts with the loan. That means the user will have just one monthly payment to make each month to cover that debt.
This can create a few specific benefits:
- The interest rate on all of the loan debt is likely lower with a HELOC than it is with some credit cards.
- The monthly payment may be lower because there is just one to make instead of multiple loans. This can significantly reduce what is owed each month. That makes it easier for a person to repay these debts.
- More so, since there is just one loan to pay each month, there is less chance of forgetting to make a payment. That can help to improve a person’s credit score by making payments on time.
Another key benefit is that a HELOC can help rebuild credit. For those who do not close their existing credit cards but pay them off, the HELOC will extend their credit further. This can help to make their credit limit to debt ratio a bit better. Of course, it is important not to continue to add to the debt by using the credit cards again.
#3: Long Term Investment Goals
The HELOC opens up a new bank of funds that can be used for multiple needs and used over time. A long-term investment strategy can play a role here. For example, if a consumer wants to invest in the real estate market or the stock market, but does not have available funds to do so, they may wish to use a HELOC to do so.
There is a risk here. There is the potential to make mistakes that lead to a significant loss. That is why it is so important to ensure a person has ample education and experience in this type of investment strategy before he or she decides to use their home’s value as a part of an investment deal like this.
The key here is that there has to be a plus side. For example, the interest paid on the HELOC is likely low – but it is a cost. Any type of investment strategy a person decides to enter into with these funds, then, needs to be made with the likelihood of being worth more than the interest paid out to secure the loan.
#4: Cover College Costs
Another way to use a HELOC is to do so to cover college costs. The cost of a college education can be high and while loans are available to help, they may not cover all the expenses. Some people may not qualify for college loans. Student loans are an option to consider, especially if they are affordable and accessible. However, for others, the interest rate on a HELOC will be lower and a tax deduction, making this a bit of a smart move for some people.
Keep in mind that a HELOC provides for a maximum amount borrowed. That amount may not be enough to cover all of a person’s education debt. In some situations, it may not cover all of a person’s tuition costs. For some people, it may be worth using a HELOC as a secondary support component to covering the cost of education.
#5: To Start a Business
Some homeowners long to start a business but lack the cash to do so. A HELOC can offer a way to do this in an affordable loan structure. As with any other type of investment, it is important to remember that there is risk in starting a business. Should the business default, that may make it harder for the borrower to make payments on the loan, which puts their home on the line. (Nonpayment of a HELOC may lead to foreclosure or other legal actions against the property owner).
Yet, a HELOC is an attractive option for many starting a business. That is because it tends to be very affordable with low interest rates and requires less overall documentation compared to a small business loan.
For those who wish to start a business or to cover costs associated with running their existing business, the HELOC can work well because it allows for multiple draws (multiple uses) for many situations. That means that the business may use these funds over time when there is a financial need to do so and pay them off quickly when business conditions are more favorable.
#6: Cover Wedding Costs
A HELOC can also be a good way to pay for wedding expenses. For those who plan to use credit to pay for a wedding, HELOC opportunities can be ideal because the interest rate is typically much less than what is common on credit cards. That could mean reducing costs by a significant amount for those who plan to carry that debt with them long term.
For those who have access to a HELOC, using it to cover wedding costs such as hall rentals, catering, and even a honeymoon can seem like a good idea. Just remember, this is a secured debt. If a person is unable to pay those funds back, it can lead to financial hardship. Keeping wedding costs in line with goals and with a budget is an important way to minimizing this risk.
#7: Create an Emergency Account
Things happen that can lead to costly expenses. From a car breaking down to a larger problem like the foundation of the home buckling, the need for available cash in hand is often a big one. For those who do not have a savings account they can borrow from when there is an emergency, a HELOC can work as a temporary option. For example, the user may only tap into these funds when there is an emergency and then works to pay off that debt quickly.
There is a cost associated with HELOCs. However, account holders pay interest on these loans as long as they carry a balance. For that reason, a HELOC can work well as an emergency source of funds over a period of time. Borrow from it and repay the debt quickly and only when needed. This can provide some peace of mind to users who may not have another way to pay for large, expensive emergencies.
#8: Major Purchases
Another way to use a HELOC is to use it as a way to make a large purchase. It is always a good idea to use cash for purchases when possible. However, for large purchases, that can be hard to do. When using a HELOC, a person is using their home as collateral for that purchase, though – it is important to remember that the home is on the line for any purchase.
For those who need to purchase things like new appliances, a recreational vehicle, or new equipment for a business, a HELOC can work well. Again, because it remains in place long term, a user can borrow from it and pay those funds back over time. They can then use it again as they need to do so. This can make it a bit easier to handle larger expenses without having to use a costly credit card to do so.
#9: Take a Vacation
For some people, a HELOC is the perfect way to pay for a dream vacation. For those who work long and hard hours most of the year, getting away on a big vacation can be the ideal way to enjoy themselves. With the availability of a HELOC, it becomes possible to take that trip and then pay back those funds over time. With a low interest rate, this can prove to be a very important investment for some people.
Be careful to spend what can be paid back. With all HELOC investments, that is critical. These loans do put the home on the line if there are any repayment problems. Yet, for those confident in their ability to pay back the loan, a HELOC can work well to meet just about any need a person has.