A home equity line of credit (HELOC) is a useful and flexible way to unlock the equity in your home. Home equity is the difference between the market value and the amount you owe on your home mortgage.
A HELOC can deliver up to 80% of this value in cash. You could spend the money on anything, but there are risks, so proceed with caution. Only consider a HELOC if you can afford the payments and don’t spend the money on short-term items, like daily expenditures. Use the money to maintain or grow your assets, and you’ll put the funds to good use.
Discover the best HELOC uses and when to avoid using a HELOC.
9 Best Uses for a Home Equity Line of Credit (HELOC)
Many homeowners have discovered the benefits of using a HELOC to access home equity. There are many ways to put this money to work.
1. Pay for Home Repairs and Improvements
A HELOC can finance home repairs and renovations. If you qualify for a HELOC, you can use these funds to fix or replace a roof, add an ensuite bathroom or raise a fence around your property. This expenditure should increase the property value and make it more comfortable for your family.
2. Use as an Emergency Fund
Do you need money in an account to cover you in case of an emergency, like hospitalization, a vehicle breakdown or an accident? A HELOC can serve as an emergency fund. Use the funds sparingly and hold a balance to draw on when needed. You only pay interest on the balance.
3. Pay Off or Consolidate Debt
While the interest rate on HELOCs is higher than on a mortgage, the rate may be lower than your other debts. Use a HELOC for debt consolidation. Settle your debts, then make monthly payments on the HELOC. The payments are more affordable and easier to manage than the sum of the individual amounts.
4. Cover Medical Expenses
Medical debt is one of the top reasons for bankruptcy in America. Unexpected expenses or emergencies can stretch your budget. A HELOC can provide the funds to pay the doctor’s bills and get back on your feet.
5. Pay for Education
Do you or your children want to further your education? Save yourself the worry of paying back a student loan and cover the costs with a HELOC.
6. Use as a Down Payment for a Second Home
If you’re investing in a second home, you’ll need a down payment. A HELOC on your current home could provide the capital for your second mortgage.
7. Save for Retirement
Use a HELOC for investments that grow your personal wealth for retirement. Ensure that the investment returns exceed the interest you’ll pay on the HELOC.
8. Start a Business
Perhaps you’ve always wanted to start a business, but haven’t had the start-up funds. You could use HELOC funding to get started. Cash flow is the lifeblood of businesses, and a HELOC can get you a head start.
9. Use as an Upfront Payment for Investing in Rental Properties
Most investment properties require down payments, and having access to a source of cash solves that issue. You can also take out a HELOC on an existing investment property to invest in more rental properties. These credit lines may have different terms, so it is worth exploring the options.
When Should You Not Use a HELOC?
There are circumstances under which you should not use a HELOC.
Your House is Your Sole Valuable Asset
Your property secures the HELOC. If you fail to make payments, the lender can foreclose and sell your home to recover losses. If your home is your only valuable asset, carefully consider your options. Are you willing to risk your family home?
You Can Access Financing with Lower Fees and Costs
The interest rates on a HELOC are generally lower than credit card interest. However, you can also access other types of funding. If you have a good credit score, it may cost less to take out a personal loan. A personal loan is unsecured, and you may even be able to access a larger amount of financing.
A refinanced mortgage may be more cost-effective if you pay relatively high interest rates. You could negotiate new interest rates and different terms on the refinanced mortgage. Closing costs on a refinanced mortgage are higher than those you’ll pay for a HELOC, so weigh the costs against the savings.
You Cannot Afford the Monthly Payments
You should use a HELOC only if you can afford to make the monthly payments. The HELOC variable interest rates will change over the term. Can you afford to pay more each month? Stretching the budget to cover HELOC payments is risky and could lead to foreclosure.
You Are Using It for Non-Essential Expenses
While you may be tempted to take a long holiday abroad, using your home equity for this or other non-essential expenses is not worth it. A HELOC is best used to invest for the future, such as by renovating your home, consolidating your debt or paying for an education.
You Do Not Have a Steady Source of Income
If you don’t have a steady income, build up an emergency fund in more lucrative months. It is safer. You must make regular monthly payments to the HELOC or risk losing your home.
Consider this: If you’re a freelance worker, builder or tiler, your income depends on a steady workflow. If you were to become ill and unable to work for a time, your income would cease. Unless you have money saved, you cannot make regular payments and the bank could foreclose.
Compare the Best HELOC Lenders from Benzinga’s Top Home Loan Providers
Find the best HELOC lender on the chart below.
- Best For:Flexible Mortgage Optionssecurely through Angel Oak Mortgage Solutions's website
Available in: CA, CO, CT, DC, FL, GA, IL, MD, MA, MI, NH, NJ, NY, NC, OH, PA, RI, SC, TN, TX, VA, WA
A Convenient and Flexible Financial Instrument
A HELOC is a convenient and flexible tool, but it isn’t a solution for all cash requirements. Consider your long-term financial goals, risk tolerance and alternatives before using a HELOC. You must understand the payment requirements and factor in the effect of possible interest rate changes.
Frequently Asked Questions
Can you use a home equity line of credit for anything?
You can use a home equity line of credit for anything. However, your house is collateral on the loan, so you will want to make sure you can repay the credit line.
Is it smart to use your home equity to pay off debt?
Paying your debts off using your home equity could be a smart move. If you do this, you’ll consolidate your debt under a single loan. The combined payments may be more affordable. Because it is a secured loan, the interest rate may be lower.
Can I use my home equity to pay bills?
You can use your home equity to pay bills, but this can be risky and should not be a long-term solution.
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