Best Uses For A Home Equity Line Of Credit

One of the most common ways homeowners get cash out of their home is by taking out a Home Equity Line of Credit (HELOC), which makes available an amount based on the dollar value of their equity at a variable interest rate.

One of the best things about a home equity line of credit (HELOC) is its versatility: The funds can be used for just about anything, although the nature of the loan makes some uses better suited than others.

These are the six best uses for a mortgage-secured line of credit, as well as some of the less ideal uses.

6 Best Ways to Use a Home Equity Line of Credit (HELOC)

HELOCs tend to be used for large expenses, and the smallest line of credit you can set up is $10,000, with $30,000 being a common minimum for many lenders.

1. Home renovation or repair

One of the most common reasons for opening a HELOC is to renovate or repair a home, in part because of the tax benefits: If you use the funds for significant renovations or repairs to your home, you can deduct the interest you paid on your taxes.

A HELOC can help you take care of important issues like fixing a leaky roof, updating old plumbing, addressing foundation issues, etc. Making these repairs regularly will help keep your home in tip-top condition.

Additionally, a HELOC gives you access to large amounts of capital over a long period of time if needed, making it ideal for long-term renovation projects that could increase the value of your home. ModsAccording to the Cost vs. Value 2024 report, a garage door replacement can recoup approximately 200% of its costs, while a minor kitchen remodel can recoup 96%.

A HELOC can also be used to make home improvements for seniors or people with disabilities to better accommodate their physical needs, such as adding a first-floor bathroom or bedroom, widening doorways, or installing a rimless shower. Again, the interest on the amount borrowed is tax deductible if you itemize it on your tax return.

2. Payment of Education Expenses

Homeowners can use a HELOC to pay for college tuition. Long-term expenses like these are perfect for setting up a HELOC. You can withdraw funds when you need them, for a semester or a year, and you only pay interest on the amount you actually withdraw. Plus, instead of taking on a lump sum of debt after graduation, you (or your child) can start paying off the debt sooner.

Be sure to check that your lender allows you to use a HELOC for education expenses, and you should explore all possible student loan options before taking this route, especially Federal Direct PLUS Loans (loans taken out by parents). The prevailing interest rates on HELOCs should be lower, or at least competitive.

3. Use it as an emergency fund

It’s always a good idea to have an emergency fund that contains three to six months’ worth of living expenses, and if you don’t have an emergency fund, a HELOC can help cover some of those pesky unexpected expenses and give you access to cash fairly quickly (though not as quickly as some personal loans) when the unexpected happens.

However, if you use a HELOC for this purpose, it’s a good idea to set up a repayment plan and aim to start saving aggressively. You can’t use a HELOC as an emergency fund forever. The drawdown period (the period you can access the funds) for a HELOC is about 10 years maximum. After that, you’ll need another source of quick cash.

4. Consolidate and pay off high-interest debt

Credit card bills have piled up over the years or due to a big expense, like a child’s wedding. Either way, a HELOC can get you out of a pinch. HELOCs generally offer lower interest rates than unsecured loans and certainly lower APRs than credit cards, so they’re a good choice for paying off credit cards or consolidating other types of high-interest debt.

But be careful: “Consolidating debt with a HELOC is only a reasonable option if an individual is addressing spending issues; otherwise, it will likely end up making the debt hole even bigger,” says Steve Sexton, CEO of Sexton Advisory Group, a San Diego, California-based financial advisory firm.

You can use a HELOC to pay off your student loans, but you need to understand the trade-offs. For example, federal student loans offer forbearance, deferral, and income-contingent repayment options in case you face unexpected financial hardship. Once you pay off your loans, these programs are no longer available to you, and they certainly don’t apply to HELOC debt.

5. Start a business

A HELOC can provide seed capital to take your side hustle to the next level or provide a source of funding to cover expenses for an existing business. Interest rates on a HELOC may be lower than comparable business loans, and because a HELOC is a secured loan (i.e., a loan secured by your home), it may be easier to get approved.

Keep in mind that the fact that your home serves as collateral for your HELOC also comes with a drawback: If your business fails or you experience unexpected financial difficulties and start to default on your loan payments, the lender can foreclose on your home.

6. Buying real estate

It’s not uncommon for homeowners to leverage their home equity to purchase additional property. By leveraging the equity in your current home, you can use the funds from your HELOC as a down payment on a new property, such as a second home, vacation home, rental property, etc. This approach, often called piggybacking, allows you to leverage the equity in your home to fund the purchase without having to liquidate other investments or savings.

Is using a HELOC for retirement a good idea?

Taking out a HELOC for retirement is a convenient, cost-effective way to access large sums of money at potentially low interest rates. It may be worth tapping into your home equity for home improvements or surprise repairs as you age, or to pay off long-standing debt. Or, if the HELOC interest rate is better (i.e., lower), you could even use it to pay off your mortgage.

But using a HELOC to pay for everyday ongoing expenses is rarely a good idea. Borrowing money to plug a budget gap is rarely a good idea, and retirees on a limited income risk losing their home if they miss their monthly payments. Also, keep in mind that a HELOC’s variable interest rate means your interest rate could rise unexpectedly. Plus, having a HELOC can affect the value of your home when you die, complicate things for your surviving family, and reduce the proceeds you could get if you were to sell the home (because it would have to be paid off in full).

When should you not use a HELOC?

Although HELOCs are advantageous, they aren’t suitable for all types of expenses.

Generally, a HELOC is not recommended if:

• Your home is your only real asset. While this line of credit may be a short-term solution, remember that your home is collateralized, which means that if you don’t pay back what you borrowed, the lender can foreclose on it. And if debt is already a problem, an open line of credit could tempt you to take out more than you really need.
• You can get financing with lower fees and lifetime costs: Very few loans are free, and HELOCs in particular have a variety of costs, from upfront costs like a home appraisal to ongoing costs like a variable interest rate (which means it’s likely to rise). Make sure you explore other financing options, like a personal loan, to make sure you’re not overpaying to borrow the amount you need.
• I’m just thinking about the draw period: Although the drawdown period of a HELOC may seem appealing because it gives you access to your money whenever you need (or want), all good things come to an end. Don’t forget to consider the repayment period after that and how it will affect your future cash flow. Typically, a HELOC has a repayment term of about 20 years.
• Income varies: In this case, it may be tempting to withdraw as much as possible from your HELOC, but you could find yourself in a situation where you’ll have a hard time paying back the amount you borrowed over the repayment term. Keep in mind that your monthly payment may fluctuate with changing interest rates, and if your income also fluctuates, this could be a strain. In this case, a home equity loan (see below) may be a better option.
• If you want to buy a non-essential, high-value item: Using a HELOC to buy a luxury car or expensive vacation is risky because it puts your home at risk for a discretionary purchase that has no investment value and won’t improve your financial situation. Additionally, with a HELOC, you’re locking yourself into long-term payments on a depreciating asset, reducing your home equity for future use or bequests.

What are the alternatives to a HELOC?

A HELOC Isn’t Your Only Option: If you need cash, there are a few alternatives to a home equity line of credit.

• MortgageA home equity loan also uses your home as collateral to secure the loan. It has a fixed interest rate, which makes your payments more predictable. However, you may be locked into a higher interest rate than with a HELOC, and the amount you borrow may not be enough for your needs.
• Credit card: If you need to pay for short-term expenses, find the best credit card with a 0 percent introductory interest rate. This gives you the opportunity to make purchases and pay off your credit before interest rates start to apply, but you still need to make payments on time to protect your credit.
• Personal Loans: A personal loan is an unsecured debt that allows you to borrow funds for any purpose. No collateral is required, as approval is based on personal factors like income and credit score. However, personal loans usually have shorter terms and higher interest rates than mortgages (though they can be lower than credit cards).
• Reverse Mortgages: A reverse mortgage gives you access to tax-free funds as a line of credit, a lump sum, or a combination of both. You make periodic payments to the lender in the opposite order to how you would pay your mortgage. To qualify for a reverse mortgage, you must be a homeowner over 62 and have equity in your home that you can borrow against. However, if you move or sell your home, you must pay off the loan immediately.
• Cash-out refinance: A cash-out refinance is a new mortgage. It is larger than your original loan because it includes additional money that you receive as cash immediately. The amount is based on the current equity in your home. However, this new mortgage resets your loan schedule, incurs new closing costs, and may also mean you incur a higher interest rate.
• Savings or emergency fund: Dipping into your savings account or emergency fund can help you preserve the equity in your home and avoid paying interest, going through approval procedures, and accumulating debt. However, using those savings can deplete your cash reserves, putting you at risk for future financial emergencies.

In the current interest rate environment, is a HELOC a good idea?

The rising interest rate environment has affected HELOC interest rates, which are currently hovering around 9%, and while they’re not as good a deal as they once were, they’re still cheaper than other types of debt. Here are some factors to consider when deciding if a HELOC is right for you:

• Variable interest rate: Unlike other types of loans that allow you to lock in a specific interest rate, most HELOCs include variable interest rates that can cause your monthly payments to increase suddenly and unexpectedly. “Ask yourself if you’d be comfortable with your variable rate increasing if interest rates rise, potentially resulting in higher monthly payments in the future,” says Matt Hackett, operations manager at mortgage lender Equity Now.
• Funding Needs: A HELOC gives you the flexibility to borrow as much as you need, when you need it, making it a good option for people who don’t have a set amount or who need ongoing funding.
• Responsible Borrowing: When you open a HELOC, you gain access to a line of credit that you can draw on as many times as you want for 10 to 15 years. Managing this type of money requires discipline and a repayment plan; otherwise, it’s easy to find yourself in a situation that gets out of hand. “For people who are financially responsible, this can be a great tool. But for those who lack financial discipline and stability, it can be a very bad thing,” says Ryan Cichelli, founder of Generations Insurance & Financial Services, a financial planning firm based in Cadillac, Michigan.

Key Points on How to Best Use a HELOC

What is a HELOC used for? Obviously, there are a variety of uses. In many cases, a HELOC can be a smart way to leverage the equity in your home to achieve other financial goals or pay off large expenses. However, before you open a HELOC, it’s a good idea to compare different companies and crunch the numbers to make sure this line of credit is truly the most cost-effective option for you. Additionally, you should be diligent about managing your HELOC responsibly and creating a clear repayment plan that you can stick to.

No matter what you use your HELOC for, responsible management is key: “Responsible management can be achieved by only taking out funds that you’re comfortable paying off relatively quickly, making payments on time, and not getting too deeply borrowed,” Cicchelli explains.