A HELOC can be used for just about anything, but financial experts recommend a few uses.
A home equity line of credit (HELOC) is a useful and flexible way to unlock your home's equity. 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 a revolving line of credit you can withdraw from as needed. You could spend the money on anything, but there are risks, so proceed cautiously. 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.
HELOC Uses
Many homeowners have discovered the benefits of using a HELOC to access home equity. There are many ways to put this money to work.
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, which may increase your equity.
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 keep a small amount in the credit line to draw on when needed.
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.
“If you have high-interest debt, using a HELOC to consolidate and pay off that debt can save you money on interest and simplify your payments,” says Jose Garcia, president and CEO of Northwest Community Credit Union.
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.
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.
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.
Use as a Down Payment for a Second Home
You'll need a down payment if you’re investing in a second home. A HELOC on your current home could provide the capital for your second mortgage, so long as you have enough equity built up in your primary residence to afford the down payment.
“Typically, an individual who receives a large bonus or variable commission income is a good candidate for a HELOC as they can earmark those funds toward paying down the balance over time,” says Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage.
RELATED: Can you use a HELOC for a down payment?
Save for Retirement
Use a HELOC for investments that grow your wealth for retirement. Ensure that the investment returns exceed the interest you’ll pay on the HELOC.
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.
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 or renovate investment homes to increase their value. These credit lines may have different terms, so it is worth exploring the options.
Tim Gordon, a real estate investor who’s used HELOCs on investment properties, advises people to be cautious when using this strategy. “I wouldn't use a HELOC for some really risky or speculative investments,” he says. “It is all about balancing opportunity with financial prudence.”
In his case, he used the funds to make renovations on his investment properties. “Although the interest rate was a little higher than a HELOC on a primary residence, the returns from the increased rental income and property appreciation outweighed the expense,” he says.
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, taking out a personal loan may cost less. 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, 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.
Key Takeaways
While you can technically use a HELOC for any reason, most financial experts recommend using it to increase your home’s value, consolidate debt or establish an emergency fund. Using a HELOC for non-essential purposes could further poor financial habits, and since HELOCs are secured by your home, it could result in foreclosure on your home.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his coverage of the New York City economy. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Tim Gordon, a San Diego-based real estate investor and financial expert who’s used HELOCs to increase his properties’ value; Jose Garcia, president and CEO of the Illinois-based Northwest Community Credit Union, a financial institution that offers HELOCs and other loan types; and Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage.
FAQ
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 must ensure 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 lead to defaulting on your loan if you don’t have sufficient income.
Sources
- Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage
- Jose Garcia, president and CEO of Northwest Community Credit Union
- Tim Gordon, real estate investor and financial expert at Gordon Buys Homes
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.