What Can I Use a HELOC For? Best and Worst HELOC Strategies

A home equity line of credit (HELOC) allows you to tap some of your home equity as a revolving credit line. A HELOC uses your home as collateral; you can use the funds however you’d like. 

However, not all HELOC uses are created equal, and some options can be more financially productive than others. If you’re considering borrowing against your equity, here’s a closer look at strategies for using a HELOC.

What can you use a HELOC for?

A HELOC is similar to a credit card, giving you a revolving line of credit instead of a lump-sum disbursement. During the initial draw period, you can borrow up to your credit limit, pay down some of your balance, and borrow again. Once you enter the repayment period, you’ll pay down your remaining balance without access to further draws.

When you apply for a HELOC, lenders typically ask how you plan to use the funds, primarily to help evaluate your creditworthiness. For example, you may qualify for a lower rate if you plan to use the funds to consolidate debt instead of pay for a vacation. 

However, you’re not obligated to use the funds strictly for the purpose you declare, and you can use HELOC funds for anything you want.

Can you use a HELOC for home renovations?

Home renovations can be one of the best ways to use a HELOC, primarily because of the tax benefits. The IRS allows taxpayers to deduct interest paid on a HELOC on their tax returns if they use the funds to buy, build, or substantially improve the home used as collateral. 

The caveat is that you must itemize your deductions to qualify for the tax break, which may not make sense if your standard deduction exceeds your eligible itemized expenses. What’s more, you may be limited on how much you can deduct, especially if you have a large primary mortgage balance. 

Find out more about using a HELOC for home improvements.

Can you use a HELOC to pay off student loans?

You can use a HELOC to pay off student loan debt, but it may not make sense unless you have expensive private student loans. HELOCs charge variable interest rates, which fluctuate over time, while most student loans have fixed interest rates that don’t change. 

Paying off federal student loans with a HELOC will cause you to lose access to federal relief options, including forgiveness programs, income-driven repayment plans, and generous deferment and forbearance programs. So while it’s possible, consider the potential drawbacks before you proceed. 

See our resource on using a HELOC to repay student loans.

Can you use a HELOC to pay for college?

You can use a HELOC to pay various educational expenses, including tuition, room and board, supplies, transportation, and other living expenses.  

However, before you consider this option, find out whether you’re eligible for federal student loans. These loans may offer better interest rates and various relief options for struggling borrowers. 

Find out more about using a HELOC to pay for college.

Can you use a HELOC as an emergency fund?

Unexpected expenses can throw your budget off course if you don’t have the cash to pay for them. While credit cards are convenient, they tend to charge higher interest rates.  

In contrast, a HELOC can offer a more favorable interest rate and still give you low minimum payments—often interest-only—during your draw period. You might consider getting a HELOC to access cash in an emergency. Just be sure to avoid dipping into your HELOC unnecessarily to keep your long-term costs down.

Learn more about using a HELOC for emergency expenses.

Can you use a HELOC to pay off your mortgage?

Taking a second mortgage to pay off the first might sound illogical, but having more equity than you owe can be beneficial. The low minimum payments, in particular, can be attractive. 

However, HELOC rates are often higher than mortgage rates. You’ll also want to look beyond the HELOC rate and consider the bigger picture. If you extend your repayment term past what’s remaining on the original mortgage, you could pay more interest overall.

Get more details about using a HELOC to pay off a mortgage loan.

Can you use a HELOC to consolidate higher-interest debt?

Debt consolidation is one of the most common and effective HELOC uses, primarily because it can help you save money on interest charges—HELOC rates tend to be much lower than credit card interest rates, for example. 

However, if you’re uncomfortable using your home as collateral for debt consolidation and you have great credit, you might consider an unsecured personal loan with a fixed interest rate instead. 

Learn more about how to use a HELOC to pay off credit card debt.

Can you use a HELOC to fund a medical procedure?

You can use a HELOC to pay for medical procedures, including those that are necessary and elective. 

But if you have health insurance, it’s often better to exhaust your coverage first. The same is true if you have other options, such as a flexible spending account (FSA), health savings account (HSA), or interest-free payment plan with your medical provider. 

Can you use a HELOC to pay off medical bills?

You can use a HELOC to pay for medical bills your insurance doesn’t cover, including consolidating multiple medical bills. 

Before using a HELOC to pay medical bills, you might consider other ways to reduce your costs. Examples include:

• Ask your healthcare provider for a zero-interest installment plan.
• Negotiate discounts with your doctor or hospital.
• Ask about charity care programs.
• Apply for Medicaid if you’re eligible.

Can you use a HELOC for a down payment on real estate?

If you want to buy a second home or an investment property, a HELOC can help you cover the down payment and closing costs. What’s more, it could help you avoid private mortgage insurance (PMI) on the new mortgage loan. Just ensure that the mortgage lender you choose allows you to use borrowed funds for these expenses.

Read up on using a HELOC for a down payment.

Can I use a HELOC to buy another house?

If you have sufficient equity in your current home, you could use a HELOC to buy another house outright. 

If you plan to sell your current home, remember that you’ll need to pay off the HELOC when you do. This can shrink your profits and potentially result in a prepayment penalty. 

Find out more about what it takes to use a HELOC to buy another house.

Can I use a HELOC for an investment or rental property?

Using a HELOC to buy a home you plan to rent instead of live in is also possible. But again, you’ll want to consider what to do if your investment doesn’t pan out and the potential risks to your primary residence. 

Get more details about buying an investment property with a HELOC.

Can you use a HELOC to start or buy a business?

If you want to start or buy a business, you could use a HELOC to cover some or all of your costs. The upside of using a HELOC to start or buy a business is it can be easier to qualify for than a business loan, especially if you don’t yet have an established business credit history. 

Unlike a HELOC, however, a business loan doesn’t use your home as collateral. Before using a HELOC to start or buy a business, consider how easily you can repay the loan if the company doesn’t pan out. 

Find out more about using your home equity to start a business.

Can I use a HELOC for business expenses?

If you have an established business, you can also use HELOC funds to cover some of your everyday expenses, such as inventory, supplies, payroll, and equipment. 

But as with buying or starting a business, using a business loan can help you avoid putting your home at risk over a potentially risky venture. If you have an established business credit history, compare business loans before you proceed.  

Keep reading about how to use a HELOC to cover business expenses.

Can you use a HELOC for investments?

Investing can help you build wealth, but it can take several years to amass a sizable portfolio. While you can use a HELOC to invest in the stock market, join a real estate crowdfunding platform, or invest in other ways, it’s crucial that you weigh the risks. 

For starters, investment returns aren’t guaranteed, and depending on economic conditions, your HELOC rate could be higher than your return on investment. Contributing to a 401(k) or individual retirement account could be the better way to start building your investment portfolio and enjoy tax benefits without risking your home.

Can you use a HELOC for a wedding?

Weddings can be expensive, particularly if you’re planning a large or lavish affair. You might use a HELOC to pay for a wedding for yourself, your child, or someone else. 

Using a HELOC for wedding expenses offers flexibility. However, you could also consider a fixed-rate installment loan, such as a home equity loan or personal loan, especially if you don’t plan on using the HELOC for anything else. 

Can you use a HELOC for a new vehicle?

You could use a HELOC to purchase various types of vehicles, such as cars, trucks, motorcycles, RVs, and boats. HELOCs may offer higher credit limits than auto loans, and you could get more affordable payments. If you buy the vehicle outright, you also don’t need to put any money down.

You may be able to get a lower interest rate with a HELOC, but a fixed-rate auto loan could provide more predictability. Also, while defaulting on an auto loan can result in a repossession, it won’t put your home at risk of foreclosure.

Read More

Should You Buy a Car With a Home Equity Loan or a Car Loan?

Can I use a HELOC to pay off an auto loan?

If you have an auto loan, you could use a HELOC to consolidate the debt. However, this only makes sense if your HELOC offers a lower interest rate and you can’t refinance your auto loan and get more favorable terms. 

Even then, it’s crucial to weigh the potential risk of losing your home against the risk of losing your car in the event of default.

Find out more about using a HELOC to pay off an auto loan.

Can you use a HELOC for a vacation?

Covering the cost of a dream vacation is another potential HELOC use, but most experts recommend avoiding it because a vacation doesn’t provide any financial benefit or involve an asset you can sell if you’re struggling with payments.

In most cases, the best way to pay for a vacation is to save up and pay out of pocket. You could also consider travel credit cards that offer rewards you can use to pay for flights, hotel stays, and other travel expenses.

Find out more about using your home equity to fund a vacation.

What is the best HELOC strategy?

To determine the best HELOC strategies, we consulted Jim McCarthy, CFP®, to ask whether he recommends using a HELOC for several popular reasons.

HELOC strategy	CFP® recommends?
Establish an emergency fund	✔️
Increase home value	✔️ (in certain situations)
Pay off debt	✔️ (if debt has a higher interest rate and you commit to no longer amassing debt)
Pay off your mortgage	❌
Invest	❌

Our expert’s take

Jim McCarthy

CFP®

I generally recommend that all my clients establish a HELOC. It allows them to use the HELOC to cover emergencies or even home improvements instead of selling other investment assets when the financial markets make that undesirable. It also makes sense to consider a HELOC to pay off higher-interest debts—with a  giant caveat: You must destroy all those credit cards. However, I would never recommend using a HELOC for investments or paying off a first mortgage.

He told us that he thinks using a HELOC for an emergency fund, consolidating high-interest debt, and increasing home value makes sense for many borrowers.

McCarthy recommends against using a HELOC to pay off your mortgage, to invest, and for purchases that don’t appreciate in value, such as weddings, vacations, and new vehicles.

How to use a HELOC to make money

A HELOC can be more than just a financial safety net—it can be a tool to help you make money. By using your home’s equity strategically, you might be able to generate returns or create new income streams.

For instance, if you use a HELOC to fund home repairs or renovations, you could increase your property’s market value, potentially leading to a profitable sale or increased rental income down the line. Moreover, the IRS allows you to deduct the interest on a HELOC if the funds are used to buy, build, or substantially improve your home, which could offer additional tax savings.

Beyond home improvements, you can use a HELOC to invest in other areas, such as purchasing investment properties or funding a business venture. Both options come with risks, but they can also provide a substantial return if managed correctly. It’s crucial to assess the potential returns versus the risks and ensure you have a solid plan for repayment. Leveraging your home to make money comes with the risk of losing it if you can’t keep up with payments.

Are there any restrictions on what you can use a HELOC for? 

While you may need to disclose your reason for taking out a HELOC, lenders generally don’t restrict the use of your line of credit. You also don’t necessarily need to stick to the original reason you declared during the application process. 

Are there bad uses for a HELOC?

We don’t recommend using a HELOC if you’re not confident you can pay it back as scheduled. If you default on payments, you could lose your home. 

Items we never recommend you use a HELOC for include:

• Gambling
• Illegal activity, such as drug smuggling or money laundering
• Investments, particularly high-risk securities, such as cryptocurrency
• Vacation expenses

Those could all have adverse financial consequences and, in some cases, get you into legal trouble. Using a HELOC for items with no tangible return on investment, such as political donations, may also be unwise. 

With other HELOC uses, it’s important to evaluate the potential risks to your home and research alternatives to ensure that a HELOC is your best choice.

Is a HELOC a good option for me?

What can you use a HELOC for? Anything. However, it’s important to consider whether a HELOC is your best financing option. 

Before taking out a HELOC, you should consider the following:

• How much equity you have in your home and how long you plan to stay there.
• The reliability of your income and ability to manage a first mortgage and a HELOC payment.
• HELOC rates and how they compare to other loan rates.
• Closing costs you may pay for a HELOC.
• Return on investment and what you’d gain by using your home equity to fund expenses.

It’s also important to consider your overall creditworthiness and your likelihood of qualifying for a home equity line of credit. 

If you still have questions, check out our guide “What Is a Home Equity Line of Credit?”

Get more information on how HELOC repayment works.

If you’re ready to take out a HELOC, review our list of the best HELOC lenders.