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Home equity is the difference between what you owe on your home and its worth. A home equity line of credit (HELOC) allows you to borrow against your equity through a revolving credit line. Many HELOCs have variable interest rates, though some lenders offer a fixed-rate option.
What can you do with a HELOC? Just about anything you like. Lenders authorized $131 billion in HELOCs through the first two quarters of 2022, according to data from CoreLogic, suggesting that homeowners are eager to tap into their equity.
Home improvements and debt consolidation are two of the most common HELOC uses. If you’re considering borrowing against your equity, here’s a closer look at what you can do with a HELOC.
Home renovations can make your home more livable and, in many cases, raise your home’s value. Funding home improvement projects can be one of the best uses for a HELOC if you’re looking for a flexible credit line with a low interest rate.
One of the most challenging aspects of tackling home renovations is figuring out your budget. A HELOC gives you access to a line of credit that you can draw against as needed, which can be helpful if unexpected expenses crop up during renovations.
You could use a HELOC for any of the following:
- HVAC replacement
- Kitchen or bathroom remodeling
- Roof replacement
- Building a deck or addition
- Repaving the driveway or walkways
- Updating windows and doors
In many cases, you can just pay interest on the amount of your credit line you use, unlike a personal loan, which requires you to pay interest on the entire loan amount. As a bonus, the IRS allows you to deduct HELOC interest when you use the money to “buy, build, or substantially improve” the home that secures the loan.
But there’s one caveat you should know: Defaulting on a HELOC could lead to foreclosure because your home secures your credit line.
Find out more about using a HELOC for home improvements.
Education is another common HELOC use. The scenarios in which you might turn to a HELOC to cover education expenses include the following:
Pay off student loans
Paying off student loans with a HELOC might be appealing if you can secure a lower interest rate or want to streamline debt repayment. You could use a HELOC to consolidate the debt if you have multiple loans.
Whether this makes sense can depend on several factors, including the type of loans you have and how much you owe.
If you’re weighing a HELOC for student loan repayment, please consider the following comparisons:
|Pay off loans with a HELOC||Pay loans as scheduled|
|May save on interest if the HELOC has a lower rate than your student loans.|
Using a HELOC to pay off multiple loans can streamline debt payments.
Lower monthly payments with a longer repayment term.
|Federal loans offer borrower protections, including grace periods, deferments, and potential loan forgiveness.|
Private student loan refinancing may yield lower rates than a HELOC.
No need to use your home as collateral.
You can use a HELOC to pay ongoing education expenses.
For example, you might use a HELOC to pay for one of the following:
- Private school tuition for your child or another family member.
- College tuition and fees for yourself, your spouse, your child, or another family member.
- Room and board, or living expenses, for a student
A HELOC may be a more attractive funding option than high-interest credit cards if you don’t have the cash to pay education expenses out of pocket. However, it’s important to remember your home secures the loan.
If you’re paying education expenses on behalf of someone else with the expectation they’ll pay you back, be confident they’ll do so. Otherwise, you could put your home at foreclosure risk.
If you’re worried about that, you may want to consider these alternatives:
- Unsecured personal loans (for private school expenses or college living expenses).
- Federal student loans, which offer low, fixed interest rates.
- Private student loans, which may have fixed or variable rates and higher borrowing limits.
Find out more about using a HELOC to pay for college.
Unexpected expenses can throw your budget off course if you don’t have the cash to pay for them. You might consider getting a HELOC “just in case” to access cash in an emergency.
Using a HELOC for emergencies could be a good option if you’re not using the money for anything else and you have a favorable interest rate. Credit cards can be just as convenient but more expensive. According to Federal Reserve data, the average credit card APR was 16.27% as of November 2022.
If you’re considering a HELOC for emergencies, it’s essential to clarify what constitutes a true emergency. For example, a job loss that leaves you without income for two months is an emergency, but a family vacation is not. Keeping that in perspective can help you avoid dipping into your HELOC unnecessarily.
Find out more about opening a HELOC ”just in case.”
Pay off mortgage
Taking a second mortgage to pay off the first might sound illogical, but it offers several advantages. Replacing your primary mortgage with a HELOC could make sense if the HELOC has a lower interest rate or more favorable repayment terms.
Of course, you’d 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. In some instances, paying off your mortgage may not make sense.
You could use a home equity loan instead of a HELOC to pay off a mortgage. The difference is you’ll pay interest on the entire loan amount, not just the part of the HELOC you use. Remember: A home equity loan and a HELOC are secured by the home.
Consolidate higher-interest debt
Debt consolidation is one of the most common HELOC uses because you can combine multiple debts.
Types of debt you can consolidate with a HELOC include:
- Credit cards
- Medical bills
- Unsecured personal loans
- Veterinary bills
- Outstanding tax debts
Using a HELOC to pay off debts could be appealing if you can secure a lower interest rate. Depending on how long it takes to repay the HELOC, you could save money on interest versus continuing to pay your debts as scheduled.
However, if you’re not comfortable using your home as collateral for debt consolidation, you might consider an unsecured personal loan instead.
As we mentioned, HELOCs often have variable interest rates, which could make your line of credit more expensive over time. Choosing a fixed-rate personal loan can offer predictability with repayment, and it’s not tied to your home.
Pay medical expenses
Health insurance can cover medical expenses. But if you’re uninsured or underinsured, that could leave you with a financial gap. HELOCs may be helpful in certain situations for handling healthcare costs.
Fund a medical procedure
HELOCs can be used to pay for medical procedures, including those that are necessary and elective. Common medical uses for a HELOC include:
- Cosmetic surgery
- Weight-loss surgery
- LASIK eye surgery
- Dental surgery
- Emergency surgery or treatment
- Cancer treatment
You might also use a HELOC to pay to have a baby, which could include in vitro fertilization (IVF), labor and delivery expenses, or adopting a child.
If you have health insurance, it’s often better to exhaust your coverage first. For example, if you have a flexible spending account (FSA) or Health Savings Account (HSA), you might want to draw those down before borrowing for medical care. Those accounts offer tax advantages, and you don’t create debt when you use them.
Pay off medical bills
You can use a HELOC to pay for medical bills your insurance doesn’t cover. You might use a HELOC this way to consolidate medical bills.
Before using a HELOC to pay medical bills, you might consider other ways to reduce your costs, such as:
- 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.
You might also weigh the merits of taking a loan from your 401(k) or withdrawing money early from an Individual Retirement Account (IRA) to pay for medical expenses. While those options don’t create debt, they can shrink your retirement savings and trigger expensive tax consequences.
Down payment on real estate
If you want to buy a second home or rental property, you’ll need money for a down payment and closing costs. You might draw on the equity in your primary home to cover those costs.
When you do this, you’re creating debt to finance new debt. So it’s essential to review your budget to make sure you’ll be able to pay all the following:
- First mortgage payments
- HELOC payments
- Mortgage payments on the second home
You’d also need to check with the lender to ensure you can use borrowed funds for a down payment or closing costs. Find out more about using your HELOC on an investment or rental property.
You might consider using a HELOC on a down payment for a new property if you’re planning to sell the home you own now. Remember that paying back the first mortgage and the HELOC out of the proceeds can shrink your profits.
The most straightforward alternative is to make a smaller down payment. That could mean paying private mortgage insurance (PMI), but you’re not adding to your overall debt.
Owning a business means dealing with various costs, and you might need access to credit to maintain positive cash flow. You can use a HELOC for several business needs.
Start or buy a business
If you want to start a new business or buy an existing one, you could use a HELOC to cover 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.
Getting approved for a business loan is often easier with a solid operating history, positive revenue, and good credit. Business loans may also require collateral and a personal guarantee, as with SBA Microloans. A personal guarantee means the lender can hold an individual responsible for the business’s debts.
Unlike a HELOC, though, 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.
Investing can help you build wealth, but you need capital to get started. You might use a HELOC to invest in the stock market or join a real estate crowdfunding platform.
If you’re considering this, weigh the risks. Investments are not guaranteed, and you could just as easily lose money as make gains. So you have to decide whether you’re comfortable putting your home up as security for a HELOC based on your knowledge of the market and risk tolerance.
Contributing to a 401(k) or IRA could be the better choice to invest without using your home as collateral. You can grow your money in both accounts while enjoying tax benefits. Investing always involves risk, and this way is no different, but it doesn’t extend to losing your home.
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 allows for flexibility. You can withdraw as needed to pay deposits, purchase wedding attire, and cover other costs. You only pay interest on the amount you withdraw.
Wedding loans are an alternative if you’d rather borrow a lump sum. You can get unsecured wedding loans at fixed rates to pay for a wedding or honeymoon. That can make it easier to budget repayment if you’re worried about the rate on a HELOC increasing over time.
Buying a new vehicle is another common use for HELOCs. You could use a HELOC to purchase:
- Cars or trucks
- Motorcycles or dirt bikes
HELOCs may offer higher credit limits than auto loans, and you could get approved at a lower rate. You could get a longer repayment term, and you might have more room to negotiate the price of the vehicle if you visit the dealership with cash in hand. You wouldn’t need to offer a down payment either.
Auto loans, on the other hand, can offer low fixed rates to the most creditworthy borrowers. You won’t pay closing costs the way you might with a HELOC. If you default on an auto loan, the lender can repossess the vehicle, but it can’t lay claim to your home.
A HELOC could help you pay for a dream vacation. For example, you might want to take a “bucket list” trip and tour a dozen European countries for a month. Your HELOC could cover travel costs and help to pay your bills while you take time away from work.
Credit cards can also help you pay for travel, and they can offer an advantage over HELOCs if you earn cash back, miles, or points on purchases. Many travel cards also include premium perks, such as free checked bags, hotel upgrades, or concierge service.
Consider the interest rate if you’re weighing a HELOC or credit card for travel. Credit cards often have double-digit APRs, which could make a vacation more expensive if you take months to pay it off. On the other hand, you won’t pay closing costs or have to use your home for collateral as you would with a HELOC.
Find out more about using your home equity to fund a vacation.
Are there bad uses for a HELOC?
Is there anything you shouldn’t use a HELOC for? The answer depends on your financial situation.
In general, we don’t recommend using a HELOC if you’re not confident you can pay it back as scheduled since you could lose your home if you default on payments.
Items we never recommend you use a HELOC for include:
- Illegal activity, such as drug smuggling or money laundering
- Fraudulent investments
- High-risk investments, such as cryptocurrency
Those could all have adverse financial consequences and, in some cases, get you into legal trouble. It may also be unwise to use a HELOC for items with no tangible return on investment, such as political donations.
Is a HELOC a good option for me?
What can you use a HELOC for? Almost anything, but it’s important to consider whether a HELOC is the best financing option for you.
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 how likely you are to qualify for a home equity line of credit.
If you still have questions, check out our guide titled “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.
Author: Rebecca Lake