5 ways to use a home equity line of credit (HELOC)

• Interest rates can be comparatively low (though they are typically variable).
• Borrowing power is potentially greater. While personal loans are generally capped at $100,000, a HELOC may allow you to borrow hundreds of thousands of dollars depending on the amount of equity you’ve built.
• Loan repayment terms can be longer—decades, in fact.

If you’re a homeowner who has built considerable equity in your property, you may be wondering how best to deploy this valuable financial tool. We’ll consider some of the most useful ways to leverage a HELOC.

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What is a HELOC and how does it work?

Your home equity is simply the value of your property minus the amount you owe on your mortgage. As a straightforward example, if your home is worth $400,000 and you owe $200,000 on your mortgage, you’ve got 50% equity.

A home equity line of credit lets you borrow against the equity you’ve built in your home. It’s a revolving credit line that you can use somewhat similarly to a credit card. Your available credit goes down when you make a purchase, and it replenishes when you pay off that purchase. You’ll be charged interest for the amount of credit you’re using.

A HELOC is made of both a “draw” period and a “repayment” period. During the draw period (often lasting up to 10 years), you can borrow and repay the loan as you please. After that is the repayment period (often lasting up to 20 years), during which you can no longer borrow against your line of credit. You must pay back what you owe, opting to either pay the outstanding balance all at once or enroll in an installment plan.

Importantly, a HELOC is a secured loan backed by your home. If you default on your loan, the lender can take possession of your home and sell it to recoup its losses. For this reason, a HELOC is higher stakes than an unsecured personal loan or credit card.

Also, most lenders demand that you keep between 15% and 20% equity in your home. If you’ve built up less than that, you probably won’t be eligible to borrow. You’ll also generally need a good credit profile, proof of income and employment, and an acceptable debt-to-income ratio (below 40% is ideal).

5 ways to use a HELOC

Home renovations 

Remodeling your home does more than just elevate your environment and improve your family’s quality of life; it can potentially skyrocket your home’s equity by making your property more valuable. You may think of it as using your equity to generate more equity.

A HELOC can be ideal for home improvement projects because it gives you the freedom to borrow only what you need at whichever stage of renovation you’re in. Building typically happens in stages. The nature of a HELOC means you can finance your project in phases as you can afford them—instead of taking out either one giant installment loan that you won’t immediately use or multiple smaller loans as your remodeling progresses.

Debt consolidation

HELOCs tend to have lower interest rates than credit cards and personal loans. If you’ve got a lot of high-interest debt with monthly minimum payments that are undermining your budget, a HELOC could be a good way to consolidate those balances and pay off your debts faster. Your APR may very well drop, and your monthly out-of-pocket might be more manageable.

This isn’t always a good idea, however. Consolidating unsecured debt with a HELOC means that your home is at risk if you fail to pay off your loan. Defaulting on unsecured debts will wreck your credit health and may result in serious consequences like lawsuits and wage garnishment—but you won’t lose your home. Understand if you opt to consolidate debt with a HELOC, you must avoid overspending and racking up additional credit card or loan balances.

Life milestones

There are many life events that are important but oftentimes expensive. From weddings to moving expenses to funerals to adoptions, you might eventually find yourself staring at a bill of tens of thousands of dollars. A HELOC can be a comparatively inexpensive way to fund such important milestones (though you still shouldn’t spend more than you can pay back in a reasonable amount of time, and your budget should account for the repayments).

Education-related expenses

Similar to home renovations, a HELOC can be a great tool to finance schooling. That’s because large expenses occur intermittently throughout your education. You might opt to draw from your equity to pay for each semester and take advantage of a low APR to quickly pay it back.

Funding your education can be a huge steppingstone in your career, if done strategically. If you can utilize your HELOC to boost your professional advancement, it’s money well spent.

Emergency expenses

Beyond those life events that you can anticipate, unexpected costs can undermine your finances. From medical expenses to vehicle repairs to a loss of income, a HELOC can give you the money you need to get by.

On a related note, one of the perks of a HELOC is that you won’t pay interest on the unused portion of your balance. You can open your account and let your credit line gather dust without incurring interest charges. For peace of mind, you may decide to open a HELOC before you need it—just to serve as a safety net. But be aware that some lenders charge annual fees or inactivity fees.

When is a HELOC a bad idea?

A HELOC isn’t always the best answer. In fact, it can be a poor option for some situations. Ask yourself the following questions to decide whether a HELOC is right for you:

• Are you sure you can repay your loan? Again, the repercussions for not paying back a HELOC are severe. You’re putting your home at risk when you borrow from your equity. We don’t recommend defaulting on any financial obligation, but it adds a level of severity to the issue when the loan is backed by your dwelling.
• Can you pay off your purchase within a month or two? If your expense is manageable, taking out a HELOC may be overkill. If you can repay the balance quickly, swiping a credit card for the expense may be defensible.
• Do you simply want something you can’t afford? You should never take out a loan for a nonessential purchase just because you want it now. Impulse purchases, vacations, etc. are not a good use of a HELOC.
• Can you pay lower fees with other loan options? Similar to when you first took out your mortgage, you’ll pay closing costs when opening a HELOC. You may pay up to 5% of your loan amount in fees. Personal loans, on the other hand, typically don’t come with as many fees. If you can find one with a competitive APR, it could be the most cost-effective option.
• Do you need the money fast? Due to the lengthy closing process, a HELOC can take several weeks to close. From fetching the required documentation to initiating a home appraisal to undergoing a title search, it’s not the best choice for those who need fast funding. Meanwhile, some personal loans may deposit into your bank account the same day.

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Alternatives to a HELOC for financing

A HELOC isn’t the only way to get the money you need for a large upcoming purchase. Other common methods include:

• Home equity loans: Similar to a HELOC, you can borrow from the equity you’ve built in your home. The big difference is that a home equity loan is an installment loan—not a revolving credit line. You’ll receive a large upfront sum and immediately be enrolled into equal monthly payments with a fixed APR until your loan is repaid.
• Credit cards: With high APRs, credit cards are typically a bad option for large expenses. They’re best for small everyday purchases that you pay off in full every billing cycle. That said, some cards come with 0% intro APR for up to two years. If you can pay off your purchase before that interest-free window closes, a 0% intro APR credit card could be your best bet.
• Buy Now Pay Later (BNPL) options: BNPL services have increased in popularity in recent years. They split your purchase into multiple interest-free transactions so you don’t have to foot the entire bill upfront. If you can pay off your purchase within a few months, a BNPL company could be a fit for your financial goals. But make sure you fully understand the terms before opting for such a plan. Some may assess expensive deferred interest charges if you don’t zero out your balance within the promotional period.

Of course, you may also turn to friends and family. It’s not the first choice for many, but asking a loved one for a loan can be the cheapest and simplest way to get the funds you need. If you do this, make sure you and your family member or friend are on the same page about how and when you’ll repay them, and stick to this agreement so you don’t damage the relationship.

The takeaway

Thanks to potentially high borrowing limits and low interest rates, there are many great uses for a home equity line of credit. You can consolidate debt, fund your home renovations, finance your higher education, and more. You may even open an account before you need it, just as an emergency fund. This revolving credit option can be a powerful, flexible tool.

But, it’s important to understand that defaulting on your loan can be catastrophic, as the lender could take your home. It may sound obvious, but only take out a HELOC if you’re certain you can pay back what you borrow.

Frequently asked questions

What can you use a HELOC for?

Similar to a personal loan, you can use a HELOC to pay for virtually anything (as long as it’s legal).

What is the best use for a HELOC?

The best use for a HELOC is something that improves your financial situation. For example, you may consolidate debt to pay down your balances faster or renovate your house to create more equity in your property.

Can I use a HELOC for a down payment on a second home?

You can most likely use a HELOC for a down payment on a second home. Just note that this can result in multiple mortgages, however: your current home (unless you sell it or pay it off), your new home, and your HELOC.

What is the difference between a HELOC and a home equity loan?

Both a HELOC and a home equity loan involve borrowing money from your equity. A home equity loan is an installment loan that gives you a large cash sum upfront and then sets you up on a monthly payment plan until your loan is paid off. A HELOC is a revolving line of credit that you can reuse as long as you pay down your balance.

How much can I borrow with a HELOC?

Most lenders may allow you to borrow between 80% and 85% of your home’s equity. For example, if you’ve built 30% equity in your home, you can borrow between 10% and 15%.