How to Use Your HELOC

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Where do you turn when you need funds for big projects or large bills such as a home remodel or medical bills? Unless you have adequate cash at the ready, your home’s equity can prove to be the hero. A Home Equity Line of Credit (HELOC) is a type of loan that uses your home as collateral and provides credit to you when you need it. You can access the funds when you want (up to your approved limit) and there are no restrictions on what you can use the money for. However, you’ll want to evaluate your use of HELOC funds and try to avoid using them for one-time/short-term costs that won’t contribute to your overall financial health. Here are the pros and cons of various uses.

Best HELOC Uses

Home Improvements: Remodeling a kitchen or bathroom, adding a room, upgrading windows.
Projects of this type improve your home and increase its value while offering the highest rate of return. Plus, interest on the HELOC may be tax-deductible if the improvements boost your home’s value (consult with your tax advisor for your situation).

Major Home Repairs: Rewiring your home, installing a new roof, updating the piping.
Again, these projects offer the best value and rate of return for the money borrowed, and may provide tax-deductibility of the interest on the HELOC.

Emergency Funds: Suffering a job loss or, major medical expenses
A HELOC can help get you through these crises.

Debt consolidation: Paying off high-interest credit card debt.
A HELOC can bring your debts under one, lower interest rate, and that’s a good thing. But make sure you have a plan to avoid building up debt again.

Living in retirement: Starting a small business or buying a property to generate income.
A HELOC can provide low-cost funding if you want to pursue a venture or improve your quality of life in retirement.

Avoid these HELOC Uses

College tuition: There are better ways to fund your child’s higher education, such as federal student loans which typically have lower interest rates than HELOCs and may allow for hardship features like loan deferment or income-based repayment plans.

Buying a car: Using a HELOC for a car purchase is a prime example of a short-term gain for a long-term cost. A car only depreciates in value, and if you have decent credit, you can likely get an auto loan with a lower interest rate than a HELOC.

Vacation/Wedding: You would be better off setting a budget and save for your dream trip or fairytale wedding than to go into debt and use your HELOC funds. These are short-term events with no long-term return.

Investing: Returns on investments like stocks or rental properties are not guaranteed, making them risky uses of HELOC funds.

With its lower interest rate and flexibility, a HELOC might be the right choice for you. However, take the time to talk to a mortgage consultant first to evaluate all your financing options before deciding. Whatever loan you end up with, you want it to be the best financial fit for your needs.