Five smart ways to use a HELOC

From everyday living expenses and retirement savings to debt management and emergency funds, most people face tough choices about their financial priorities. While you should weigh all your options, a home equity line of credit (HELOC) is something to consider for several types of expenses – and some of them may surprise you.

What is a HELOC?

Unlike a conventional home equity loan, a  HELOC  gives you ongoing access to funds over a specified period of time – think of it as a revolving line of credit, except your credit limit is based on your home’s equity. You might originally use it to help pay for a kitchen remodel, then draw from the same line of credit a few years later to replace your air conditioning unit.

Some pros to choosing a HELOC:

• Cost:  The interest rate with a HELOC is usually lower than you’d get with some other loan types because your home serves as collateral.
• Repayment time:  Most HELOCs offer a 10 year draw period with a 20 year repayment period which means you’ll have more time to pay the interest and principal back than you would with many other types of loans.
• Flexibility:  Traditional HELOCs are assigned a variable rate, meaning your interest rate and payments can fluctuate over time. However, many lenders have begun to offer a HELOC with a fixed rate option that allows the borrower the ability to repay a portion of their debt on a fixed-interest rate plan.
• Control:  You can use your credit limit as much or as little as you’d like.
• Versatility:  HELOCs can be used to fund many things, as we’ll discuss later.
• Multiple property types:  HELOCs aren’t just for single-family homes and primary residences; many lenders offer HELOCs on condos, townhomes, vacation homes and investment properties.

1. Home renovation and remodeling

Funding a home renovation is a common use for a HELOC. Whether you’re remodeling to maximize your sale price or getting your “forever” home just the way you want it, a HELOC is typically a lower-interest alternative to throwing it on a credit card. Plus, home renovations have the potential to be fluid and unpredictable, so it’s helpful to have a revolving line of credit you can continue to draw from – something you won’t be able to do with a fixed loan amount.

2. Paying for a child's education

If you’ve already exhausted your options with federal financial aid and you still don’t have enough cash to cover your child’s tuition, consider applying for a HELOC. While it might sound tempting to just take a private student loan and call it a day, it could (literally) pay off to compare interest rates between a private student loan and a HELOC before making any decisions. Because you wouldn’t have any collateral to reduce the risk of your private student loan (like your home would serve as collateral for a HELOC), your interest rate could be higher, costing you more money in the end.

If you already have a student loan, you might also consider using a HELOC to pay it off. Why pay off debt with other debt? Again, depending on the difference in interest rates, you could save thousands of dollars by switching over to a HELOC. Your situation is unique, so it’s best to evaluate the numbers to make the right choice for yourself.

3. Covering unexpected expenses

Life is full of surprises, and some of them hit your bank account harder than others. Even if you’re a disciplined budgeter, just one unexpected expense can make a huge dent in your savings. You might have to pay for:

• A new HVAC system or water heater
• Plumbing or electrical work
• Auto repairs
• Medical expenses

Unless you have tens of thousands of spare dollars lying around, it’s tough to be fully prepared for these situations with your savings alone. A HELOC gives you the flexibility you need to handle the unexpected: the right amount of money at the right time, with some breathing room to pay it back. Plus, you can leave that line of credit open in case you need quick funding for another unforeseen expense.

4. Taking a vacation

Between work, finances and personal responsibilities, everyone needs a break from time to time. While you can use a HELOC for not-so-fun things like repairs around the house, you can also put it toward a vacation. Let’s say there’s an ideal time for you to take a trip, like a honeymoon or a getaway before you start a new job, but you don’t quite have the money you need yet. A HELOC allows you to seize that window of time and take your vacation without pinching pennies.

5. Consolidating debt

While we’ve touched on this concept briefly, debt consolidation deserves its own mention for HELOC uses. If you’re paying off one or more types of high-interest loans, like student loans or credit card debt, you could save money by paying them off with a HELOC – or at least paying them down significantly. 

Sure, the difference in interest rates between your current loan and a HELOC might be negligible, but it could also mean thousands of dollars in savings. You could also save a significant amount of money if you consolidate multiple loans into one HELOC. Even if your interest rate on each of those loans doesn’t seem overwhelming, you might be paying more altogether than you would with a single HELOC.