A HELOC loan stands for “Home Equity Line Of Credit.” It uses the equity of your home as collateral for a loan. What’s equity? It’s the difference between your home’s value and the balance of your mortgage; essentially, it’s what’s “yours” in your house.
A HELOC is a flexible loan option that functions similarly to a credit card: you have a maximum line of credit, and you can take out any amount of cash under that cap over the life of the loan, with funds available on an as-needed basis. You’ll pay it back with interest, of course, but usually at a much lower rate than a credit card. You also have the convenience of accessing the money multiple ways, whether it’s at a bank ranch, through checks provided by the bank, or through online banking.
Homeowners have plenty of purchases to make, and a HELOC can help with several specific goals, offering immediate funds at an interest rate that is manageable. You can use it for regular expenses, like tuition payments, or use it in an emergency to pay a large bill. You can also use it for projects that have a big up-front cost (like remodeling a kitchen) that may eventually offer you a return on investment when you sell your home.
Here are some ways to utilize a HELOC.
This is the most obvious way to use a HELOC, and from a financial standpoint, it’s a savvy decision. Putting money into your house will increase its value, so you’re rebuilding equity while also enjoying the perks of a more livable home.
However, not all home renovations increase your home’s value, as strange as that may seem. In fact, it’s a common mistake to add features to your home that don’t actually increase the resale value. Remember that a remodel is about more than your comfort or style, and what you deem as a necessity may seem frivolous to future homebuyers.
So, before you decide to build a pool, remodel the kitchen, or turn your dark, damp basement space into a living area, do your research. Which renovation will give you the most gains? Think about cost, what you’ll be paying in interest, and the impact on your home’s value.
College is expensive, there’s no doubt about that. Instead of charging tuition payments, books for the semester, or even daycare costs to a credit card, you can utilize your HELOC. It usually offers a more competitive rate than a credit card, but it could potentially be more lucrative than a student loan, too.
Large purchases Like Cars & Appliances
No matter how modern and functional they are when you first buy them, cars and appliances eventually need to be replaced. A HELOC can fund a new washer and dryer or cover the down payment on a new car. Its rates could even be comparable to a car loan, so you could actually use the HELOC to cover the entire cost of the car and make monthly payments there instead of taking out a car loan.
Fun Life Events Like Vacations & Weddings
Life experiences like weddings, vacations, and honeymoons can create memories that will last a lifetime. A HELOC not only allows you to access money to fund these adventures, but it can give you extra money to improve their quality, too. Keep in mind that you’re using house equity to fund these events, though, so make sure they’re worth it before you take the plunge.
We’ve all been there: a sudden trip to the emergency room for a broken arm or appendicitis. Health insurance doesn’t always cover everything, and when you have large medical debt looming over you, having a manageable payment plan in place can mitigate a lot of unnecessary stress.
Debt Consolidation For Student Loans & Credit Cards
Lots of us have made mistakes with credit cards and student loans. Even though you’re doing your best and chipping away at your debts, the interest can be so high that your payments make little impact. Whether you have credit card debt, student loan debt, or both, a HELOC may allow you to pay them off faster and with lower interest. Plus, if you have multiple high-interest debts, you can combine them into one single payment instead of juggling different payment due dates and risking late fees.
Opening a HELOC doesn’t mean you have to have a plan for the money. It can also serve as an emergency fund in case the unthinkable happens such as job loss, sudden medical expense, or a home disaster like burst pipes. Having an emergency fund can give you peace of mind in case disaster strikes. (Pro Tip: you should also build up your savings for situations like these, too.)