5 Ways to Use a Home Equity Line of Credit

Are you dreaming of a home remodel or want to surprise your daughter by paying for her dream wedding? There are so many options available to help you finance your dream, but one of the best options is with a home equity line of credit, also known as HELOC. When you own your home, a home equity line of credits acts like a credit card without the high interest rates. There are many ways you can use your home equity line of credit to help you start a project.

Explanation of Home Equity Line of Credit

Before we get into ways you can use your HELOC, we first need to go into a little more detail about how it works. Depending on how much you have paid into your home, a lender will allow you to borrow a certain amount for a specific time limit. Let’s say you are granted a $10,000 home equity line of credit. You can borrow $5,000 tomorrow and still have $5,000 remaining to use at any time. Now let’s say a few months have passed and you have paid $3,000 back from the first $5,000 you borrowed. This means you now have $8,000 available for you to borrow in credit.

The interest rate on a home equity line of credit is variable so that it will fluctuate throughout the life for the loan. Required minimum payments will vary depending on how much credit you have used and what the interest rate is. Not only do you need to pay off your home equity line of credit by the end of the time limit set by your lender, but you will also need to pay it off before you can sell your home.

Now that we have covered the basics of a home equity line of credit, let’s get into the ways you can use your HELOC.

Home Improvement, Remodeling, Additions, and Renovations

Using a home equity line of credit for home improvement is the most popular way a HELOC is used. The HELOC can be used for something as small as basic cosmetic changes, like painting your home’s exterior, to much larger renovations, like building a garage. It is important that, whatever you borrow on a home equity line of credit to make home improvements, your budget is used for improvements that will increase the value of your home to get the most bang for your buck. Many people choose to do a renovation because their home has risen in value and they want to raise it even more.

Student Loans for College

Many parents want to help their kids pay for college and use a home equity line of credit to give their children a lower interest rate than traditional student loans. However, it is important not to bite off more than you can chew. Since college is so expensive, it may not be wise to attempt to pay for the entire cost of college with your home equity line of credit. Rather you can help your student with housing costs, book expenses, or lab fees with your HELOC.

Retirement Income

Some retirees will use a home equity line of credit to supplement their retirement income if they have not saved enough. This can be risky since you have to pay back your HELOC, but it is a good idea to speak to a financial professional before making the decision to use a HELOC for retirement income.

Emergency Fund

Saving enough money for an emergency fund can be difficult, especially if you are working on a sizable nest egg for retirement. A home equity line of credit can serve as an emergency fund in case you get into a car wreck and need major repairs, or if you have medical bills you need to pay.

Consolidate Debt

If you have car loans, credit cards, student loans, and other high interest debt, using a home equity line of credit can be a good option to help you consolidate into one payment with a lower interest rate. This is a wise tactic only if you have your credit card spending under control. Using a HELOC to pay off credit card debt only to charge your credit card up to high numbers again will leave you in a bad situation.