What can you use a HELOC for?
If you're looking for ways to finance a major expense, cover emergency costs or just make ends meet, you have plenty of options to choose from. Credit cards and personal loans are common choices for many people, but they're not always the best.
If you're a homeowner, tapping into your home equity can be a cost-effective way to pay for expenses. Two common ways to do this are with a home equity loan or home equity line of credit (HELOC). Both options offer competitive interest rates. Currently, credit card interest rates hover around 20%, and average personal loan rates range from about 8% to about 36%, depending on a series of factors. By contrast, average home equity loan and HELOC rates are around 7.8% to 8%.
The nice thing about a HELOC is you only have to pay back the amount you use. It works like a credit card: you're approved for a certain amount, and you can borrow funds up to that amount as needed within the draw period (typically, two to 10 years). With a home equity loan, on the other hand, you get a lump sum and begin paying it back immediately, whether you've used it yet or not.
As with credit cards and personal loans, how you use your HELOC funds is up to you. That said, there are some things you should keep in mind to use them as wisely as possible. In this article, we take a look at the best ways to put a HELOC to work for you.
Get started by comparing your local HELOC options here now!
What can you use a HELOC for?
There are no restrictions on what you can use a HELOC for. Common ways people use them include for:
- Home repairs and renovations
- Covering an emergency expense
- Consolidating high-interest debt
- Paying college tuition
- Generating retirement income
You don't necessarily need to have a particular use in mind when you apply for a HELOC. If you like, you can use it as a safety net. Since you have up to 10 years to borrow from the line of credit, you can keep it in reserve for unforeseen expenses. You won't pay anything unless you take money out.
You can shop around for HELOCs online right now.
Best uses for a HELOC
While you can use a HELOC for anything you want, some expenses are a better use of the money than others.
Home repairs and renovations
If you use your HELOC funds to make improvements to your home, the benefits are two-fold. First, you add value to your home, which can increase your profit when you sell it. Second, you may qualify for a tax deduction.
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS explains. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
"Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a," the IRS goes on to say. "However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home."
Repairs and renovations you might use a HELOC for include:
- Renovating a bathroom or kitchen
- Building an addition
- Installing a new roof
- Upgrading the electrical or HVAC system
- Updating the landscaping
To learn if your home improvement plans qualify for a deduction, speak with a tax professional in person or via a tax filing site.
Long-term, ongoing expenses
Since it's an open line of credit, a HELOC is best suited for long-term, ongoing expenses (think: college tuition rather than a one-time vacation). You can take out what you need as you need it over a long period, and you'll only have to pay back what you use. Every dollar you pay back is then available to be used again.
Get started by comparing your local HELOC options here now!
The bottom line
When deciding if you should get a HELOC, be sure you're not relying on it to fund a lifestyle beyond your means. If you're tempted to use it for a vacation you couldn't otherwise afford or a pricier wedding than you budgeted for, you could be setting yourself up for trouble. Yes, the interest rates will be lower than credit cards and personal loans, but with a HELOC, your home serves as collateral. That means you risk losing your home if you can't make the payments.
To get the most bang for your buck, stick to expenses that have the potential to set you up for a better financial future, such as a college education, starting a business or buying an investment property. Home improvements are also a smart use of HELOC funds as they can boost your home's value and may qualify for a tax deduction. As with any financial product, do your homework to find the best rates and consider your budget to get the HELOC that's right for you.
