Good Uses of a Home Equity Loan

A couple painting a door and a wall in their home. Home improvements are an excellent use of a HELOC Loan.

A Home Equity Loan, and especially a Home Equity Line of Credit (HELOC), is a fantastic financial tool that can give you access to large amounts of cash you can repeatedly draw from to pay for large expenses. A HELOC loan offers you generally lower interest rates, flexible borrowing power, and possible tax benefits.

You can use HELOC funds for whatever you like, but that doesn’t mean spending the money on just anything is a good idea.  

The equity in your home backs the line of credit (like a credit card), giving access to funds generally at a lower interest rate than an unsecured loan. However, you are putting your home up as collateral, which means you are putting your most important assets at risk. This isn’t a problem if you can pay back your HELOC and have a plan to do so.

With that in mind, using your HELOC to invest in improving your life and wisely using the funds is important. Here are three of the best uses for a Home Equity Line of Credit:

Home Improvement Projects

Funding home improvement and repair projects with your HELOC is a fantastic and popular use for these funds. This may include adding a bedroom to the property, updating a bathroom, putting on a new roof, or repairing damage from weather or age.

Even though you are taking equity out of your house with the loan, you are building equity in your property in the long run and increasing its value. Making this a smart investment.

Since a HELOC loan gives you revolving access to large amounts of funds, you can pull money when completing different stages of home renovation. And if there are any surprise costs, you don’t have to seek additional loans when you encounter the unexpected.

Also, the interest you pay for these home improvement funds can be tax-deductible. Just make sure you itemize it on your tax return and consult a tax expert to ensure everything is correct.  

Home Equity Loan for Education Funding

From investing in your home to investing in yourself. If you can’t secure subsidized federal student loans either because you don’t qualify or need additional money, HELOCs can be a great alternative to fund your education. HELOCs can also be more affordable than private student loans, which interest rates can range from 4.50% to 16%.

Thanks to their extended draw period, your HELOC can help pay for tuition from semester to semester and other expenses like textbooks. And since you only pay interest on what you take out and not the cost of your whole education at once, this can help reduce payments as you go.     

Fully explore your options for funding your education to ensure your Home Equity Line of Credit gives you the best, or at least comparable, rate.   

Debt Consolidation for Higher-Interest Debt

Credit card debt can be the most expensive debt you can carry, with an average interest rate of around 25%. So, if card or other higher-interest debt is starting to weigh down your finances, consolidating your debt into your HELOC could save you money.

This can also give you more time to pay off the debt, giving you some breathing room. You will simplify your debt payments into one payment rather than multiple creditors.

However, clearing those credit card balances creates the temptation to start accumulating more debt, which can lead to more problems. So, if you use your HELOC for debt consolidation, it’s a good idea to address any spending issues that have led to your debt becoming unmanageable and come up with a plan to reduce spending and get out of debt.

A HELOC can help you get out of debt, but it might not solve all your debt problems.

How NOT to spend your Home Equity Loan

Non-Essential Luxuries. Spending funds on a fancy car or a big vacation is not advisable. You are creating long-term debt for assets that quickly depreciate or don’t return value.

Risky Investments. You should avoid taking out loans for high-risk investments. You lose the money you invest if it goes bad, and you must still pay the interest.

Short-Term Borrowing with No Plan to Repay. When you take out money from your HELOC, you should have a plan for the money and how you will repay it. The line of credit can be a great resource for emergency funds, but using the HELOC to pay everyday expenses can create another ongoing obligation for you to worry about. It also might reduce the funds you have available, forcing you to borrow more and more, which might trap you in a cycle of debt. 

Home Equity Lines of Credit are a great financial tool to help you borrow to invest in your life, usually giving you better interest rates because your house backs the loan. But because the risk of losing your house in involved, you need to make sure you use the funds wisely and have a plan to pay your loan back.

To learn more about HELOCs with GNCU, click here. If you would like to learn more about paying off debt with your HELOC funds, read this blog from our partner, Greater Nevada Mortgage.