A Home Equity Line of Credit, or HELOC, is a versatile financial tool that allows you to borrow against the equity in your home. Unlike a traditional loan that provides one lump sum, you can draw from the HELOC whenever you need to.
HELOCs can be used for anything, from home renovations to paying down debt, giving you financial flexibility.
How a HELOC Works
A HELOC lets you borrow and repay funds as needed, up to a predetermined credit limit.
Your home’s equity is calculated by subtracting what you owe on your mortgage and how much your home is worth. The borrowing amount is typically up to 80% of your home’s appraised value.
For example, if your home has an appraised value of $550,000 and you owe $250,000 on your mortgage, your home’s equity is $300,000, so you could potentially borrow 80%, or $190,000. Calculate how much equity you may have.
In the initial phase of a HELOC, known as the draw period, you can withdraw funds as often as you need to, up to your credit limit. Typically, the draw period lasts up to 10 years. During that time, you’re only required to pay interest on the amount you borrow. When the draw period ends, you’ll start paying what you’ve borrowed, including interest.
Benefits and Risks
Because a HELOC is a secured loan, it uses your home as collateral, allowing lenders to charge lower interest rates. And you may be able to deduct the interest on your taxes.1 HELOCs have no restrictions on how you choose to use the funds.
But if you have a variable-rate HELOC, interest rates may rise and your payments with it, which could put an unnecessary strain on your budget. That’s why you need to do the math to see if it makes financial sense. Make sure you don’t overspend during the draw period, because it’s easy to run up a balance when you’re making interest-only payments.
10 Ways to Use a HELOC
- Home Renovations: Use the funds to upgrade your kitchen, bathroom or add a new room. These improvements can increase your home's value and enhance your living comfort. Learn more about making home improvements.
- Energy Upgrades: Invest in energy-efficient upgrades such as solar panels, insulation or energy-saving appliances. These upgrades can help reduce your utility bills and boost your home's value.
- Fire Preparedness: Enhance your home's fire safety by installing fire-resistant materials, sprinkler systems and creating a defensible space. This not only protects your family and property but can also provide peace of mind.
Here are some tips to protect your home from wildfires. - Debt Consolidation: Combine high-interest debt into a single, lower-interest payment. This can make it easier to manage and pay off your debts more efficiently.
- Emergency Fund: Create a financial safety net for unexpected expenses, like urgent home repairs or medical bills.
- Education Costs: Cover tuition, books and other educational expenses for yourself or your children. This can help you or your family reach academic goals without the burden of high-interest student loans.
- Healthcare Expenses: Pay for medical treatments, surgeries or other health-related costs that may not be covered by insurance.
- Vehicle Purchase: Use the funds to buy a new or used car or pay off an existing car loan. This can help you manage your transportation needs and potentially save on interest.
- Travel and Vacations: Plan and fund memorable trips without the stress of high credit card interest.
- Weddings and Special Events: Finance a wedding, anniversary party or other significant life events. A HELOC can provide the financial flexibility you need to make these events special.
A HELOC is a powerful financial resource that can help you achieve a wide range of personal and financial goals. By understanding the ways you can use a HELOC, you can make informed decisions benefiting both your home and your financial well-being.
1. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.