With a home equity line of credit, or HELOC, the equity you’ve built in your home can be a convenient source of funds to help pay for nearly anything. But just because you can use your equity for, say, a wardrobe update, doesn’t mean you should — especially since your home will be used as collateral. Understanding what a HELOC is best used for (and what it’s not) can help you maintain financial well-being and stay on a path to reach your goals.
What are HELOCs best for?
With a HELOC, you can access funds whenever you need them, as often as you need to, up to your credit line, without having to reapply. As you pay down your balance, those funds become available to use again. And you only pay interest on what you withdraw.
These features make a HELOC a good choice when you need to access funds for recurring expenses or multiple expenses that hit at different times. But a home equity line can also be useful for nearly any large expense. Here are three popular examples:
- Home improvements. From new flooring to a new roof, a room addition, enhanced accessibility or an energy-efficient upgrade like adding solar panels. These types of use may make the interest you pay tax-deductible. Consult your tax advisor for details.
- Consolidate bills. Paying off multiple high-interest debts with a HELOC means you’ll have just one easy-to-manage monthly payment. It may also lower your monthly payment and reduce interest fees. (Quick tip: Make a plan to avoid running up similar debts once you’ve paid off those balances with your HELOC.)
- Emergency fund. Since you can open a home equity line and not access funds unless you need them, you can gain peace of mind knowing you have that money available to cover unplanned costs if they occur. That might mean anything from medical bills to major home or auto repairs, to managing your finances in the face of lost income and more. Having a home equity line as an emergency fund can help you avoid running up high-interest debt or tapping funds meant for other uses, such as retirement. In fact, a HELOC can even temporarily fill a cash flow gap in your retirement income.
How not to use a HELOC
In general, it makes less sense to use a HELOC for everyday expenses like groceries, gas, clothing, eating out, entertainment and leisure activities. It’s usually better to build these items into your regular monthly budget.
In some situations, a HELOC may be useful, but may or may not be the best financing choice, depending on other factors. For instance, college expenses may be addressed through federal student loans, grants, scholarships and other financial aid. But a home equity line can help fill gaps or temporarily cover costs before other funds are available. And it may be a great choice if you’re training for a new career and don’t have access to other forms of education funding.
If you’re buying a vehicle, take time to compare rates and terms between a HELOC and traditional auto loans. Remember that an auto loan will give you a fixed rate and payment. On the other hand, a home equity line usually has a variable rate and a much longer payback period — which could lower your monthly payment but may also allow interest charges to build.
Some people may also consider using a HELOC to fund investments or start a small business. These can be riskier or more complex decisions, particularly since a HELOC uses your home as collateral. So, it’s best to talk with your financial advisor about your specific situation and needs.
Learn more about HELOCs
For more information on HELOCs or other financing solutions that can help you reach your goals, connect with a Hancock Whitney associate. Visit a nearby financial center, or contact us by phone or email. You can also use our simple online tool to get personalized recommendations. And if you’re ready to apply, you can get started online right here!
Post comments on this article
Enter your first name, email and comments below