You can use a HELOC for almost anything you want — and everyone’s financial situation is different. However, there are some situations when this type of borrowing can make more sense for homeowners — and some situations where it likely isn’t the right idea.
Here are some common situations where taking out a home equity loan could be the right choice. But before taking out a HELOC for one of these purposes, carefully weigh all your options and consider discussing your plans with a financial adviser or credit counselor.
Home Renovations and Improvements
Home renovations and home improvements upgrade your living space to increase property values, correct problems or make your space more livable. Projects could include anything from putting on a new roof to adding an additional bedroom. And they can be expensive, with many upgrades or repairs costing tens of thousands of dollars.
A HELOC can be a good way to pay for these projects precisely because home improvements generally increase the value of your home. You’re building equity when you remodel, even as you’re taking equity out.
Since you can withdraw funds from your HELOC as you complete your project, you can also borrow only as much as you need at each project stage. This helps keep total interest costs down.
Finally, your interest may also be tax deductible if you itemize on your taxes and are using HELOC proceeds to substantially improve the home securing the loan. That’s less money coming out of your pocket.
>> Related: Read more about using a HELOC for home improvement
Debt Consolidation
If you have multiple credit cards or other high-interest debt, you may be able to use a HELOC to consolidate or refinance these accounts. This involves using the funds from your line of credit to pay back other lenders, essentially replacing multiple debts with one new loan at a lower interest rate.
A HELOC can be a good option for debt consolidation because it can substantially reduce your rates. The average interest rate on credit cards was 20.68% in May 2023, according to data from the Federal Reserve. But HELOC rates in the current market are typically in the 7% to 10% range, according to our research.
That means paying off expensive credit card debt with cheaper funds from a HELOC can lower your monthly payment, making paying off your debt more affordable.
Using a HELOC to combine multiple existing loans into one also usually simplifies repayment. You’ll have just one monthly payment to your HELOC lender instead of many creditors to keep track of. You won’t have to choose which debt to focus on repaying first, and total monthly payments may even be lower.
>> Related: Learn more about using a HELOC to pay off credit card debt
Education Expenses
Federal student loans are often an ideal way to pay for educational expenses. Most students can qualify regardless of credit score, benefit from affordable fixed rates and qualify for important borrower protections including income-driven payment options. You may even become eligible for loan forgiveness through certain programs.
However, sometimes you won’t qualify for federal student aid, perhaps because you’re attending school for less than half the time. Or you may not be able to borrow enough to fund your degree due to loan limits. A HELOC is another option in these situations. Since you have more flexibility in how HELOC funds are used, you can use your line of credit to pay for expenses you can’t cover with student loans.
A HELOC may also be a more affordable alternative than some private student loans, which can have interest rates topping 15%, depending on credit score and income. Some private loans do offer competitive financing, though. Be sure to compare options if you’re considering using a home equity line of credit for educational expenses.
Emergency Expenses
Emergency expenses are a fact of life. A car may break down, or an appliance may need to be repaired. Some homeowners may have an emergency fund to cover surprise expenses, but that’s not always the case.
If you’re faced with an unexpected expense you can’t pay for, a HELOC can be a more affordable option than a credit card or payday loan.
It does take time to get approved for a HELOC, though — generally two to six weeks. So if you suspect you may want to use a home equity line of credit to cover emergency expenses, it’s best to apply for one early.
Since you don’t have to access your line of credit immediately once approved, you may choose to open a HELOC before you’re facing a financial need and wait until you need funds to begin accessing the money.
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