Insights & Stories

Three Good Uses for a HELOC

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December 8th, 2020

Owning a home opens up a lot of opportunities. Not only does a house or condominium give you a secure place to live and build a family, it can be an effective and stable long-term investment, and an asset you can leverage to finance large projects.

For example, once you've built up some equity in your home, you can apply for something called a home equity line of credit, or HELOC. This line of credit uses your home's equity as collateral to give you flexible access to cash at a more affordable rate than a credit card, meaning a HELOC could be just the tool to accomplish a whole range of life goals.

Here are three of the top ways you might be able to benefit.

1. Consolidate debt into one payment, saving money.

One of the smartest ways to use a HELOC is to pay off high-interest debts like credit cards. This is called debt consolidation, and it lets you pay off your credit card accounts, personal loans, car loans and other debt with one loan or line of credit, giving you a single convenient monthly payment, often at a lower interest rate than you would have otherwise paid.

A HELOC can be a great way to consolidate debt, since it uses the built-up value of your home as collateral, allowing for an often substantially lower interest rate than many other types of loans and credit lines. The reason this works is the general difference in cost between secured and unsecured debt.

With a secured loan, an applicant must put up something as collateral, to act as an insurance policy in case they don't repay the loan. If the borrower defaults, the lender can take possession of that collateral asset to cover the loss.

With an unsecured personal loan, on the other hand, a lender extends credit based on how creditworthy the potential borrower is, including their credit score and income details. Because there is no collateral securing the debt, lenders generally consider these kinds of loans riskier, and charge a higher interest rate to compensate for that risk—often 15 percent or more.

If you've got credit card balances, personal loans or other kinds of unsecured debt, you're probably paying relatively higher interest rates compared to a HELOC, and may benefit from paying off that unsecured debt with a line of credit secured by your home.

One note of caution: Be careful not to take on new credit card debt while using debt consolidation as a repayment strategy, as you could end up with an even larger total debt.

2. Start a home renovation.

They say home is where the heart is, and of course you want to make your home as cozy, livable and modern as possible. Part of that is keeping it in good repair, but you can also upgrade your place with new features that transform it into your dream home. Consider how much you'd enjoy an addition to your house, a remodeled floor plan, new windows, a modernized kitchen and bathrooms, or even a backyard deck or swimming pool.

A side benefit of repairs and upgrades is that they can really boost the value of your home, making the money you put into these kinds of projects a sound investment.

(Of course, you'll want to research and come up with a sensible budget for any planned renovations. Some projects will get you more bang for the buck than others, and you also need to make sure the value of your improvements isn't eaten away by overspending on materials and construction overruns.)

There are a range of ways to pay for home renovations, but one of the most cost-effective and convenient is a HELOC. That's because, as we discussed in the previous section, HELOCs offer a relatively lower interest rate that's secured by your home. And because a HELOC acts as an ongoing line of credit, rather than a one-time loan, it can allow you to more easily pay for unexpected expenses on an as-needed basis, rather than re-applying for additional funds.

Additionally, if you use a HELOC to repair or improve your home, you may be able to deduct the interest you pay on your HELOC when you file your annual federal income tax return. Consult a tax advisor to learn more about how this might apply to your specific situation.

3. Invest in your family's future.

Because a HELOC is secured by your home, it's generally not a good idea to use one to live above your means or to purchase large, depreciating assets such as vehicles, vacations or luxury goods. However, the low cost of borrowing offered by a HELOC can make it a good fit for other investments into your family's future success, such as helping to pay for education. You can, for example, finance the cost of private elementary and/or high school tuition, college or trade school.

Don't think of a HELOC as your first choice for higher-education tuition (there are usually other financing types, including financial aid and structured student loans, that make for better options). That doesn't mean a HELOC can't be useful for a university student, of course. Instead, consider the added flexibility of a HELOC to cover things like supplies, school fees and travel expenses that aren't covered by financial aid or traditional student loans.

Ready to take the next step? Learn more about how a Bankoh Home EquityLine could help you reach your goals.

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