A Home Equity Line of Credit is a popular type of loan for homeowners looking to tap into the equity they’ve built in their homes. Unlike a traditional mortgage or a HELOC offers flexibility because it is a credit line and works like a credit card. The HELOC often featuring lower variable interest rates and allowing homeowners to borrow only what they need, when they need it.
Should I get a HELOC just in case?
But is a HELOC the right choice for you? Below are the top 12 reasons why you might want to consider getting a HELOC.
1. Access to Large Amounts of Cash
A HELOC allows you to borrow against the equity in your home, which can often result in access to significant funds—sometimes tens or hundreds of thousands of dollars, depending on your home’s value and how much equity you’ve built. This can be particularly useful for large expenses such as home renovations, major life events, or even investment opportunities.
With a HELOC, the amount you can borrow typically depends on your home’s appraised value and your current mortgage balance. Lenders generally allow you to borrow up to 85% of your home’s equity, making it a substantial financial resource.
2. Lower Interest Rates with a HELOC
One of the most attractive features of a HELOC is the lower interest rates compared to other forms of credit, such as personal loans or credit cards. HELOCs are secured by your home, which generally allows lenders to offer lower rates because the risk is lower compared to unsecured loans.
If you’re planning a large purchase or need to consolidate high-interest debt, using a HELOC could save you money in interest payments over time.
3. Flexibility in How You Use the Funds
Unlike traditional loans that give you a lump sum upfront, a HELOC functions like a credit line, allowing you to borrow money as needed, up to your approved limit. This makes it ideal for situations where you need ongoing access to funds rather than a single, large payment. For instance, if you’re renovating your home, you can withdraw money as expenses arise, ensuring you don’t borrow more than you need.
The ability to borrow only what you need when you need it can help you manage your budget more effectively, keeping you from borrowing (and paying interest on) more than necessary.
4. Interest-Only Payments During the HELOC Draw Period
During the draw period of your HELOC, typically lasting 5 to 10 years, you’re often only required to make interest payments on the amount you’ve borrowed. This can result in lower monthly payments, freeing up cash flow for other financial needs. You have the option to pay down the principal during this period if you choose, but it’s not required.
This interest-only feature can make HELOCs particularly appealing for those who anticipate fluctuating income or expenses but need financial flexibility during the initial years of the loan.
5. Home Renovations and Improvements with a HELOC
One of the most common reasons homeowners get a HELOC is to finance home renovations or improvements. Upgrading your kitchen, adding a bathroom, or remodeling your basement can add significant value to your home. Since HELOC interest rates are often lower than other types of financing, using this line of credit to fund home projects can be a financially smart move.
In addition, depending on the improvements you make, the interest on a HELOC may be tax-deductible when the loan is used to “substantially improve” your home. Be sure to consult with a tax professional to see if you qualify for this deduction.
6. Debt Consolidation Opportunities with a HELOC
If you’re carrying high-interest debt from credit cards or personal loans, consolidating that debt into a HELOC can be an excellent way to reduce your interest payments. Since HELOCs generally have much lower interest rates than credit cards, transferring your debt can result in significant savings, potentially helping you pay off your balances faster.
Using a HELOC to consolidate debt also simplifies your financial life by allowing you to make one payment each month instead of juggling multiple credit cards or loans with different due dates. Does debt consolidation hurt your credit scores?
7. Education Expenses
A HELOC can be a useful tool for funding education expenses, whether you’re paying for a child’s college tuition or financing your own continuing education. The flexibility of a HELOC means you can withdraw funds as needed to cover tuition, textbooks, and other educational costs without taking out multiple loans.
Since education expenses often fluctuate, having access to a HELOC allows you to manage these costs in a way that suits your financial situation. The lower interest rates can also make this option more attractive than private student loans, which tend to have higher rates.
8. Emergency Fund
As we mentioned earlier, many people ask us if they should get a HELOC just in case. Yes, a HELOC can serve as a backup emergency fund, providing you with access to cash when unexpected expenses arise. Whether it’s a sudden medical bill, urgent home repairs, or any other unforeseen financial need, having a HELOC in place gives you peace of mind knowing you can access funds quickly without needing to scramble for a loan.
Unlike a traditional loan, where you’re required to borrow and pay interest on a lump sum, a HELOC allows you to borrow only what you need, making it a flexible safety net for emergencies.
9. Lower Closing Costs with a HELOC
Compared to refinancing your mortgage or taking out a second mortgage loan, a HELOC often comes with lower closing costs. While there may still be fees involved, they are usually significantly lower than those associated with other forms of financing. Some home equity lenders may even waive certain fees, depending on your creditworthiness and the loan terms. Ask about a no appraisal HELOC from Refiguide Lenders.
Lower closing costs make HELOCs an attractive option for those who need access to funds but don’t want to incur the high upfront expenses that come with other loan types.
10. Potential Tax Benefits
As previously mentioned, the interest on a HELOC may be tax-deductible if the funds are used for home improvements. While the Tax Cuts and Jobs Act of 2017 eliminated some deductions for personal expenses, the IRS still allows a deduction for HELOC interest if the loan is used to “buy, build, or substantially improve” the home that secures the loan.
If you’re considering using a HELOC for home renovations, this tax advantage could make the loan even more cost-effective. However, always consult with a tax advisor to ensure you understand how these benefits apply to your situation. Read more info on tax benefits for home equity interest from the IRS.
11. Investing in Other Properties
If you’re an experienced real estate investor, you can use a HELOC on your primary residence to invest in other properties. By tapping into your home’s equity, you can access the funds necessary to make down payments on rental properties or even purchase a fixer-upper to flip.
This strategy allows you to leverage your home’s equity to grow your real estate portfolio, all while benefiting from the lower interest rates typically offered by HELOCs compared to investment property loans.
12. Business Financing
For entrepreneurs and small business owners, a HELOC can be a convenient way to finance business needs, especially if you’re struggling to qualify for a traditional business loan. You can use the funds to cover startup costs, purchase inventory, or manage day-to-day expenses. The flexible nature of a HELOC means you can borrow only as much as your business requires, helping you avoid overborrowing.
Additionally, since HELOCs often have lower interest rates than business loans or credit cards, they can be a more cost-effective option for financing your business.
Takeaway on Getting a HELOC Just in Case
A HELOC can be an excellent financial tool for homeowners who need access to funds for a variety of purposes, from home improvements to debt consolidation to emergency expenses. Its flexibility, lower interest rates, and potential tax benefits make it a versatile option for managing your financial needs.
However, it’s essential to use a HELOC responsibly. Because your home is used as collateral, failure to repay the loan could result in foreclosure. Therefore, before taking out a HELOC, consider your long-term financial goals and ensure that you have a clear plan for how you’ll use and repay the borrowed funds.
If you’re in a situation where a HELOC could provide financial flexibility, it’s worth exploring this option further and consulting with a financial advisor to determine if it’s the right fit for your needs.