What Can You Use a HELOC For? Your Questions Answered

A Home Equity Line of Credit (HELOC) is a financial tool that lets you borrow against the value you've built up in your home.

A HELOC provides a versatile means of accessing funds when you need them the most.

Imagine you're looking at your home as a place to live and a source of capital for renovations, covering unexpected expenses, or consolidating debt.

This article will unpack what a HELOC is, explore its many uses, and answer your most pressing questions, helping you confidently navigate its potential.

What is a HELOC?

A home equity line of credit, or HELOC, is like a financial Swiss Army knife for homeowners.

It's like a credit card, but instead of being backed by your creditworthiness alone, it's backed by your home's equity—essentially the portion of your home you truly "own."

Unlike a traditional loan, which involves receiving a lump sum and starting to pay interest on the entire amount immediately, a HELOC gives you the flexibility to borrow what you need, when you need it, up to a certain limit.

How does a HELOC work?

Let’s break it down: when you get approved for a HELOC, you enter the "draw period." During this time, which typically lasts 5 to 10 years, you can tap into your available credit whenever needed.

Do you need to fix the roof after a particularly nasty storm or finally update that avocado-green kitchen from the 1970s? No problem. Just write a check from your HELOC account or use a special card provided by your lender.

But here’s where it gets interesting: during the draw period, you typically have the option to pay back only the interest on what you borrow, which can keep payments low.

However, keep in mind that once the draw period ends, you’ll enter the "repayment period." Now, you need to start paying back the principal amount you borrowed, which will increase your monthly payments.

• Approval in 5 minutes. Funding in as few as 5 days
• Borrow $20K-$400K
• Consolidate debt or finance home projects
• 640+ credit
• 85% max loan-to-value (LTV)
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Collateral and your home

Think of your home as the star of the show here—it’s what’s making your line of credit possible. Because your home is collateral, it’s important to borrow responsibly.

Overborrowing can put your house at risk. So, while a HELOC offers a flexible way to manage finances, it ties directly to your most valuable asset. It’s like playing a financial chess game with your home as the king.

Keep it safe, think your moves through, and you can strategically improve your financial position.

Remember, a HELOC isn’t just a financial tool—it’s a commitment that should be managed wisely. Like any line of credit, planning and understanding all the terms your lender provides is important.

This isn’t just about borrowing money; it’s about empowering your financial future without putting your home at undue risk.

Steps to getting a HELOC

Applying for a HELOC isn't quite like sending a text message; it's a bit more involved, but it doesn't have to be a headache—we're here to guide you through each step, keeping the legalese to a minimum and the practical advice front and center.

1. Prepare your financial snapshot

Before diving into the application, get a clear picture of your financial standing. Calculate your current home equity—simply subtract the amount you owe on your mortgage from the current market value of your home.

Have more than 20% equity? You're likely in a good spot to proceed.

Next, buff up your credit score, as it's a determining factor in not only getting approved but also securing a favorable interest rate.

Regularly check your credit report, correct any inaccuracies, and pay down existing debt when possible. It’s like cleaning up your house before a big party—make it look its best!

2. Gather your documents

You’ll need to provide documentation similar to what you did for your mortgage. This typically includes recent pay stubs, tax returns, a list of debts, and possibly a statement of assets.

Also, prepare to have your home appraised—lenders love to know exactly what they’re investing in.

3. Application submission

Fill out the HELOC application with your chosen lender. This can usually be done online, but a face-to-face meeting can provide a personal touch and immediate answers to your questions. Be thorough and honest in your application to avoid any hitches.

4. Understanding your credit limit

The amount you can borrow, or your credit limit, hinges on several factors: your home’s equity, credit score, and overall financial health. Lenders use these to gauge how much risk they’re taking on.

5. Approval and setting up access

Once approved, you’ll discuss the terms of the HELOC, including the interest rate and repayment schedule. You'll also set up how you’ll access the funds.

Many lenders offer checks or cards linked directly to your HELOC, and some also provide electronic transfer options—making it as easy as online shopping.

6. The draw period begins

Welcome to your draw period—this is your time to shine! You can draw on the credit for renovating your kitchen or consolidating high-interest debt. Just remember, like any good party, don't overindulge; borrow only what you need and what you can comfortably pay back.

HELOC vs. home equity loan

Choosing between a HELOC and a home equity loan depends largely on your financial situation and your comfort with variable vs. fixed expenses.

Are you planning multiple projects over time? A HELOC might suit you better. Need a specific amount right now? Consider a home equity loan.

Let’s break down the differences so you can pick the best option.

HELOC: the flexible friend

A HELOC is like a credit card that uses your home equity as its limit. You get approved for a certain amount but only borrow what you need during the "draw period," which is usually 5 to 10 years.

Pros:

• Flexibility: Borrow amounts as needed within your credit limit.
• Interest control: You pay interest only on the amount you use, not the total credit line.
• Reusability: As you repay what you’ve borrowed, that amount becomes available again.

Cons:

• Variable interest rates: Interest rates can change based on the market, which might unexpectedly increase your payment amounts.
• Overborrowing risk: Easy access to funds can lead to spending more than necessary, jeopardizing your financial health.

Home equity loan: the steady companion

A home equity loan gives you a lump sum all at once, based on the equity you have in your home. It’s like buying a gym membership a year in advance—you know the total cost upfront and commit to it.

Pros:

• Fixed interest rates: The interest rate is set at the time of the loan and doesn’t change, which means predictable monthly payments.
• Simplicity: You get the money upfront, which is great for large projects with immediate high costs like a major renovation.

Cons:

• Less flexibility: Once you receive your lump sum, you can’t borrow more without applying for a new loan.
• Interest on total amount: You pay interest on the full loan from the start, regardless of how much you immediately use.

Fund disbursement and repayment

• HELOC: Funds are accessed as needed using checks or a card linked to the line of credit. Payments vary based on how much you borrow and the current interest rate.
• Home equity loan: Funds are disbursed in one lump sum, making them ideal for immediate, large-scale investments. Based on the total loan amount, you start repaying interest and principal immediately.

HELOC vs. personal loan

Choosing between a HELOC and a personal loan depends on how much you need to borrow, how you handle financial fluctuations, and whether you're okay with using your home as collateral.

A HELOC slices through larger, more variable expenses, while a personal loan offers a predictable financial meal to plan around. Choose the one that best fits your financial appetite and risk tolerance.

Why choose a HELOC?

• Interest rates: HELOCs often come with lower interest rates than personal loans because they're secured by your home. It's like getting a discount because you put up collateral.
• Loan amounts: With a HELOC, you can usually borrow more than a personal loan, depending on your home equity. This makes it a good fit for bigger projects or ongoing expenses. It’s akin to having a bigger pantry at your disposal.
• Payment flexibility: HELOCs offer a draw period where you can borrow as needed and make interest-only payments. This flexibility can be a real budget helper, allowing you to manage cash flow more fluidly than the fixed payments of a personal loan.

When might a personal loan be better?

• No collateral: Personal loans are unsecured, meaning you don’t put up your home or another asset, which can be a relief if you don’t want to use your home as a financial lever.
• Fixed payments: If you prefer predictable payments for easy budgeting, personal loans offer stability. Each month’s payment remains the same, making financial planning straightforward.

How can I use a HELOC?

A HELOC isn't just a line of credit—it's a tool that can help reshape your financial landscape. Here are some key ways homeowners like you are putting their HELOCs to work:

• Home renovations: Are you upgrading your kitchen or adding a bathroom? HELOCs are perfect for home improvement projects that increase your property's value.
• Emergency funds: Unexpected repairs can't wait. Whether it's a leaking roof or a broken furnace, a HELOC gives you the funds to fix it fast.
• Education expenses: From college tuition to continuing education courses, investing in education can be within reach with a HELOC.
• Debt consolidation: Combine your high-interest debts into one lower-interest payment, simplifying your finances and potentially reducing your overall interest costs.
• Case study: Consider Sarah, who used her HELOC to add a rental suite to her home, boosting her home’s value and creating a new income stream. This strategic move paid off the borrowed amount and improved her long-term financial stability.

Using a HELOC to consolidate and pay off debt

Consolidating debt with a HELOC can be like hitting a reset button on your finances.

Replacing high-interest debts (like those pesky credit card bills) with a lower-interest HELOC can reduce your monthly payments and simplify your financial life.

Typically, HELOCs come with lower interest rates because they are secured by your home. For instance, the average HELOC rate might hover around 5-6%, whereas credit card rates can easily spike to about 20% or more.

Example: Let’s say you have $15,000 in credit card debt at an interest rate of 20%, costing you a hefty interest over time. By transferring this debt to a HELOC at a 6% interest rate, the amount of interest you pay dramatically decreases, potentially saving you thousands and reducing your monthly payments.

How much can I borrow with a HELOC?

How much can you tap into with a HELOC? Lenders look at your loan-to-value (LTV) ratio, which is the difference between what your home is worth and what you still owe.

Understanding LTV

For instance, if your home is appraised at $300,000 and you owe $200,000 on your mortgage, your home equity is $100,000. With an 85% LTV cap, the maximum potential credit line would be calculated as follows:

• 85% of home value = $255,000
• Subtract mortgage balance = $255,000 - $200,000 = $55,000

This $55,000 represents the maximum line of credit you might access through a HELOC, provided all other financial credentials are in order.

Equity requirements

Most lenders require you to maintain at least 15-20% equity in your home after taking out a HELOC, ensuring you do not over-leverage your property.

This safeguard helps protect both the homeowner and the lender in case of a downturn in the housing market.

Can I get a HELOC on my rental property?

Yes, you can secure a HELOC on a rental property or second home, but it's a bit more complex than with a primary residence.

Lenders often see investment properties as higher risk, which can mean stricter requirements—think lower loan-to-value ratios and proof of rental income stability.

Example: Suppose you own a duplex valued at $400,000 with a mortgage of $250,000. A lender might offer a HELOC up to 75% LTV rather than 85%, capping your potential credit at about $50,000 instead of higher.

For investors, demonstrating reliable rental income and maintaining good property conditions are key to approval. It’s about showing that your investment can hold up its end of the financial bargain.

What are the risks of a HELOC?

A HELOC can be a flexible financial tool, but it has risks. Since HELOCs often have variable interest rates, your monthly payments could increase if rates rise. This unpredictability could stretch your budget, especially if you need more preparation for a rate hike.

Also, because your home is collateral, failing to keep up with payments could lead to foreclosure. It's a high-stakes game where timely payments are a high priority.

Additionally, shifts in the housing market could affect your home's value, potentially reducing your equity and altering your HELOC terms.

It’s important to consider these factors carefully, monitor market trends, and plan financially for possible rate increases.

When and how do you start paying back a HELOC?

When the curtain falls on the HELOC draw period—typically after 5 to 10 years—you'll enter the repayment period.

You might have been paying interest only during the draw period, but now it’s time to start paying back both the principal and the interest. This means your monthly payments could increase significantly.

Suppose you miss payments during the repayment phase. In that case, you risk serious consequences, including damage to your credit score and potentially losing your home since it serves as collateral for the HELOC.

Does a HELOC affect my credit score?

Opening a HELOC can impact your credit score both positively and negatively. Initially, it may dip slightly due to the hard inquiry from your lender.

However, if managed wisely—like making timely payments and maintaining a low balance relative to the credit limit—it can improve your score over time by adding to your credit mix and proving your creditworthiness.

Remember that high balances or missed payments can negatively affect your score, making it essential to manage your HELOC responsibly.

HELOC fees and closing costs

Opening and maintaining a HELOC comes with its share of costs, including closing costs. Here’s a quick breakdown:

• Application fee: Usually around $100 to cover processing your application.
• Appraisal fee: Expect to shell out $300-$500 to determine your home's value.
• Annual fee: Some HELOCs have an annual maintenance fee of about $50-$100.
• Transaction fees: If your lender charges for each draw, it could be $10-$20 per transaction.
• Closing costs: These can range from 2% to 5% of the credit line, generally lower than those for a full mortgage. Comparatively, traditional home loans often have closing costs of around 3-6% of the loan amount. So, HELOCs can be more cost-effective if you want to leverage your home's equity without the heftier upfront costs.

Can I refinance a HELOC?

Refinancing a HELOC can offer several benefits, especially if your financial goals or market conditions have changed. Here’s why you might consider it:

• Lower interest rates: Secure a lower rate to reduce monthly payments.
• Extended repayment term: Lengthen your loan term to decrease payment amounts.
• Consolidate debts: Combine multiple debts into one for simpler management.

HELOC refinancing process:

• Application: Submit a new application, much like the original HELOC process.
• Appraisal: An updated appraisal of your home may be required.
• Approval: The new loan will pay off your existing HELOC upon approval.

HELOC potential costs:

• Closing costs: Typically 2-5% of the refinance amount.
• Early termination fees: Check for penalties on your current HELOC for early closure.
• Appraisal fees: Can range from $300-$500.

HELOC FAQs

What will you use your HELOC money for?

Thinking about using your home’s equity to pay for some much-needed repairs? A Home Equity Line of Credit (HELOC) might be the perfect solution.

Whether you dream of updating your kitchen, need a safety net for unexpected bills, or want to streamline your debts, a HELOC can finally help turn those plans into a reality.

Ready to take the next step? Get started with a HELOC today.