A home equity line of credit (HELOC) is a revolving line of credit that you can access as needed. HELOCs are typically tied to the equity in your home, and they allow you to borrow up to an established limit. Because there are no restrictions on how the borrowed funds can be used, using a HELOC responsibly is important.
Before taking out a HELOC, it’s essential to know your eligibility status and how much credit you’ll qualify for. Several good uses of HELOCs include covering emergency expenses such as car repairs or medical bills, consolidating high-interest debt, home improvements, or investing or buying another property.
How does a HELOC work?
With a HELOC, the homeowner does not have to wait until the house is fully paid off before borrowing funds. Instead, a lender will allow you to borrow up to 80% of the equity you have accrued in your home (that is, 80% of the current market value of your home, minus what you still owe on your primary mortgage).
This type of home equity loan gives you access to a revolving line of credit that works in a similar manner as a credit cards work. This means that you can withdraw the amount of money needed during the draw period and make payments over time.
HELOCs have two distinct periods: the draw period and the repayment period.
Draw Period: The draw period typically lasts 5-10 years, during which you can withdraw funds as needed up to your credit limit. Additionally, with Figure's HELOC, you can repay principal and interest throughout the loan term, without penalty. As you repay the balance, you may withdraw additional funds from the credit line as needed.1: Navigates to numbered disclaimer
Repayment Period: Once the draw period ends, the repayment period starts, typically lasting 10-20 years. During this time, you must make monthly payments on both principal and interest until the loan is paid off.
What can you use a HELOC for?
A HELOC accesses the equity you have accrued in your home to allow you to meet your personal and financial goals, and to live a fulfilling life. There are no restrictions on how you can use your HELOC funds.
Paying off debt
Using a HELOC to consolidate debt can be an effective way to reduce the amount of money owed each month. It puts all of your high-interest debts into one, easy-to-manage loan with a potentially lower interest rate. This lets you take full control of your finances and pay back debt in a much more organized way.
When considering if a HELOC is the right solution for you, start by comparing the interest rates between your current debts and this new line of credit. Choosing the lower rate option is key to saving money over time - don't forget to consider all possible closing costs as well before making this decision.
Once you have established that, you can then decide which debts are best suited for consolidation with the HELOC. This could include mortgages, student loans, medical bills or other recurring expenses where debt has accumulated. Utilizing a HELOC gives you financial flexibility, streamlines payments, and helps improve your credit score over time when managed properly - making it an attractive option for those looking for more financial freedom.
Paying medical bills
A HELOC can be a great way to finance medical bills. With the rising costs of healthcare, many people are turning to HELOCs to help cover their treatment expenses. By taking out a loan against the equity in your home, you can access funds quickly and easily without having to worry about being denied due to bad credit or lack of other collateral.
The great thing about a HELOC is that you can access just the amount you need for your medical bills and nothing more, and then pay it back with no interest until you start to draw from the line of credit again. This makes it ideal for covering emergency expenses or one-time treatments without having to resort to high-interest credit cards or personal loans.
Home renovations, improvements, and repairs
HELOCs are most often associated with home improvements and home repairs. If you have significant equity in your home, you can likely access a large amount of money, allowing you to improve your life and increase the value of your home. If you use the funds from a home equity line of credit to make certain home improvements, your interest payments could be tax-deductible under certain circumstances.1: Navigates to numbered disclaimer Figure's unique home equity line of credit has a fixed interest rate2: Navigates to numbered disclaimer and gives you full access to your funds upfront, while also enabling you to access additional funds once you start to pay down your original disbursement. Plus, you’ll be able to access the full line of credit in as few as 5 days.2: Navigates to numbered disclaimer
Covering emergency expenses
Having an emergency fund is essential for anyone looking to secure their financial future. It's recommended that everyone have three to six months' worth of living expenses saved up in case of a financial emergency. However, if this isn't possible due to a limited savings account, having a home equity line of credit is another viable option.
With a HELOC, you can draw upon the funds only if needed, such as during job loss or unexpected medical expenses. Keeping the credit line available ensures that you're prepared for these eventualities without having to worry about accumulating debt from using a credit card. Additionally, the lower interest rate associated with HELOCs makes it preferable than taking out other forms of loans or financing. Having access to this kind of emergency funding can prove invaluable in times of need and should not be overlooked as part of your financial plan.
For a down payment on another property
Purchasing a new house can be an exciting journey but it is often difficult to find the necessary funds to make this dream come true. For those looking to purchase an investment property or vacation home, typically more money is required upfront in order to secure the loan as down payments may range from 20-25%. If you do not have access to sufficient funds from personal savings, you may be able to borrow from your current home’s equity and use these for the purchase.
If you are fortunate enough to have accumulated considerable equity in your primary residence, then this may be enough for the purchase of your second home and it may even be possible to reach this goal by making a cash purchase. It is important to take all variables into consideration when assessing if it is feasible for you to buy a new house and remember that building up equity in your existing residence will provide much security in providing financial assistance towards another property.
Starting a business
Starting a business can be expensive, requiring both initial capital to cover costs like licensing fees, insurance, inventory and equipment as well as ongoing marketing costs. The majority of new business owners turn to sources such as business loans and credit cards for capital in order to cover the upfront costs. However, there are other capital-raising options available, for example, HELOCs, which typically tend to have a lower rate of interest than that of a business loan or credit card. Furthermore, the line of credit provided with HELOCs will have no repayment requirements until you tap into it, providing you with an invaluable safety net should your business find itself in straitened circumstances during its early stages.
Paying for college expenses
Paying for college can be difficult, and some people look to a HELOC as a way to finance their education. Getting a HELOC might seem like an attractive solution due to its ease of accessibility and higher potential amount. In most cases, federal student loans can offer lower interest rates than HELOCs for families who qualify, providing more affordable monthly payments.
When federal loans aren't an option, a HELOC can be a great alternative to private student loans, such as Parent PLUS loans.
How to use a HELOC carefully
A HELOC is a great way to get access to some quick cash, but it’s important to use it carefully. The money you borrow through a HELOC is tied to your home, so if you can’t pay off the loan it could result in foreclosure. It’s best to invest in something long-term that will generate returns rather than spend the funds on one-time expenses that won’t produce any financial gain.
The primary risk of taking out a HELOC is the possibility of losing your home to foreclosure if you fail to meet your debt obligation. A HELOC is a type of mortgage, and because it uses your home as collateral, lenders have the right to initiate foreclosure proceedings against you if payments are not made.
A HELOC generally has a lower interest rate and longer repayment terms than other financing opportunities, making it a good choice for people looking to finance over an extended period of time. However, with the loans secured by your home, there is greater risk involved if you are unable to repay it comfortably according to schedule. Therefore, proceed with caution – assess your current and future financial obligations before deciding if borrowing from a loan against your home equity is right for you.
Have a plan for HELOC use and pay off
Before taking out a HELOC, it’s important to make sure you have a plan and can pay off the loan. Start by deciding how much money you need to borrow and when you will be able to pay it back. Then, figure out how much you can afford to pay each month towards your loan. You should also consider factors such as your current income, debt-to -income ratio, monthly expenses, and other financial obligations. This will help you determine the right amount of money to borrow and the best repayment plan. Additionally, make sure to factor in the interest rate when calculating your monthly payments; higher rates can add up quickly over time. Finally, if you don’t need all of the funds from the HELOC upfront, it may be beneficial to only draw what you need and pay the principal balance down as soon as possible. This will help reduce your interest payments over time.
Get started with a HELOC from Figure
A HELOC is a powerful financial device for homeowners who have accrued equity in their home. There are no restrictions on how funds can be used, which is great for borrowers who need flexibility in how they spend their cash. It works best for long-term projects that show a return on investment, such as education and home improvements but is also a great alternative to credit cards for bigger ticket items. Learn more about how you can benefit from a HELOC and what limit and interest rate you qualify for by completing an online application now.
This article is published for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors when preparing your tax returns.
