Is a HELOC a good idea?

That’s a good question! But before we answer it, let’s take a quick look at what a HELOC is and how it works. Simply stated, a HELOC is a home equity line of credit — a borrowing tool that lets you access the equity in your home and turn it into cash. Home equity is the difference between what your home is worth and how much you owe on your mortgage(s). The interest you pay on a HELOC is typically lower than what you’d pay on a personal loan or credit card. This is because the line of credit is secured by your home. You can use a HELOC to pay for anything, but should you? That’s another good question!

How should you use a HELOC?

A HELOC is a great way to fund long-term, ongoing expenses. These can include:

Home improvements and renovations — Borrowing against the equity in your home to increase the value of your home is just plain smart. From a new roof or deck to a kitchen or bathroom update, a HELOC can provide the funds you need every step of the way.

Debt consolidation — High-interest credit card debt can add up fast. And if you only make the minimum payment each month, your revolving balance just keeps growing. A HELOC can help you pay off your debt and save with a more favorable interest rate.*

College tuition — Investing in your family’s future is also a great way to use a HELOC. You can draw on your line of credit as needed each semester to bridge the gap between college savings/financial aid and tuition bills, then pay it back over time.

Unexpected expenses — A HELOC can help you cover expenses you might not see coming, like a big medical bill or major auto repair.

Another home — A HELOC can help you use the equity from your first home to help purchase a second. This might include a vacation home or even a rental property.

* “Paying off unsecured debt with a HELOC makes it secured.”

How shouldn’t you use a HELOC?

While a HELOC can technically be used to pay for anything, there are definitely a few things to avoid. These include expenses you may not be able to afford right now with your current income and savings.

Travel — Getting away from the everyday while seeing and doing new things is a wonderful way to unwind. But better to save up for the trip beforehand than to borrow from your home’s equity and still be paying long after you return home.

New car or truck — A new (or new-to-you) vehicle can be an exciting purchase. But, unlike your home, cars and trucks depreciate quickly. Better to take out an auto loan to finance your new ride.

Shiny new toys — Here, we’re talking big-ticket purchases like televisions, recreational vehicles, or boats that fall into the nice-to-have versus need-to-have category.

So, yay or nay on HELOCs?

Like so many things in life, the answer is: it depends.

If you have enough home equity and a steady source of income, tapping your home’s equity can be a smart way to cover many types of expenses. Just remember that whatever you borrow now will need to be paid back (with interest) down the road.

Learn more about a Homebridge HELOC!