If you have some equity available in your home, meaning that the amount you still owe on it is less than its value, you might be able to qualify for a home equity line of credit, or HELOC.
A home equity line of credit is a form of secured loan, since the lender will use your home as a guarantee that you will pay back what you have borrowed. That being said, you need to have a clear plan for how you will repay your loan before you go ahead.
If you are wondering how to use home equity line of credit, here are a few examples of purchases you can make with it:
1. Use your home equity line of credit to improve your home
Many homeowners choose to use their home equity line of credit to repair, upgrade or improve their home. This makes a lot of sense, especially since some types of home improvements can increase the value of a home.
Even if you don’t plan on selling your house any time soon, anything that can increase its value is a worthy investment. Therefore, if you have been thinking about updating your floors, getting energy-efficient windows installed, or building a second bathroom in your basement, using your HELOC to borrow the money you need for these upgrades is a good idea.
Of course, you have to make sure you’ll be able to pay back what you owe after you have improved your home.
2. Use it to invest on another property
A good way on how to use home equity line of credit is to invest it on another property. If you would like to own a second home or an apartment building, you can use your home equity line of credit to buy another property.
If an investment opportunity seems too good to be missed, but you don’t have enough funds to go ahead, your HELOC will provide you with the money you need to buy that property.
One of the benefits of doing this is that by renting out your second home or your apartments, you will be able to pay back what you have borrowed by simply collecting rent from your tenants.
3. Check if you could use your HELOC to access lower interest rates
When you need a loan, a home equity line of credit might not be the first thing you think of. However, it’s good to know that the interest rates of a HELOC could be lower than those of some other types of loans.
Before you decide to get a car loan, for example, it could be a good idea to do some research to compare the rates of that loan with the rates of your HELOC.
Keep in mind that when you apply for your HELOC, you might get approved for a higher limit than what you actually need. Don’t hesitate to ask for a lower limit so you only borrow the money you need, and will be able to repay without any issue.
4. Think carefully before you use it for big purchases
While your home equity line of credit can be used to finance big purchases, it’s not always the best option there is. Before you decide to use a HELOC to go on a long vacation or to buy an expensive car you don’t really need, keep in mind that your home will be used as collateral for this purchase.
This means that if you fail to repay your loan, you could get in trouble.
However, if you want to go back to school, or to send your children to college, for example, borrowing money on your HELOC could be a good idea. Avoid spontaneous purchases, and use your HELOC for things that really matter.
5. Avoid using your HELOC to consolidate your debt
Taking advantage of the low interest rates of a HELOC to consolidate your debt can seem like a good idea, but once again, you have to be careful. If you are struggling with debt in the first place, you might not be able to repay a new loan that would use your home as collateral.
Indeed, your HELOC might come with lower interest rates than your credit card debt, for example, but it will not stop you from accumulating more debt if you are not being careful.
6. Don’t use it to pay for your living expenses
Finally, you should avoid using your home equity line of credit to pay for your living expenses, as borrowing money to pay your monthly bills can only lead to debt. If you are in a situation that makes it difficult for you to cover your living expenses, there are better options than using your HELOC.
As you can see, using your home equity line of credit can help you when you need extra funds, as long as you keep in mind that using your home as collateral can be risky in some situations.