JoshLet’s say you find yourself in need of some extra cash. Maybe you were hit with an expensive emergency that drained your funds, or maybe you’re trying to finance a project or dream of yours. No matter your situation, there are many options out there to get you the funds you need— but that doesn’t mean they’re always smart for your financial situation and future.
One such option is a home equity line of credit, or a HELOC. When a homeowner takes out a HELOC, their bank allows them to access a line of credit based on how much their home is worth. It’s important to note there is a difference between home equity loans and HELOCs: a home equity loan uses your home’s value as collateral on a loan, which it delivers to you in one lump sum of cash. With a HELOC, the money is available to you in the form of available credit — meaning you can use just what you need, then pay it back.
In this article, we’ll discuss the different ways you can use a HELOC responsibly — and when you should steer clear of the extra debt.
Use a HELOC to… consolidate debt
A home equity line of credit will likely come with a much lower interest rate than traditional credit cards. If you are accruing interest on high-interest credit cards, you may with to transfer your credit card balances to a line of credit with a lower interest rate so you can save money while you pay down your debt. Instead of making several smaller payments on multiple credit cards every month — most of which goes to interest anyway — you can make one lump payment and begin to formulate an actual game plan on how to become debt-free.
Use a HELOC to… invest in your home — if you have a plan
Let’s say you have plans for a home renovation project to increase your home’s overall value, but you’re strapped for cash. A HELOC can get you the cash you need to fund the remodel, ultimately increasing your equity in your home as you make upgrades.
It’s critical you have a clear plan for your renovation and have set budgets with your contractors (allowing some extra room for unexpected costs) so you don’t end up overspending. If you max out your HELOC, you’ll likely need to put the rest of your project on high-interest credit cards, making paying off your debt all the more difficult.
Before you take out a HELOC, make sure you have a plan in place to pay it off and you’re absolutely certain you can afford the payments.
Don’t use a HELOC if… you can’t afford the payment
This ties in to the point we made above. Ultimately, taking out a HELOC means you’re giving yourself another monthly payment to worry about each month. While HELOCs can be a powerful way to consolidate and pay off debt, you’ll only be digging yourself into a bigger hole if you’re unable to make the payments.
If that extra payment puts a strain on your financials, you’re better off saving up for your project the slow, old-fashioned way.
Don’t use a HELOC… to pay for luxuries
We get that it’s tempting to use a line of credit to fund a luxury vacation to paradise, but it’s never a good idea for your financial health. By leveraging your home’s equity, you’re taking away your option to sell your home and take the cash with you if you end up in a situation where you need to move— or need the money. Blowing your home’s equity on non-essential items — especially ones that will eat up your available credit in a few days or weeks — puts you in a needlessly strained financial situation.
Don’t use a HELOC… to invest
Experts advise never using loan money to invest in stocks, since it’s possible your investment will go south, leaving you with a loan you’re unable to repay.
As a homeowner, your home’s equity can be a nice safety net, and a home equity line of credit is a good way to access those funds if you find yourself in need. But to keep it from hurting you in the long run, HELOCs and home equity loans should be part of your strategies to pay off debt, increase your home’s value, and become financially stable. If you’re tempted to take out a HELOC for any other reason, you may be doing more harm than good.