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Uses of Home Equity Lines of Credit

April 28th 2015 by
2 comments

This is a guest post from Roberta Pescow, NerdWallet

The equity in your home is a powerful thing, but it’s up to you to unleash that potential. A home equity line of credit can put your equity to work for you. Here’s what you should know about this form of revolving charge account and some of the ways to use it.

Understanding HELOCs

A HELOC (pronounced “hee-lock”) is a form of secured financing that uses the borrower’s home as collateral. It relies on using your home equity, or the difference between the appraised value and what you owe on the property.

What makes this type of credit stand out is that unlike a loan, where you get all the money as a lump sum at the outset, a HELOC provides an amount that can be drawn on over a fixed time period. You withdraw what you need, up to your limit, and only pay interest on the amounts actually used.

Typically, the interest rate varies depending on a market gauge, but the annual percentage rate you pay is usually lower than on most other forms of debt. Although rates may change periodically, they’re capped by law. Often the interest paid can be tax deductible, but there are usually upfront fees and other costs that can raise the overall price of the money you borrow.

Making the most of a HELOC

Home equity lines of credit work well for a number of life-changing purposes:

Debt consolidation

When high interest debt from multiple sources becomes unmanageable, consolidating what you owe can help get your finances back under control. Because HELOCs from lenders such as Aspire Federal Credit Union extend over as much as 15 years, the monthly payment can be much lower, even though the total amount you pay may rise. Streamlining debt to a single bill also reduces the chance of missed payments, overdrafts and math errors. Better debt management may raise your credit score over time.

Home improvements

Since you only borrow what you need, HELOCs are particularly well suited to financing home renovation projects. Replacing an aging roof one year can be followed a few years later with a kitchen remodeling.

Weddings, education and other major expenses

Homeowners eyeing a special vacation or who have wedding plans or other future financial obligations often find HELOC rates lower than those on personal loans. These credit lines can also help pay for college, where unanticipated costs frequently pop up. A HELOC can be less costly than a private student loan.

Home equity can be a powerful resource, used properly. You only need to unlock it so it can start working in whatever ways serve you best.

Post by Roberta Pescow, NerdWallet

 


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