When you think of a Home Equity Line of Credit (HELOC), home renovation projects are probably what immediately comes to mind. But a HELOC can be used for so much more than just home improvements. If you’re a homeowner looking to make a any kind of purchase, or are just looking for the peace of mind of having an emergency fund, the equity in your home might be a great resource to expand your budget and maximize your options.
What is a HELOC?
Your home equity is is the portion of your property that you “own”. To calculate how much equity you have, subtract your outstanding mortgage loan balance from the property’s market value. Home equity can increase over time if the property value increases or the loan balance is paid down. For example, if your home was purchased for $200,000 and you’ve paid $50,000 toward that amount you have $50,000 worth of equity in your home. Now, let’s use the same scenario, but the value of your house has increased to $250,000. Your equity would now equal $100,000.
A HELOC is a revolving line of credit that allows you to withdraw funds as needed. Similar to a credit card, you can borrow what you need when you need it and only owe interest on the amount you borrow. So what can you use the borrowed money for?
1.Pay for education
If you have children heading off to college or if you are considering going back to school, a home equity line of credit can help you manage the high-interest costs. You can borrow money through your HELOC to make tuition payments and pay the debt off over the set repayment period for your line of credit.
2. Consolidate debt into one low interest rate
Homeowners often use the equity in their home to consolidate other personal debts, like an auto loan, student loan, or credit cards into a lower interest rate. As an example, say you have an $8,000 credit card balance with a 20% annual interest rate, and a student loan with a balance of $10,000 with an annual rate of $8. You may want to consider paying off these balances with a HELOC that is only charging a 5% annual interest rate.
3. Take a vacation
Whether it’s a summer vacation, or a winter getaway, we all need a vacation. While some vacation destinations can be cheaper, many can cost a family thousands of dollars. A Home Equity Line of Credit can be a good way to help finance your vacation or travel plans, while also alleviating the stress of having to use a credit card or cutting back your regular budget.
4. Shop for the Holidays
Holiday shopping is approaching fast, and if you haven’t been saving throughout the year you may find yourself strapped for cash after your big shopping trip. Last year, Americans racked up more than $1,000 each in holiday debt, and over half of holiday debt holders use a credit card to finance those expenses. Rather than using a credit card, which can often have higher interest rates, a HELOC can help fund those seasonal and family expenses.
5. Use as an emergency fund
If you’re a homeowner, you know that related costs can appear out of nowhere. If your furnace goes out, or if you find your roof leaking, you’ll need fast cash to do the repairs. Saving thousands of dollars could take years, but a HELOC can be a nice fund for emergencies like these, or others.