With interest rates as low as they are right now, you may be considering taking out a HELOC. For those of you who haven’t heard the acronym before, a HELOC is a home equity line of credit. It is different than your mortgage, but still goes against the total amount you owe against your home. Basically, if you have positive equity in your house, you can potentially qualify for a HELOC. Most banks won’t loan up to 100% of what the home is worth though, but closer to 80% – 90%. A good example of what this might look like is if you owe $120,000 on your home that is worth $200,000, you could potentially qualify for a HELOC ranging between $40,000 – $60,000.
The perk of a HELOC is that you don’t have to pay interest on any money you aren’t using currently. So, once you pay the closing costs, you could let the money sit in the HELOC until you need it and don’t have to pay anything. Now that you have a better idea of what a HELOC is, let’s dive into some of the best options to optimize the funds at your disposal.
1. Home Renovations
I currently have a HELOC, and have had them previously. I love them for all of the possibilities they afford me. And home renovations are high up on the list when I have a HELOC at my disposal. This is due to the fact that a lot of major home renovations can be extremely costly. Most times, it is difficult to come up with the money all up front to pay for these renovations. So that is where a HELOC can come into play.
When you do major home renovations, you are also increasing the property value of your home. Which means more money for you in the future. So this sort of investment is a win-win in my book.
When considering using a HELOC for home renovations, it is best to try and use the money for renovations that will net you the greatest return on your money. Some of those renovation projects fall into the following categories:
- Kitchen upgrade
- Bathroom upgrade
- New HVAC system
- Roof replacement
- Upgraded flooring
- New windows
- New doors
No matter which project you choose to tackle, just remember that the numbers need to make sense. So do your research first to ensure what you plan to spend will be worth it in the end. If not, the money in your HELOC may be better used somewhere else instead.
2. Purchase Investment Properties
While home renovations are high up on my list of uses for our HELOC money, I used our last HELOC a bit differently. I wanted to start purchasing rental properties and realized that I had the money at my disposal because it was sitting in the value of my primary residence. So, we took a HELOC out (at a very low interest rate) and used the money to begin purchasing investment properties.
When most people think of landlords, they presume that the investment properties are owned outright. But, more often than not, that isn’t the case. While there are many different ways you could get involved in investment properties, a HELOC is a great way to tap into capital that you already have. And when you purchase the properties, you will be considered a cash buyer, so you have less paperwork to deal with.
You will also get the title to the property you have purchased and can begin paying back the HELOC with rental income. So, if you play your cards right, and do your due diligence, you could potentially own the property outright in a few years. That is when it becomes actual passive income, which is magical!
3. Educational Costs
Educational costs is another great use of HELOC money. College these days is so much more expensive than it was even 10 years ago. So much so, that most college students come out of school with massive student loan debts. If you are a parent and decide that you want to help your child fund their education, then this might be a good avenue to explore.
Interest rate on HELOC’s are usually pretty low, and exceptionally so right now. So, using this money to help pay for college expenses, as your child needs them, could be one good way to help alleviate the cost of college. Since you don’t have to pay interest on anything you aren’t using in the HELOC, taking out a little bit at a time is probably the best strategy. That way, you have the opportunity to pay back some, if not all, of the money you have paid towards each semester before you take more money out. This reduces the amount of interest you will have to pay overall.
And, if your college student is working even a little bit, it might be beneficial to work out a deal with them that they have to pay you back some of the money to help offset the costs. Now that’s teamwork!
4. Emergency Fund
As previously noted, the funds you have in a HELOC can just sit there and do nothing until you need them without accruing interest. This means that your HELOC could be another form of your emergency fund.
Therefore, if you find yourself in an emergency situation and need the money, you have it. But, the biggest drawback to this use of the HELOC is not having a repayment plan in place. While the interest rates for HELOC’s are low right now, they can usually fluctuate with the market. Which means, if you don’t have a plan to repay the money in a certain amount of time, you could end up paying a lot of money in interest alone.
5. Pay off High Interest Loans
If you have high interest loans you have been struggling to pay off, then your HELOC may be a good solution. However, this category is similar to the emergency fund option in that you need to have a repayment plan in place to avoid paying a lot in interest.
While you may be getting rid of loans with upwards of 20% – 30% interest (especially if it’s a credit card), you still need to come up with a viable repayment plan. So, you could be saving a massive amount in interest just by rolling these loans into your HELOC. But you need to come up with a shorter time horizon to pay the HELOC off in order to actually be saving yourself money.There are so many awesome things you can do with HELOC funds! Click To Tweet
6. Buy a Car
Now, this may be a category that makes some people a bit nervous. However, car loans can come with pretty hefty interest rates, depending upon your credit score. And if you fall into the category of only qualifying for higher interest car loans, then a HELOC may be a better option for you.
Of course, this is still has more truth to it if you plan to pay your car off early also. With a HELOC, the only payment you have to pay each month is the interest. So you can choose how long you want to be paying back the HELOC loan without having to jump through all of the hoops of a traditional loan. Plus, you will have the title to the car outright when you purchase it, similar to investment properties.
When it comes to buying a car with a HELOC, I would recommend using it for a lower priced used car instead of a new car though. This will help create less anxiety and stress overall because you aren’t using such a massive amount and it will be more manageable to pay it back in a timely manner. Which means you will be paying less in interest this way instead.
Here is a good example of how this might work to your benefit:
- You have a credit score of 500
- Therefore, you qualify for an auto loan interest rate of 9.5% at the dealership
- The loan terms are for 60 months
- You are looking at a used car for $15,000
- Your payment would be $315 and cost you a total of $18,902
- If you use your HELOC instead, your interest rate is 4%, instead of 9.5%
- You decide you can afford to pay more and will pay it off in 24 months instead of 60
- Therefore, you will be paying $651 per month instead
- This will cost you a total of $15,633 over the life of the loan
- And will ultimately save you $3,269
I don’t know about you, but this sounds like a no brainer to me!
Overall, tapping into a HELOC is a great way to take advantage of capital you already have. There are so many great options at hand to utilize the money to your benefit. Some of our favorite ways to use the money are:
- Home renovations
- Purchasing investment properties
- Paying for educational costs
- Using it as an emergency fund
- Paying off high interest loans
- Buying a car
No matter which direction you take with your HELOC funds, it is always important to do the math first. If the numbers make sense in the long run, then go for it. But, if the numbers simply don’t work, or you won’t be able to pay it off in a shorter amount of time, then go a different direction. But, ultimately, it is great to have HELOC funds at your disposal, no matter what you choose to do with them.
What are some of the best ways you have found to utilize your HELOC funds?