Using Your HELOC
for Big Purchases
Using your HELOC for Big Purchases
Are you considering making a big purchase but don’t have the funds readily available? A Home Equity Line of Credit (HELOC) may be the solution you’re looking for.
A HELOC is a type of loan that allows you to borrow against the equity in your home. It’s a revolving line of credit, meaning you can borrow and repay funds as needed, similar to a credit card. In this article, we’ll explore how a HELOC can provide access to funds for big purchases and the benefits and considerations of using one.
What is a HELOC?
Before we dive into using a HELOC for big purchases, let’s first understand what it is and how it works.
A HELOC is a loan that uses your home as collateral. The amount you can borrow is based on the equity you have in your home, which is the difference between the current market value of your home and the amount you owe on your mortgage.
For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. With a HELOC, you can typically borrow up to 80% of your home’s equity, in this case, $80,000.
How Does a HELOC Work?
A HELOC works similarly to a credit card. You have a set credit limit, and you can borrow and repay funds as needed. The interest rate on a HELOC is typically variable, meaning it can fluctuate over time.
During the draw period, which is usually the first 5-10 years of the loan, you can borrow funds and make interest-only payments. After the draw period ends, you enter the repayment period, where you must repay the remaining balance plus interest over a set period, usually 10-20 years. For more information check out our Understanding a HELOC Article.
Using a HELOC for Big Purchases
Now that you understand what a HELOC is and how it works, let’s explore how it can be used for big purchases.
Access to Funds
One of the main benefits of using a HELOC for big purchases is the access to funds. With a HELOC, you have a set credit limit, and you can borrow and repay funds as needed. This flexibility allows you to have access to funds for big purchases without having to take out a lump sum loan.
For example, if you’re planning to renovate your home, you can use your HELOC to borrow funds as needed for materials and labor. This way, you only pay interest on the amount you borrow, rather than a lump sum loan where you pay interest on the entire amount.
Lower Interest Rates
Another advantage of using a HELOC for big purchases is the potential for lower interest rates. HELOCs typically have lower interest rates compared to other types of loans, such as personal loans or credit cards.
This lower interest rate can save you money in the long run, especially if you’re making a large purchase that you’ll need to repay over time. However, it’s essential to keep in mind that the interest rate on a HELOC is variable and can increase over time.
Tax Deductible Interest
In some cases, the interest paid on a HELOC may be tax-deductible. This is because the loan is secured by your home, making it a type of mortgage. However, there are specific criteria that must be met for the interest to be tax-deductible, so it’s best to consult with a tax professional for guidance.
Considerations When Using a HELOC for Big Purchases
While a HELOC can be a useful tool for accessing funds for big purchases, there are some considerations to keep in mind.
- Risk of Losing Your Home: Since a HELOC is secured by your home, there is a risk of losing your home if you’re unable to repay the loan. It’s essential to carefully consider your ability to repay the loan before using a HELOC for big purchases.
- Fluctuating Interest Rates: As mentioned earlier, the interest rate on a HELOC is variable and can increase over time. This means that your monthly payments can also increase, making it important to budget accordingly.
- Potential for Overspending: With a HELOC, it can be tempting to borrow more than you need, especially with the flexibility of being able to borrow and repay funds as needed. However, it’s crucial to remember that you’ll need to repay the borrowed funds, plus interest, in the future.
How to Get a HELOC
If you’re interested in using a HELOC for big purchases, here’s how to get one. There are a few HELOC requirements needed to cover before you get a HELCOC`
- Check Your Credit Score: Before applying for a HELOC, it’s essential to check your credit score. A higher credit score can increase your chances of being approved for a HELOC and can also result in a lower interest rate.
- Gather Necessary Documents: To apply for a HELOC, you’ll need to provide documentation, such as proof of income, tax returns, and a recent appraisal of your home. It’s best to gather these documents before applying to speed up the process. Also check out home equity loans vs home equity line of credits
Real-World Examples of Using a HELOC for Big Purchases
As mentioned earlier, using a HELOC for home renovations is a common use case. For example, if you’re planning to remodel your kitchen, you can use your HELOC to borrow funds as needed for materials and labor.
Education Expenses
Another example of using a HELOC for a big purchase is to cover education expenses. If you or your child is attending college, you can use a HELOC to borrow funds for tuition, books, and other education-related expenses.
Starting a business
A Home Equity Line of Credit (HELOC) can offer initial capital to elevate your side gig or provide a continuous flow of funds to cover expenses for an established business.
Debt Consolidation
When you find yourself burdened with credit card debt, whether it has accumulated over time or due to a significant expense like a wedding, a Home Equity Line of Credit (HELOC) can provide a solution.
Going on Vacation
Using your HELOC for a vacation is another option. With lower interest rates than Credit Cards you can pay for a vacation upfront and typically save money while doing so. We have often heard of cases where members will use their equity to take their family on a cruise or all-inclusive resorts for a holiday gift.
A HELOC can be a useful tool for accessing funds for big purchases. With its flexibility, lower interest rates, and potential tax deductions, it’s worth considering if you’re in need of funds for a significant expense. However, it’s essential to carefully consider the risks and potential for overspending before using a HELOC. With proper planning and budgeting, a HELOC can help you achieve your financial goals.