What Is a HELOC?
A HELOC is a revolving credit line secured by your home. HELOCs are often compared to credit cards because, like credit cards, HELOCs allow you to borrow money as needed, then repay the amount you borrowed plus interest in installments. One big difference between HELOCs and credit cards is that HELOCs can offer a much lower interest rate than credit cards. Another important difference is that HELOCs are secured by your home; if you fail to repay your debt, your lender can foreclose its security lien to recoup the loan amount[1]. On the other hand, credit cards are unsecured; failure to repay credit card debt can negatively impact your credit score, but those creditors cannot move to enforce their lien.
The amount you can borrow through a HELOC depends on multiple factors, including:
• The amount of equity you have in your home. Home equity is the value of your home minus any debt you currently owe on it. Many lenders expect homeowners to retain at least 10-20% equity in their homes[2]
• Your debt-to-income ratio. Lenders want to ensure you won’t be over-extended with this added credit line.
What Are the Benefits of a HELOC?
The benefits of a home equity line of credit include[3]:
• Flexibility. You can borrow only the amount you need, as you need it.
• Lower interest rates. HELOCs typically offer lower APRs than other lines of credit (like credit cards).
• Higher credit limits. Because HELOC lenders have collateral to secure the loan, they can offer higher limits than credit card companies can.
• Potential for low monthly payments during the “draw period.” Some HELOCs allow borrowers to pay only interest during the “draw period,” reserving principal balance payments for the “repayment period.”
• As with all lines of credit, making payments on schedule can improve your credit score over time.
Are There Downsides to a HELOC?
There are potential downsides to consider before using a HELOC[4]:
• Because HELOCs are secured by your home, your home can potentially be foreclosed on if you fail to repay the debt.
• HELOCs often come with variable interest rates, so your payments may go up if market rates increase.
• There may be fees for opening and/or maintaining the line of credit.
• Some borrowers are tempted to overspend when they have an open line of credit.
What Is a HELOC Used For?
Here are seven potential uses for HELOCs.
1. Home Improvements or Repairs
Home renovations and repairs can increase the value of your home, potentially allowing you to recover your investment in your home improvement projects. Some homeowners choose a HELOC to fund home renovations before selling their homes to maximize the sale price. If you use your HELOC to fund home renovations or home repairs, the interest on the loan may be tax deductible. Ask your accountant or tax preparer about potential tax benefits.
2. Debt Consolidation
Because HELOC interest rates are typically lower than credit card rates, some borrowers take out a home equity line of credit to pay off their higher-interest credit card debts. This debt consolidation method can save borrowers money in interest payments, assuming high-balance credit card use stops.
3. Emergencies
Unlike home equity loans, HELOCs are revolving credit lines that, once opened, you can choose to use or not. So, some homeowners like to keep a HELOC open just for emergency use. If an appliance goes out, a pipe bursts, a severe weather event damages your roof, a car breaks down or there’s a medical emergency, you could have the funding available through your open HELOC.
4. Education
While there are many methods of funding education, including governmental financial aid, private grants and student loans, some students still need to pay some educational costs out of pocket. If you own a home, a HELOC can be used to help cover tuition costs for yourself or your children.
5. Launching a Business
Getting the seed money to fund a start-up business can be difficult. You might consider finding investors or taking out a business loan. A HELOC is another possible option for you to explore if you’re looking to start your own business.
6. Investing
If a strong investment opportunity comes up, a HELOC can give you the funding needed to capitalize on it. For instance, perhaps a rental property in your area becomes available. You may be able to use a HELOC to help with the down payment, closing costs and/or repairs needed to make the property market-ready. All investments carry some level of risk, so analyze the opportunity carefully before funding it with a HELOC.
7. Other Large Expenses
Weddings, vacations, holidays — there are many ways to use your HELOC funds. Technically, a HELOC can be used for any of these purposes. However, putting your home on the line for an unnecessary expense with no financial return may not be the best use of your home equity and could potentially create a serious financial problem.
HELOC Use FAQs
Here are a few commonly asked questions about how to use a HELOC.
Can HELOCs Be Used for Anything?
Technically, yes. Once the line of credit is open, the borrower can spend the money as they see fit[5]. However, the decision to borrow against your home should not be taken lightly.
How Do You Responsibly Use a HELOC?
To responsibly use a HELOC, only borrow what you need and be sure you can repay, even if interest rates rise. Make your payments on time, as scheduled, to build your credit record over time.
What Should You Not Use a HELOC For?
Using a HELOC to fund an unnecessary expense with no financial return (such as a vacation or wedding) should be done with caution. Even when a financial return is projected (such as when investing in pre-sale home renovations or an investment property), care should be taken to ensure you can comfortably afford the repayments plus interest.
Can I Use HELOC for Debt Consolidation?
Yes. If you have other debts with higher interest rates, consolidating those debts with a HELOC can result in fewer monthly bills and a lower monthly payments on those debts[6].
The Bottom Line on How To Use a HELOC
HELOCs can be a useful tool for getting homeowners the cash they need to fund renovations, cover unexpected expenses, consolidate debt or make careful investments. However, because HELOCs are secured by real estate, failure to repay the debt could potentially result in the loss of your home. Therefore, borrowers should confirm that the benefits outweigh the risks before taking advantage of a HELOC. Learn more about the benefits and potential risks of HELOCs from the financial professionals at PNC Bank.
The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.
